Reversal of Cenvat credit on waste and scrap of Capital Goods, Spares and accessories

[JAMES PG]

Sub rule (5) A is substituted in Rule 3 of Cenvat Credit Rules, 2004 with effect from 1.04.12 which reads as follows:

 (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 CENVAT 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.

Prior to the above substitution, the relevant Rule read as follows:

(5A) If the Capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value

Practical difficulties

1. It is difficult to correlate the sale of scrap of spares, accessories, refractories with the credit taken and working out of 2.5% Cenvat credit for each quarter.
2. Even if we fix average life span for the above materials and reverse Cenvat credit accordingly, while taking 50 % credit in the next financial year, it is cumbersome to link the credit of the sold out items and reverse the balance credit
3. As per the provisions of Rule 4(2) (a), Cenvat credit in respect of Capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared as such in the same financial year. Removal of capital goods as scrap and waste after put to use will not qualify ‘cleared as such’ and hence 50% credit has to be deferred to next financial year
4. As per the restrictions imposed in Pollution & Environmental Control, Occupational health, Safety etc scrap and waste of certain products can be removed only to licensed processors and sometimes on payment of a fee for lifting such materials. Even if nothing is recovered towards sales realization, Cenvat credit needs to be reversed in view of the amendment made in the Rules effective from 1.04.12 taxmanagementindia.com
1. As per Paragraph 3.7 of the Central Excise Manual, it is mentioned as follows:

“3.7     CENVAT credit is also admissible in respect of the amount of inputs contained in any of the waste, refuse or bye product.”

 If wastages are allowed for inputs used in the manufacturing process, on the same analogy, it should be extended to Spares and accessories, refractories etc also

PRISM PIGMENTS & COLOUR PVT. LTD Vs CCE, Surat (2007 (2) TMI 370 (CESTAT, MUMBAI) - 120801 - CESTAT, MUMBAI) it was held that:

“Loss of inputs during manufacturing - Fact that impugned inputs were used in the manufacture of final products, not disputed - Once inputs are used and there is a loss of such inputs during manufacture, credit cannot be denied - Rule 3 of Cenvat Credit Rules, 2004”

The above decision was upheld by Hon High Court of Gujarat  (2008 (7) TMI 310 (GUJARAT HIGH COURT) - 33072 - GUJARAT HIGH COURT)

It is hoped that the difficulties emanating from the amendment will be ironed out by suitable clarifications from the Board.