PROVISO TO SUB – RULE (5A) OF RULE 3 OF CCR, 2004 – UNCONSTITUTIONAL
Removal of Capital Goods after being used or as waste & scrap has always been an area of litigation. Sub Rule (5A) of Rule 3 of Cenvat Credit Rules, 2004 is the governing rule in this regard. Before going into detail it is important to go through this rule, which is reproduced below:-
(5A) If the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CEVAT Credit, namely:-
(a) for computers and computer peripherals :
|for each quarter in the first year @ 10%|
|for each quarter in the second year @ 8%|
|for each quarter in the third year @ 5%|
|for each quarter in the fourth and fifth year @ 1%|
(b) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter:
Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.
After going through this Sub Rule it seems that now everything is settled. Assessee is required to reverse Cenvat Credit availed at the time of removal of Capital goods as per the formula prescribed in the abovementioned Sub Rule in both the cases when Capital Goods are cleared after being used or as waste or Scrap.
But if we go through the proviso, there seems to be a problem when it says if the amount calculated as per the formula prescribed under Sub Rule (5A) is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.
It means if the transaction value of the old capital goods is more as compared to the formula prescribed under Sub – Rule (5A), then Assessee is required to reverse Cenvat Credit equal to the duty payable on transaction value. It clearly shows that department is trying to impose Central Excise Duty on removal of Capital Goods through Cenvat Credit Rules, 2004.
Hon’ble Supreme Court in the case of “Grasim Industries Ltd. vs. Union of India” decided on October 13, 2011 and categorically held that to levy central excise duty excisable goods must have been produced out of manufacturing process. Metal scrap and waste generated during repair or maintenance of plant and machinery is not excisable as not coming out of manufacturing process.
As per charging Section 3 of Central Excise Act, 1944, before Central Excise Duty can be imposed on any article, it must satisfy two basic conditions:-
(i) The article must be “goods”, and
(ii) It should have come into existence as a result of “manufacture”.
If either of the above two conditions is not satisfied, central excise duty cannot be levied. Hon’ble Supreme Court confirmed this view in the case of “Hindustan Zinc Ltd. vs. C.C.E.” cited as 2005 (181) E.L.T. 170 (S.C.)
Thus it is clear that to impose Central Excise Duty, goods must have been produced out of manufacturing process as per section 3 of Central Excise Act, 1944, which is charging section for Central Excise Duty.
Cenvat Credit Rules, 2004 has been issued by invoking the power under section 37 of the Central Excise Act, 1944. Section 37 grants power to central government to make rules inter alia in respect of valuation; assessment; interest; compounding of offences; prohibitions of goods; bonded warehouse etc. Section 37 do not grant power to make rules to the central government as to change the criteria on the basis of which central excise duty is imposed under section 3 of the Act. Rules cannot be framed in such a manner that it transgress the authority provided under main section. Hon’ble Delhi High Court confirmed this view in the case of “Intercontinental Consultants and Technocrats Pvt. Ltd.”
Cenvat Credit Rules, 2004 governs Cenvat Credit and at the best, full Cenvat Credit can required to be reversed through these rules. But in no case Cenvat Credit equal to Central Excise Duty leviable on transaction value can be demanded.
Hence, Department is trying to impose Central Excise Duty on removal of Capital Goods after being used or cleared as waste or scrap through Cenvat Credit Rules, 2004, even when it is not fulfilling the basic condition of Manufacturing, which is unconstitutional.
(Author: Anish Jain, B.Com. LL.M. – Dy. Manager – Law- Ballarpur Industries Ltd., Gurgaon)