SOME ISSUES IN CENVAT CREDIT

[Dr. Sanjiv Agarwal]

The Term 'Cenvat' is in use since April, 2000 in place of the term 'Modvat' in  relation to excise duty. The term 'Cenvat' denotes Central Value added tax. 'Cenvat' has not been defined either in the Central Excise Act, 1944 or Cenvat Credit Rules 2004.

Cenvat is basically a scheme under the Central Excise Law which enables a manufacturer or a service provider to take credit of specified duties or taxes or cess paid on eligible inputs, goods and services for manufacture of dutiable final products or provision of taxable services and utilize such credit towards payment of duties or tax or cess on any final product or output service.

Cenvat Rules provide a set of rules relating to goods and services. It covers inputs, capital goods and services. The interest and penalty amounts can not be taken as credit. It has wide applicability and simplified procedures. The burden of proof regarding the admissibility of Cenvat credit is on the manufacturer or service provider who is availing the credit. There is no one-to-one correlation between input goods/services and final goods or output services nor there is any condition of input output ratio to be met. There are no prescribed records for Cenvat and the records maintained by the manufacturer or service provider in respect of receipt, disposal, consumption or utilization and inventory of inputs, goods and services shall be acceptable to tax authorities. Transfer of Cenvat Credit shall be permitted in specified cases of transfer of undertaking by way of change in ownership or on account of sale, merger, amalgamation, lease or transfer of business to a joint venture with transfer of liabilities. A levy of education cess @ 2 percent and secondary and higher education cess @ 1 per cent of tax shall also be subject to Cenvat credit but it shall have to be utilized only for the payment of education cess payable on output services or final products.

Though the rules are in place, the Cenvat credit issue has been an area of large disputes, litigation and diverse interpretations. Some of the issues in Cenvat credit have been captured in this article, duty supported by judicial pronouncements.

Prospective Changes in Rules

In Executive Engineer (Civil), MPEB v. Assistant CCE, Ujjain, 2008 -TMI - 3934 - HIGH COURT MADHYA PRADESH, where relevant documents were not furnished in support of Modvat claim as required by law, it was held that any subsequent change in rules would not come to the rescue of assessee because, ordinarily, changes in procedural law are prospective unless clear intention is discernible to give retrospective effect.                

Can Cenvat Credit be disallowed on Appeal being not filed

Under rule 3 of Cenvat Credit Rules, 2004, a manufacturer or producer of final product  is allowed to take credit of input, input services and capital goods as per conditions laid down therein. The Cenvat credit is a substantive benefit and can not be denied in absence of any legitimate reason. The similar issue was recently decided by Cestat in Magnet Industries (Cal) Pvt. Ltd. V. CCE, Kolkata-I 2007 -TMI - 1790 - CESTAT, KOLKATA wherein it was held tax Cenvat credit can not be denied merely for the reason that the same was not claimed in the appeal and that dues can not be denied, if such dues are legitimate and patent from record. This was also in tune with Circular No. 218/52/96-CX dated 4.6.1996. The tribunal held that there cannot be any other conclusion, but only conclusion to be drawn is in consonance with the Circular as aforesaid to grant relief of Cenvat credit to the appellants, claiming or not claiming in appeal and to grant relief is delivers of due to the deserved on the facts and circumstances of each case. Uniformity and consistency as well as majesty being ordain of justice, the due cannot be denied, if such due is legitimate and patent from record. Therefore, the Authorities below, denying Cenvat credit to the appellants and levy of penalty as well as interest have deprived the appellants from the due process of justice. Such injustice could only be ruled out setting aside the order of the authorities below to meet the end of justice.Thus, in such cases, Cenvat credit can not be denied.

Denial of Cenvat Credit when Invoices Issued from Unregistered Premises.

A dealer has to issue a valid invoice and there is no condition in the Cenvat credit rules/ excise rules that the invoices issuing office of the dealer should be registered with the Department. However, the dealer  must be registered with the Central Excise Department. In CCE. v Myrorn Electricials Pvt. Ltd (2007) 207 ELT 664 (P &H), High Court held that Cenvat credit can not be denied on the ground that invoices have been issued by the dealer from the premises other that for which Central Excise registration had been granted in view of Central Excise Notification No. 7/99-CE which amended earlier Rule 57G of Central Excise Rules 1944. Supreme Court also dismissed the departmental appeal on the same issue (2007) 215 ELT A 76 (SC). Therefore, it can be said that what is important is raising of an invoice by a registered dealer and not a raising of an invoice from a registered premises.

Utilization of  Cenvat Credit in Capital Goods

The assessee can take  full credit of duty paid on capital goods but utilize only  50 percent thereof as provided in the Cenvat credit rules as per the restriction provided in Rule 4 of Cenvat Credit Rules, 2004. As such, the assessee has utilized the credit to the extent of limit of 50 percent allowed as per law. There is no wrong utilization of Cenvat credit nor there is any evidence of fraud or misstatement or suppression of facts. In my view, there is no scope for levy of penalty by the department under rule 15 of the Cenvat Credit rules, 2004. A similar view was taken by tribunal in CCE, Rohtak v. Surya Vlnayak Industries Pvt. Ltd. 2007 -TMI - 1804 - CESTAT, NEW DELHI and Delphi Automotive Systems v CCE, Noida (2004) 163 ELT 47 (Cestat, New Delhi) relying upon apex count judgment in P & B Pharmaceuticals Pvt. Ltd. v CCE (2003) 153 ELT 14(SC).  

In Bhushan Steel & Strips Ltd. v. CCE, Raigad 2008 -TMI - 3814 - CESTAT, MUMBAI, it was held that cenvat credit could be availed of duty paid on cement and CTD bars used in factory foundation of machinery, plant, tanks, cellers etc. as they are support of capital goods being necessary and integral part of plant. Credit was also permissible for roofing material used in factory sheds. Welding electrodes and wires used for producing and processing capital goods were also eligible for credit. Aluminum wires, cables, conductors and electricity transmitting tower used for transfer of power to machine in factory was also eligible for credit. However, material handling equipments and excavators   for leveling of land before construction, having no relation with manufacturing activity were held to be ineligible to cenvat credit.  

Claiming of Deprecation under Cenvat Credit Rules 

As per rule 4 of Cenvat Credit Rules, 2004, an assessee is allowed to take Cenvat credit of amount not exceeding 50 percent of the excise duty paid on capital goods in the financial year of its receipt and the balance in the subsequent financial years. It also provides that Cenvat credit in respect of capital goods shall not be allowed on that part of its value which the assessee includes in the value of the capital goods for the purpose of claiming depreciation under section 32 of the Income tax Act, 1961. These provisions do not bar the assessee from claiming depreciation of the un availed amount of credit in the year of receipt of the capital goods in income tax returns for the relevant assessment year. In Suprajit Engineering Ltd  v CCE (2007) 212 ELT 394 (CESTAT) if was held that assessee had not violated the rules for the simple reason that they had availed depreciation only in respect of that portion of duty on which they had not taken Cenvat credit . Roods Cast Pvt. Ltd. v CC,  Coimbatore (2007) 216 ELT 448 (CESTAT, Chennai), it has been held that depreciation of unavailed credit under Income tax Act, 1961 can be claimed in the year of receipt of goods. 

It may be noted that the order in Supriajit case is being interpreted in many quarters wrongly in respect of second financial year wherein balance 50 percent credit can be availed on which depreciation has already been charged in first year. In fact, the assessee has the option to choose between depreciation under Income tax and Cenvat credit under Central Excise. While he can claim 50 % credit and depreciation on balance un availed portion in first year, the same can not be done in second year as the amount left for credit will be after charging depreciation . In second year, since depreciation has been charged on that amount in preceding year, no Cenvat credit can be claimed.

Cenvat Credit on Common Inputs

In Aurobindo Pharma Ltd. v. CCE, Hyderabad (2008) 223 ELT 196 (Cestat, Bangalore),  where common inputs were used in exempted final products and dutiable intermediate products and credit was not taken earlier, it was held that non-maintenance of separate accounts was merely a technical lapse especially when appellant had no plans to clear intermediate products on payment of duty. As such, cenvat credit was not to be denied on procedural irregularities. 

In PSL Ltd v. CCE, Pondicherry 2008 -TMI - 2948 - CESTAT, CHENNAI, where option was given to assessee under rule 6(3) of CENVAT Rules in case of common inputs for both exempted and dutiable final products, it was held that when an option in given to manufacture, revenue cannot force him to adopt a particular course.

Refund of Input Credit in Exports

In Bala Handloom Exports Co. Ltd. v. CCE, Chennai 2008 -TMI - 3528 - CESTAT, CHENNAI,  where inputs were used in export of final goods even though process undertaken was not a manufacture, it was held that assessee was entitled to credit on such inputs and to refund if it remained unutilized.

In CCE, Hyderabad v. Paris Waves 2008 -TMI - 3977 - CESTAT, BANGALORE, where refund claim was submitted and show cause notice issued just before elapse of three months asking for certain original documents and where assessee submitted that same were given along with the application, it was held that department should have verified the information expeditiously as the duty paid to the government remained with government till it was utilized and assessee could not utilize the same. When competent authority delays the refund for one reason or the after, interest is payable u/s 11BB of Central Excise Act from the date of receipt of refund application.

Procedural Lapses

 In CCE, Chennai v. ITC Ltd. 2008 -TMI - 3936 - HIGH COURT MADRAS, it was held that modvat credit cannot be disallowed for procedural lapses. Minor procedural lapses in filing declaration for modvat should be ignored while considering claim, where substantive conditions were fulfilled.

One to One Relationship of Input- Output

With goods and services both eligible for Cenvat credit, one to one relationship is not stipulated in CENVAT Credit Rules. In Rule 3(1), entire Cenvat is a common corpus or pool of credit of all types of duties or taxes which can be utilized for payment of any duty or tax as specified in rule 3(4) subject to conditions stipulated in rule 3(7).

Subject to rule 3(7), Cenvat credit is completely inter changeable. According to rule 2(l), any service would be input service provided it is in relation to rendering of output service which is a taxable service. Cenvat credit of any input service would be allowed for payment of service tax on output taxable services.

In CCE, Chandigarh v. CNC Commercial Ltd. 2008 -TMI - 3937 - HIGH COURT PUNJAB AND HARYANA it was held that credit of duty paid on inputs cannot be confined to a particular raw material to which the credit is related and out of which a final product is manufactured. Since no one to one relationship is required, assessee was not required to reverse the credit.

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