It has been a very common practice in the manufacturing industry to remove raw materials “as such”i.e. without using in manufacturing activity. One of the common reasons for “as such” removal is that such raw materials do not satisfy the quality which is required for manufacturing the finished goods. In such a case, the manufacturer returns such raw materials to the supplier & reverses equal amount of CENVAT credit if availed on such raw materials.
There are certain manufacturers who remove raw materials “as such” without using in the manufacturing activity not because of the quality issue but as a practice of “trading of such goods”. In such a case, though there is no provision in central excise law, it is expected that such manufacturer should reverse equal amount of CENVAT credit availed on such goods.However, if such goods are sold at a higher price than purchase price and if central excise duty is collected on the value of “sale” then what to do in such a case.
The Hon’ble High Court of Gujarat, in its recent decision, in the case of CCE, Ahmedabad-II v/s Inductotherm (I) Pvt. Ltd. reported in 2012-TIOL-929-HC-AHM-CX, has held that when a manufacturer removes / sales goods “as such” at a higher price than purchase price and collects central excise duty on “transaction value” (i.e. sale value for easy understanding) then such manufacturer has to reverse equal amount of CENVAT credit which was availed at the time of receipt of such goods and the balance duty is required to be paid through Personal Ledger Account (i.e. in cash / bank) only though CENVAT credit balance is available in the books of accounts.
The above decision can be illustrated as under:
Purchase Price of raw material (RM) – Rs. 100/-
Central Excise Duty on RM – Rs. 12.36/-
CENVAT credit availed by the manufacturer on such RM – Rs. 12.36/-
Value of such RM sold – Rs. 150/-
Central Excise Duty collected in sale invoice – Rs. 18.54/- (Rs. 150*12.36%)
CENVAT credit to be reversed as per Rule 3(5) – Rs. 12.36/-
Balance amount of duty to be paid through PLA – Rs. 6.18/- (Rs. 18.54 minus Rs. 12.36)
As per Rule 3(5) of Cenvat Credit Rules, 2004, when raw material or machinery, on which CENVAT credit has been taken, are removed as such from the factory of manufacturer or premises of service provider, then in such a case, such manufacturer or service provider is required to reverse / pay an amount equal to CENVAT credit availed in respect of such raw material or machinery. Such removal ofraw material or machinery is to be made under the cover of excise invoice.
FACTS OF THE CASE
M/s Inductotherm (I) Pvt. Ltd. (the Respondent of the case), is engaged in the manufacturing of induction furnace and other engineering goods and selling them in foreign market as well as in India market. During the period of dispute, the Respondent had made substantial exports and therefore, there was excess CENVAT credit lying unutilised in CENVAT credit account.
It was found in the investigation that the Respondent was clearing certain parts of induction furnaces “as such”at a higher value and charging central excise duty on such higher value @ 12.36%. It was noticed that the Respondent was collecting higher amount of duty from the purchasers and paying the same by utilising CENVAT credit and accordingly, encashing unutilised CENVAT credit lying in CENVAT credit account.
The Department objected the same and issued a Show Cause Notice (SCN) on the Respondent for demanding the difference between excise duty collected at the higher value and the amount of CENVAT credit which was availed on sale of such goods.
The Respondent submitted that the amount of duty collected was already deposited with the Governmentby making debit entries in CENVAT credit and therefore, there is no question of recovery of anyamount. However, the Commissioner confirmed the demand along with interest and penalty.
The Respondent filed an appeal before the Tribunal and based on the above stand of the Respondent, the Tribunal allowed an appeal and dropped the demand. While dropping the demand, the Tribunal observed that demand under section 11D can be made when an assessee has collected excess amount of excise duty from its purchaser and has not deposited the same with the Government of India. However, in the present case, the amount of the duty asindicated on the invoiceshas been deposited by theappellant by making a debit entry in CENVAT credit account. It is a settled lawthat debits made in CENVAT credit account is discharge of the duty liability bythe assessee and therefore, no demand can be made.
The Department challenged the decision of the Tribunal and filed as appeal before the Hon’ble Gujarat High Court.
OBSERVATIONS OF THE HON’BLE HIGH COURT
Rule 3 (1) of Cenvat Credit Rules, 2004 relates to availability of CENVAT credit which includes excise duty paid on raw materials. Rule 3 (4) of Cenvat Credit Rules, 2004 provides the purpose for which CENVAT credit can be utilised. The list of purposes given is exclusive and therefore, it is to be noted that CENVAT credit can be utilised only for the purposes specifically mentioned in the list. The relevant text of Rule 3 (4) is reproduced below for your ready reference:
(4) The CENVAT credit may be utilized for payment of-
(a) anyduty of excise on any final product; or
(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such capitalgoods are removed as such; or
(d) an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002; or
(e) service tax on any output service.
As discussed earlier, Rule 3(5) of Cenvat Credit Rules, 2004 provides that when raw material or machinery, on which CENVAT credit has been taken, are removed as such from the factory of manufacturer or premises of service provider, then in such a case, such manufacturer or service provider is required to reverse / pay an amount equal to CENVAT credit availed in respect of such raw material or machinery. The relevant text of Rule 3 (5) is reproduced below for your ready reference:
“(5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in Rule 9.”
After going through the Rules, the Hon’ble High Court observed that since no manufacturing activity was undertaken,question of collection of excise did not arise and therefore, while removing goods “as such”, the Respondent had to follow the procedure laid down under Rule 3 (5). As per this rule, the Respondent was required to pay equal amount of CENVAT credit which was availed in respect of such raw materials. Rule 3 (4) (b) specifically provides to use CENVAT credit for such purpose and the Department has also not objected the same. However, the objection is that Rule 3 (5) does not permit collection of higher excise duty from the purchaser and therefore, such situation has not specifically been covered under any of the clauses of (a) to (e) of Rule 3 (4) which provides the specific purposes for which CENVAT credit can be utilised. Therefore, considering this legal provision, the Hon’ble High Court is of the opinion thatany amount which is collected more than exact CENVAT credit which was taken on such raw materials, then such difference (actual amount collected minus CENVAT credit which was taken in respect of such raw materials) is required to be paid through PLA only.
A WORD OF CAUTION
As a consequence of this decision, when the manufacturer has removed raw materials “as such” at a higher value and collected excise duty on such higher value, then in such a case, he may face demand notice.If we imagine a situation that such manufacturer either does not challenge the demand notice or failed to succeed in litigation, then in such a case, such manufacturer will have to pay the difference in cash (PLA) along with interest and penalty. Now the question is that when the manufacturer has paid such excess amount in cash then what is to do with CENVAT credit which was already utilised for such difference amount. Since, such excess amount is first paid through CENVAT credit and again thereafter in cash,this amounts to double payment. It is to be noted that there is no provision of taking suo moto CENVAT credit in such situation and therefore, the ultimate solution is to apply for refund of excess CENVAT credit utilised.
(Author is a Senior Associate in one of the leading consultancy company and can be reached at firstname.lastname@example.org)