FREQUENT ISSUES IN CENVAT CREDIT - PERSPECTIVE OF A MANUFACTURER

[Srikantha Rao T]

One of the things a manufacturer dreads even today is the fallout of an audit of his records by the Central Excise Department. While the audit in itself would usually not last beyond a couple of days (few days at the most), the fallout is something which he would have to contend with far beyond the actual duration of the audit. A review of the audits that have taken place in the last few years as well as the happenings/trends thereafter have revealed an upsurge in litigation. While there have been instances of audit objections leading to confirmed demands on the assessee, there have been increasing instances of audit objections being made ignoring the already available clear judicial precedents in assessees’ favour leading to increased costs of compliance to manufacturers. The matter has also been aggravated by the fact that in quite a few cases, even post issuance of SCN and conduct of personal hearings, orders have not been passed in time or been delayed needlessly despite manufacturers having a good case in their favour.

One of the areas that has seen considerable litigation in the recent past is that of Cenvat credit availment and utilisation. The issues range from differences in perception over the definition of inputs, input services and capital goods to manner of discharge of obligation of manufacturer where he has dutiable final products being manufactured along with those exempted from duty of Central Excise. In this article we shall try to address some of the frequently raised issues as well as some of the recent judgements of Courts/Tribunal in favour of assessee/manufacturers.

Input Service

Usage in relation to manufacture

The issues faced with regard to the definition of “input service” under Rule 2(l) of Cenvat Credit Rules 2004 are often in respect of the coverage of the said definition and the nature of services that have to be excluded therefrom. While the words “activities relating to business” which had originally increased the scope of the definition and brought a wide variety of services within its ambit, had been erased from the definition with effect from 01^st April 2011, it is also important to note that in the context of a manufacturer, any service used by him directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal, (with the exception of those specifically sought to be excluded from the definition), would fall within the purview of the definition. In recent times, more and more emphasis is being placed on the first segment of the definition which talks about usage by manufacturer “directly or indirectly, in or in relation to manufacture”. This would only enlarge the scope of the definition to cover all services received unless specifically barred or excluded from the definition.

In M/s Mangalam Cements Ltd Vs CCEandST Jaipur I (2014 (7) TMI 571 CESTAT New Delhi), the Tribunal allowed credit on repair and maintenance services used in factory holding the view that the phrase used ‘in or in relation to manufacture’ of final products, whether directly or indirectly is much wider than the expression ‘used in manufacture’. This view was also followed in M/s Jaypee Sidhi Cement Plant Vs CCE Bhopal (2014 (10) TMI 90 CESTAT New Delhi) where credit was allowed on manpower supply services for securing first aid facilities at factory for workers, a facility held to be a statutory requirement under Factories Act 1948. Readers may note that prior to this, the Karnataka High Court had taken a similar favourable view on the issue of credits on input services in Stanzen Toyotetsu India (P) Ltd Vs CCE Bangalore III (2011 (4) TMI 201 Karnataka HC) as well as in Graphite India Ltd Vs CCE Bangalore I (2013 (1) TMI 347 Karnataka HC).

Services for clearance of goods

The next issue which often arises in respect of input service definition is the one regarding admissibility of services received in relation to clearance of goods beyond the factory. There has been acceptance of the view here that the credit admissibility would to a certain extent depend on the place or the point where transaction of sale gets concluded. In M/s Positive Packaging Industries Ltd Vs CCE Raigad (2014 (10) TMI 128 CESTAT Mumbai) the Tribunal relied on the earlier verdict of Gujarat High Court in Parth Poly Wooven Pvt. Ltd Vs CCEandC (2011 (4) TMI 975 Gujarat HC) to hold that where the terms of delivery as per orders were “FOB destination” or “free delivery till buyer’s factory”, credit would be allowed on transportation beyond seller’s factory as charges would have been in normal course included in the price of goods sold. The High Court had earlier held that when an input service qualifies for credit in terms of usage in relation to manufacture in the first limb of the definition, the restriction of transportation being allowed only up to place of removal in the inclusive portion of the definition, cannot operate to curtail its scope. Readers may note that a view similar to that of the Tribunal in the aforesaid case has also been taken by Punjab and Haryana High Court in M/s Haryana Sheet Glass Ltd Vs CCE (2013 (10) TMI 1163 Punjab and Haryana HC).

In the context of clearances for export, the view that the port could be regarded as place of removal has been confirmed by the Gujarat High Court in Dynamic Industries Ltd Vs Commissioner (2014 (8) TMI 713 Gujarat HC) in allowing credit of input services pertaining to clearing agents.

Inputs

When it comes to availing credit on inputs, generally all goods used in the factory with the exception of those specifically listed/excluded would qualify as inputs. The issues that arise here are in respect of goods used for supporting capital goods or those for laying foundation therefor. The definition also seeks to exclude goods which have no relationship whatsoever with manufacture of final product. This particular clause though is rather open ended and sometimes misunderstood and misinterpreted by audit teams. Here in one’s eagerness to require nexus between manufacturing and inputs, the concept of “manufacturing” as understood under Section 2(f) of the Central Excise Act 1944 should not be overlooked.

The term would be comprehensive to include incidental and ancillary processes as well and this would mean goods and materials used for such processes or those that facilitate such processes also being eligible for credit. This view has been upheld by the Honorable Allahabad High Court in Samtel Color Ltd Ghaziabad Vs CCEandC Ghaziabad (2013 (1) TMI 586 Allahabad HC) where credit was allowed on paints used on floor of production halls to make it dust free and fire retardant to complete manufacture and make the product marketable. Another test available to judge issue pertaining to credit availability is the contribution of the goods towards effective functioning. Where effectiveness of process is bound to increase, this could be an indicator for availing credit going by the decision of Madras High Court in M/s P.K.P.N Shipping Mills (P) Ltd Vs CCE (2013 (3) TMI 345 Madras HC) where credit was allowed on plastic crates for material movement within the factory.

Usage in relation to installation of machinery

With regard to items to be used for installing machinery at factory, one should ascertain whether the same would qualify as “goods” or whether these would qualify as accessory or components of the machinery to be installed. Where the goods are to be used for mere support or for foundation for capital goods/machinery and where these are embedded to earth, credit could be denied. Moreover, where the machinery itself is erected at site and comes into existence in its full functional form only after embedding to earth, the same may not qualify as capital goods at all. In M/s Bharti Airtel Ltd Vs CCE (2014 (9) TMI 38 Bombay HC), the High Court denied credit on tower parts as the tower was fixed to earth and could not be regarded as goods.

In ACE Glass Containers Ltd Vs CCE Pondichery (2014 (9) TMI 106 CESTAT Chennai), the Tribunal relying on the earlier verdict of Supreme Court in Rajasthan Spinning and Weaving Mills Ltd Vs CCE Jaipur (2010 (7) TMI 12 SC) and of Karnataka High Court in Alfred Herbert (India) Ltd Vs CCE Bangalore I (2010 (4) TMI 424 Karnataka HC) allowed credit on MS angles, channels, rounds and screws used for manufacture of chimney for fabricating furnace.

In Dongarai Sangareshwar SSK Ltd Vs CCE Pune II (2014 (9) TMI 107 CESTAT Mumbai), credit was allowed on purchase of supporting structures which were part of sugar plant distinguishing the same from structures which were erected at site and embedded to earth. Manufacturers are therefore advised to confirm the fact that the items in question could be regarded as goods in the first place before claiming credit thereon.

In M/s Ravasco Transmission and Packing (P) Ltd Vs CCE Vapi (2012 (7) TMI 82 (CESTAT Ahmedabad), a structural part of a machine (required for functioning of the machine) was distinguished from supporting structure and held to be eligible for credits.

Credits pertaining to period prior to Registration

A question that could be raised at times is with regard to credit availment on goods and services received at factory but prior to registration of such factory under Central Excise. Readers may note that as long as the goods and services are used for manufacture or for facilitating manufacture of dutiable final product, credit thereon could be claimed even though these are received prior to registration. A favourable view in this regard has been confirmed in M/s Beico Industries (P) Ltd and Shri Shankaranand Sudhakar Pathak Vs CCEandST Vapi (2014 (8) TMI 14 CESTAT Ahmedabad) where the Tribunal relying on the decision of the Karnataka High Court in mPortal India Wireless Solutions Pvt. Ltd Vs CCE Bangalore (2011 (9) TMI 450 Karnataka HC) has allowed credits on input services and capital goods received before registration as generally no production is possible unless factory is set up and trial runs are conducted.

Issue of trading and denial of credit

Where credits are claimed on inputs but the said inputs are not used in a process which could be considered as resulting in manufacturing, there would be no need for reversing credit as long as duty is paid on the final product (with such duty not being lower than the credit availed) as confirmed by the Gujarat High Court in Delta Corporation Vs CCE (2013 (2) TMI 31 Gujarat HC). A similar view was also earlier taken in Ajinkya Enterprises Vs CCE (2012 (7) TMI 141 Bombay HC). Readers may note that where a manufacturer seeks to reverse input credit on input reversals as such, the issue as to whether it is one of trading of genuine input removal as such would normally be gauged based on the intention of the manufacturer to put the inputs to use in manufacturing process in comparison to the inputs that are normally procured for manufacturing and proved to have been consumed/used in the process.

Clearances to SEZ unit or developer

Clearances to SEZ unit or developer would be construed as export. This benefit can even be extended to inputs and capital goods cleared as such going by the Tribunal view in M/s WABCO TVS (India) Ltd Vs CCE Chennai II (2013 (2) TMI 165 CESTAT Chennai). In Shri Bajrang Power and Ispat Ltd Vs CCE Raipur (2012 (12) TMI 99 CESTAT New Delhi), the benefit of Rule 19(2) of Central Excise Rules 2002 allowing a DTA unit to procure goods without payment of duty for export was allowed in respect of clearances meant for SEZ. A similar view was taken in respect of capital goods imported and exported without credit reversal in Glass and Ceramic Decorators Vs CCE Mumbai I (2014 (9) TMI 864 CESTAT Mumbai)

Position on deemed exports

Readers may note that a favourable view has also been considered in respect of refunds on deemed exports/ clearances to 100% EOU which are allowed and not restricted to physical exports alone with the recent decision being in Anita Synthetics (P) Ltd CCEandC (2014 (9) TMI 368 Gujarat HC).

Whether separate accounts for inputs to be maintained where a by-product is exempted from duty?

Manufacturers have to note that the need for maintenance of separate accounts for receipt, issue and consumption of inputs would not arise where the exempted product happens to be a by-product which arises automatically during the course of manufacture of a dutiable final product without intervention by the manufacturer. Consequently, the question of payment of 6% of the price of the exempted by-product for non-maintenance of separate accounts segregating the usage of inputs in such quantity of by-product arising during manufacture should not arise going by the confirmation provided in this regard by the Honorable Supreme Court in M/s Hindustan Zinc Ltd Vs UOI and Others (2014 (5) TMI 253 SC). The manufacturer would be advised to also review the industry practice in this regard as that would be taken as indicative of actual trends especially by the Department.

Readers may also note that where the exempted product does not happen to be a by-product, it would be possible for reversal of credit on inputs prior to actual clearance of final product exempted from duty in order to avoid payment of 6% of price of exempted goods. This could be done where it is impractical or not possible to maintain account of separate receipt and consumption of inputs due to their basic nature as confirmed by the Tribunal in Sundaram Industries Ltd Vs CCE Madurai III (2013 (11) TMI 1025 CESTAT Chennai). In such cases the reversal could be based on consumption pattern as per standard Bill of Material where the same is available or on the basis of standard input-output norm subject to tracking of variances in consumption therefrom.

In M/s Rituraj Holdings Pvt/ Ltd Vs CCE and C (2013 (2) TMI 34 Gujarat HC), the High Court held that there was no need for reversal of credit before utilisation of inputs and that such reversal could be post utilisation of inputs in manufacturing.

Practice of giving endorsements on invoices-whether acceptable?

There could be scenarios where invoices are received at different locations instead of the actual unit engaged in manufacturing which has received the goods. This could happen in case of manufacturers having multiple units engaged in manufacturing. In such a scenario, the unit receiving the invoice could endorse fact of receipt of goods at the manufacturing unit along with a certificate/declaration as to non-availment of credit on receipt of invoice which could then be used for claiming credit in the manufacturing unit. This view has been confirmed by the Tribunal in Priyadarshini Polysacks Ltd Vs CCE (2014 (3) TMI 2 CESTAT Mumbai).

Can the education cess be paid by utilising credit of basic duty of excise?

One of the frequent objections during the audit is in respect of utilisation of credit of basic duty of central excise for the purpose of payment of Education cess and Secondary Higher Education cess. The issue is whether such cess could be construed as a duty of excise at all. Manufacturers may note that confirmation of such cess to be a duty of excise for utilisation of credit of basic duty of central excise for paying off such cess has been provided by Government of India in Re: TVS Motors Co. Ltd (2014 (1) TMI 1572 G.O.I) as well as by the Karnataka High Court for the same assessee in TVS Motor Co. Ltd Vs CCE Mysore III (2013 (11) TMI 434 Karnataka HC).

Can credit of input service tax be utilised for payment of duty of excise where a manufacturer also happens to be a service provider?

Once the manufacturer who also happens to be a service provider is entitled to claim credit on inputs and input services, he would be free to utilise the same for either payment of duty of excise or for payment of service tax as long as the unit manufacturing and providing service is the same. This view has been confirmed by the Tribunal in M/s Sumitha Tex Spin Pvt Ltd Vs CCEandST Rajkot (2013 (11) TMI 1456 CESTAT Ahmedabad) as well as in Enersys Astra Ltd Vs Commissioner of Customs (2013 (11) TMI 22 CESTAT Bangalore).

Can credit be claimed on inputs/goods used for job work?

The job worker engaged in manufacturing goods claiming benefit of exemption under Notification 214/86 CE should note that credit is allowed on goods used for such job work. This has been confirmed even recently in Hwashin Automotive India Pvt Ltd Vs Commissioner (2014 (9) TMI 444 Madras HC) relying on earlier decisions of the Tribunal and Courts.

There are many more issues which could possibly be raised during any audit but the attempt here has been to capture some of the more frequent ones. The author could be contacted at 09845273812 or at srikantha@rceglobal.com