Reversal of CENVAT Credit on WIP/ finished goods written off in books of accounts - Board Clarifies
GOVERNMENT stands on LAW and on principles - government is all about enforcing the law however costly it is. The Revenue Administration is all about ‘protecting' revenue at any cost! Government is all about being penny wise and ...
The CENVAT Credit relatable to inputs or final products written off has been a bone of contention for far too long.
Way back in 1995, by Circular No. , dated 22-2-1995, CBEC pronounced,
Instances have been brought to the notice of the Board where Modvat credit taken on inputs by the assessee was not reversed even after writing off of the materials on which the credit was taken. Cases have also been noticed where the credit had not been adjusted even though the write-off of the input materials had taken place three or four years ago. In such situations, it is obligatory on the part of the assessees to straight away reverse the Modvat credit taken under intimation to the Range Officers concerned. Utilisation of Modvat credit taken on inputs, which had actually been written off for stock account purposes, clearly will amount to mis-construction and abuse of the Modvat scheme.
2. It is felt that by exercising proper checks in time by the offic ers/staff and Audit loss of revenue to a considerable extent could be avoided.
3. In order to plug further leakage of revenue, it is directed that the Central Excise Range Officers/staff, Audit and Preventive parties should keep in mind the possible misus e of Modvat credit on this account and conduct proper checks in time.
The Subject of this Circular read as, Fraudulent availment of Modvat credit - Preventive measures – Why would any assessee write off materials he bought with precious money and what is the fraud in it?
The Board Circular spurred all concerned into action - Show Cause Notices, Audit Objections, adjudication, appeal etc,. And Consultants made good money.
Board issued a further clarification after seven years. In Circular No. , dated 16-7-2002, CBEC clarified,
I am directed to refer to Board's Circular No. , dated 22-2-95 which stipulates reversal of Modvat (Cenvat) credit taken on the inputs which are subsequently written off being obsolete or unfit for use.
2. The Audit Report for 1998-99 has pointed out a case involving Hyderabad-III Commissionerate where credit taken on inputs was not reversed although the inputs were written off by the assessee as being obsolete. The Department admitted the objection in ac cordance with policy decision conveyed vide Circular , dated 22-2-95.
3. The Board observes that the subject matter of reversal of Modvat (Cenvat) credit in the event the Inputs/Capital Goods are written off/partially written off in the books of accounts is being raised often. Accordingly, the Board has examined the issue of admissibility of credit taken on written off inputs/capital goods including partial write off and has decided as follows:
(i) In cases, where unused inputs are fully written off, Board's instructions dated 22-2-95 shall apply i.e. the credit availed must be paid back.
(ii) In cases where the value of the inputs is partially written off/reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of CENVAT credit availed.
(iii) In respect of capital goods viz. components, spare parts etc. which are written off before use and hence are not proposed to be used, the CENVAT credit availed will have to be paid back on the same lines as applicable to “inputs” as mentioned in (i) above.
The Board gave statutory status to these interpretations by amending the CENVAT Credit Rules in July 2009, whereby the new Rule 3(5B), stipulated that:-
5B) If the value of any,
(i) input, or
(ii) capital goods before being put to use,
on which CENVAT credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods:
Provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of taxable services, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules.
Now some bright field officers have asked the Board, it's all fine with written off inputs, but what about the inputs contained in written off final products, semi finished goods and work in progress (WIP)?
The Board clarifies that:-
++ As far as finished goods are concerned, excise duty is chargeable on the activity of manufacture or production.
++ Even though liability for payment of tax has been postponed to the time of removal of goods for the factory, but still the legal liability to pay the excise duty has been fastened on the goods, when it has been manufactured or produced.
++ Therefore, normally all goods manufactured suffer excise duty at the time of removal, but if the manufactured goods are destroyed due to natural causes etc., Rule 21 of Central Excise Rules, 2002, provides for remission of duty.
++ Further, Rule 3(5C) of CENVAT Credit Rules, 2004, also requires reversal of credit on the inputs when the duty is ordered to be remitted under the said Rule 21.
++ Therefore, if the goods have been manufactured, in that case, a manufacturer is liable to pay excise duty unless duty is remitted under Rule 21.
++ Therefore, if the value of finished goods is written off, the manufacturer would be liable to pay excise duty or he would be required to reverse the credit on the inputs used, if duty has been remitted on finished goods.
++ As regard writing off work in progress (WIP), if the WIP has reached the stage, when it can be considered as manufactured goods, in that case, the same treatment as applicable to finished goods, would apply.
++ However, if the activity carried out on the WIP goods cannot be considered as amounting to manufacture, in that case, the said goods should be considered as input and the treatment for reversal of credit applicable to input would be applicable.
How many assessees will write off inputs or final products and what would be the total revenue involved? In ‘writing off', the assessee invariably loses and should the government cause further losses?. Should the Board be wasting its precious time in recovering a few lakhs of rupees?
Why can't the Revenue Officers think of ways and means to help the assessees, who help in collecting lakhs of Crores for the State, instead of using all their brilliance in causing trouble to the geese that lay the golden eggs?
Heads I win, tails you lose!
CBEC Circular No. 907/27/2009-CX., Dated: December 7, 2009