CREDIT ON CAPITAL GOODS

[Mr. M. GOVINDARAJAN]

INTRODUCTION: 

A manufacturer of producer of final products or a provider of taxable output service shall be allowed to take credit of the excise duty, education cess, higher education cess etc., paid on capital goods received in the factory of manufacture of final products or premises of the provider of the output service.   This article will highlight the availment of credit on capital goods, conditions for the same, penal provisions etc.,

DEFINITION FOR 'CAPITAL GOODS:

Sec. 2(a) of CENVAT Credit Rules, 2004 ('Rules' for short) defines capital goods as goods mentioned as below:

(A) (i) all goods, falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the first Schedule to the Excise Tariff Act;

(ii) Pollution control equipments;

(iii) Components, spares and accessories of the goods specified at (i) and (ii);

(iv) Moulds and dies, jigs and fixtures;

(v) Refractories and refractory materials;

(vi) Fuels and pipes and fittings thereof; and

(vii) Storage tank

used-

·  In the factory of the manufacturer of the final product, but does not include any equipment or appliance used in an office; or

·  For providing output service.

(B) Motor vehicles registered in the name of provider of output service for providing taxable service as specified in-

·  Sec.65(105)(f) -Courier agency;

·  Sec. 65(105)(n) - tour operator;

·  Sec. 65(105)(o) - rent-a-cab scheme operator;

·  Sec. 65(105)(zr) - cargo handling agencies;

·  Sec. 65(105)(zzp) - goods transport agency;

·  Sec. 65(105)(zzt) - outdoor caterer;

·  Sec. 65(105)(zzw) - pandal or sharmiana contractor.

REMOVAL OF CAPITAL GOODS:

Rule 3(5) provides when capital goods on which CENVAT credit has been taken are removed as such from the factory or premises of the producer 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 capital goods and such removal shall be made under the cover of invoice referred to in Rule 9. 

Such payment shall not be required to be made where any capital goods are removed outside the premises of the provider of output service for providing the output service.

If the capital goods, on which CENVAT credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT credit taken on the said capital goods reduced by 2.5% of each quarter or a year or part thereof from the date of taking credit.

If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value.

WRITTEN OFF:

Rule 3(5) (B) provides that if the value of any capital goods before being put to use, on which CENVAT credit has been taken is written off or where any provision to write off fully has been made in the books of account, then the manufacturer shall pay an amount equivalent to CENVAT credit taken in respect of the said capital goods.

If the said capital goods is subsequently used in the manufacture of final products the manufacturer shall be entitled to take credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules.

CONDITIONS:

1. The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding 50% of the duty paid on such capital goods in the same financial year;

2. The 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 of such capital goods are cleared in the same financial year;

3. The CENVAT credit of the additional duty leviable under Sec. 3(5) of the Customs Tariff Act, in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of the manufacturer;

4. The balance of CENVAT credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer, or in the premises of the provider of output service, if the capital goods, other than components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under hearing 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of output service in such subsequent years;

5. The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of out output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company;

6. The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under Sec. 32 of the Income Tax Act, 1961;

7. (a) The CENVAT credit shall be allowed even if any capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, reconditioning or for the manufacture of intermediate goods necessary for the final products or any other purpose and it is established from records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within 180 days of their being sent to a job worker. 

   (b) If the capital goods are not received back within 180 days, the manufacturer or provider of output service shall pay an amount equal to the CENVAT credit attributable to the capital goods by debiting the CENVAT credit or otherwise, but the manufacturer or provider of output service can take CENVAT credit again when the capital goods are received back in his factory or in the premises of provider of output service;

8. The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications;

9. No CENVAT credit shall be admissible on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of exercise leviable thereon under any notification where exemption is granted based upon the value of quantity of clearances, made in a financial year; 

10. The CENVAT credit in respect of capital goods, purchased from a first stage dealer or second stage dealer, shall be allowed only if such first stage dealer or second stage dealer, as the case may be, maintained records indicating the fact that the capital goods was supplied from the stock on which duty was paid by the producer of such capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him.

PENALTY:

If any person takes credit in respect of capital goods wrongly or in contravention of the provisions of the rules in respect of any capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed or Rs.2000/- whichever is greater.

In a case where the CENVAT credit in respect of capital goods has been taken or utilized wrongly on account of fraud, willful misstatement, collusion or suppression of facts, or contravention of any of the provisions of the Excise Act or rules made there under with intention to evade payment of duty then the manufacturer shall also be liable to pay penalty in terms of the provisions of Sec. 11AC of the Excise Act.

CASE LAWS:

1. Commissioner of Central Excise, Panchkula V. Jai Forgings & Stamping (P) Ltd., - 2008 (11) STR 423 (P&H)

Electrical transformer used by assessee in part of plant and machinery, used for bringing about change in substance for manufacturer for final products, capital goods, entitled for credit.

2. Rajarambapu Patil SSK Ltd., V. Commissioner of Central Excise, Pune - II - 2008 (11) STR 437 (Tri. Mumbai)

Components and parts of capital goods are brought/manufactured by the contractors.  Invoices are issued in the name of manufacturer.   Manufacturer used such components and parts for setting up a sugar plant in assessee's premises.   Assessee is entitled to the credit of duty paid on such components and parts.

3. Commissioner of Central Excise, Bangalore - I V. Seat Metal Components India (P) Ltd., - 2008 (10) STR 108 (Tri. Bang)

Capital goods installed in factory, due to some reasons are not made functional but can be used at any time, credit denied on such capital goods is not proper.

4. Shri Vishnu Shankar Mills Ltd., V. Commissioner of Central Excise, Tirunelveli - 2007 (5) STR 30 (Tri. Chennai)

The appellant had simultaneously availed depreciation of the value of goods for income tax purposes and CENVAT credit.   A certified copy of the assessment order has also been produced which indicates that CENVAT credit has been deducted by the Income Tax Assessing Authorities.   The tribunal held that there is no simultaneous availement of CENVAT credit on the capital goods and depreciation of its value for income tax purpose.  However it is up to the original authority to consider the income tax assessment order and pass such order on the CENVAT credit issue.

5. Suprajit Engineering Ltd., V. Commissioner of Central Excise, Bangalore - 2007(6) STR 170 (Tri. Bang)

The department alleged that the appellants simultaneously availed CENVAT credit and depreciation under Income Tax.   The appellants took only 50% of the duty paid on capital goods, in the first year.   Appellants availed depreciation only in respect of balance 50% of duty on which they had not taken CENVAT credit.   The tribunal held that the provisions of CENVAT Credit Rules are not vitiated.

6. TNT India Private Ltd., V. Commissioner of Service Tax - 2007 -TMI - 1441 - CESTAT,BANGALORE

It is not open to say that the transportation is merely incidental in providing courier service as held by the Adjudicating Authority.   In fact transportation is very crucial to the courier service and courier agency rendering taxable service and is entitled to CENVAT credit on the duty paid on motor vehicles.

7. Gujarat Glass Limited V. Commissioner (Appeals) Central Excise & Customs, Vadodara - II - 2007 (8) STR 220 (Tri. Mumbai)

Capital goods such as 'split air conditioners' are not entitled to credit as they are not essentially of or accessory of either furnace of PLC system installed in the control room.

Fluidic finish kit, lamps, saipper pads are not entitled to credit since they are not used in relation to manufacture of final products.

8. Pooja Forge Limited V. Commissioner of Central Excise, Faridabad - 2007 (8) STR 318 (Tri. Del)

Movement of capital goods after availment of credit between appellant's own units and that too for use in another manufacture of same final products.   There is no disposal or alienation of capital goods to warrant return/denial of credit.