Board wakes up to reality- amends CENVAT Credit Rules relating to availment of Credit on clearances from 100% EOU

By Vijay Kumar

IN TIOL-DDT 1162 27 07 2009 we raised an issue that the CENVAT Credit formula as provided in Rule 3(7)(a) of CENVAT Credit Rules, 2004 is unsuited for clearances from 100% EOU / EHTP / STP to DTA when the goods are exempt from levy of VAT / Sales Tax and requested the CBEC to bring in suitable amendments in the CENVAT Credit Rules, 2004 (‘CCR 2004') to ensure that the CENVAT chain is not hindered.

A large number of EOUs have represented to the MoC regarding the need for amendment of CENVAT Credit Rules, 2004 to make provision for allowing credit of additional duty of customs payable under Section 3(5) of the Customs Tariff Act, 1975. The EOUs are liable to pay this duty when the goods cleared in DTA are not subject to VAT/Sales Tax. Similar representations have also been made in respect of allowing credit of Education Cess paid by the EOUs. But, why to MoC? It is because often the MoC understands the problems faced with regard to Central Excise Law better than the MoF.

We were in fact tempted to report this proposed amendment while reporting the Highlights of the Foreign Trade Policy announced recently, but were waiting for the Notification by the MoF. Para 40 of the Highlights of the Policy reads:

40. EOUs will now be allowed CENVAT Credit facility for the component of SAD and Education Cess on DTA sale

Actually, EOUs will not be allowed any credit on DTA sale. The above para should have been “CENVAT Credit facility for the component of SAD and Education Cess will now be allowed on DTA sale”. Anyway, we can understand the intention of the MoC.

Now, a second proviso has been added in Rule 3(7)(a) vide Notification 22/2009 CE(N.T.) dated 07.09.2009 as intended by the MoC in Highlights of the Policy.

Before this amendment, the Credit was allowed based on a formula. To give an illustration the duty payable on DTA clearances under Notification 23/2003 is as follows:

As per the Formula, the credit allowed is calculated as under:

Credit allowed = 100 multiplied by 1+ BCD multiplied by CVD
200 100

= 100 X ( 1+ 10/200) X ( 8/100)
= 100X ( 1.05)(0.08)
= 8.4

So, effectively, what was allowed till now was only Rs 8.4/-, i.e. CVD payable at 8% in the above table. No credit was allowed on the education cess of 0.168 and SHE Cess of Rs 0.084/-. Similarly, no provision existed for allowing credit of additional duty of customs payable under Sec 3(5) of the Customs Tariff Act.

With effect from 7th September 2009, the credit is allowed not by any formula, but by the new proviso, which is as under:

“Provided further that the CENVAT credit in respect of inputs and capital goods cleared on or after the 7 th September, 2009 from an export-oriented undertaking or by a unit in Electronic Hardware Technology Park or in a Software Technology Park, as the case may be, on which such undertaking or unit has paid –

(A) excise duty leviable under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-Central Excise, dated 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003]; and

(B) the Education Cess leviable under section 91 read with section 93 of the Finance (No. 2) Act, 2004 and the Secondary and Higher Education Cess leviable under section 136 read with section 138 of the Finance Act, 2007, on the excise duty referred to in (A),

shall be the aggregate of –

(I) that portion of excise duty referred to in (A), as is equivalent to -

(i) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, which is equal to the duty of excise under clause (a) of sub-section (1) of section 3 of the Excise Act; (Rs 8.4 in the above table)

(ii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act; and

(II) the Education Cess and the Secondary and Higher Education Cess referred to in (B)”.

However, as far as Education Cess is concerned, it appears the amendment has created more confusion. Instead of allowing Education Cess payable on CVD part (0.168 and 0.084 in the above table), the amendment at (B) reads “Education Cess on excise duty referred to in (A)”. Does this mean the EOUs should pay again Education Cess on the total duty of 14.061/-?

Though this is the popular belief of the field formations (that cess has to be charged again on total duty), the same has been dispelled by the Bombay High Court in 2008-TIOL-516-HC-MUM-CX which, the Board appears to be not aware of.

It requires half a dozen consultants to understand what they mean. The issue is simple. We have to pick up the CVD and the related Cess from the total duties and accordingly draft a proviso to allow the same, in which they are failing every time.

And why have they retained the formulae? Apparently to take care of the situation prior to 7 th September 2009. And what is the sanctity of 7 th September – why deny this rightful benefit for the period prior to 7 th September? Litigation will continue merrily.

Notification No. 22/2009- CX.,(N.T.), Dated: September 7, 2009