Inputs used exclusively for the manufacture of exempted goods
If inputs are used in the manufacture of exempted as well as dutiable final products, the assessee is required to maintain separate accounts or pay 10% on the exempted final products. What happens if some of the inputs are clearly identifiable as used only in the manufacture of exempted final products? Board had in Circular No. 754 /70/2003-CX, dated 9-10-2003 clarified that
• the option to maintain the separate accounts or payment of 8% (now 10%) of the price of the exempted goods can be exercised only in respect of common inputs used for the manufacture of dutiable and exempted goods
• Where any inputs are clearly identifiable as used only in or in relation to the manufacture of final products which are exempt from payment of duty, CENVAT credit is not admissible on such inputs which are used exclusively for the manufacture of exempted final products
• no credit can be taken on inputs which are used exclusively in or in relation to the manufacture of exempted final products
• Rule 6 of CENVAT Credit Rules, prescribes that no CENVAT credit shall be allowed on such quantity of inputs which is used in the manufacture of exempted goods.
• this position was the same in erstwhile Central Excise Rules, 1944 and there has been no change in this principle
• The procedural facility is prescribed to take care of the practical difficulties which may be faced by the manufacturers using the same inputs in both dutiable and exempted final products
Though the Board had come up with this clarification, it is interesting to note that the issue had been raised by a Show Cause Notice issued on 27-12-1996, nearly nine years ago and the tribunal in an emphatic order in 1999 - EICHER TRACTORS v COMMISSIONER OF C. EX., NEW DELHI - 2000 (116) E.L.T. 712 (Tribunal) held that the option to pay 8% was not available in respect of inputs which are exclusively used in or in relation to the manufacture of the exempted final products. Exactly what the Board clarified after four years and several Audit objections.
In his Report No.11 of 2004 (Indirect Taxes – Central Excise & Service Tax) in para 5.5.4, the CAG had pointed out,
M/s. Aurobindo Pharma Limited, Unit IV, in Hyderabad I Commissionerate of Central Excise, engaged in the manufacture of bulk drugs, availed of Cenvat credit on selinium metal powder, ethylene diamine and propylene glycol which were exclusively used in the manufacture of pyrazynamide, an exempted product. Assessee paid eight per cent of the value of the said product under rule 57AD (2). This was not correct as the above rule is attracted only if the inputs are used in the manufacture of exempted and dutiable goods. The entire credit of Rs.67.03 lakh availed on these inputs during the period between June 2001 and April 2002 required recovery.
On this being pointed out (April 2002), the Ministry while admitting objection stated (October 2003) that a show cause notice demanding Rs.67.03 lakh had been issued besides demanding interest and proposing imposition of penalty.
What could have happened to this case? Predictably the Commissioner confirmed the demand. The matter obviously reached the Tribunal. DDT understands that the Tribunal has allowed the appeal of the party; that is according to the Tribunal, credit cannot be denied on inputs exclusively used in exempted final products.
As reported in yesterday’s DDT, Government has now added an explanation to Rule 6(3), “For the removal of doubts, it is hereby clarified that the credit shall not be allowed on inputs and inputs services used exclusively for the manufacture of exempted goods or exempted services.”
This clarification is applicable only from 16th May 2005 and so till 15th May 2005, this credit is available! Wait for that retrospective validation!