TIOL-DDT 1254 · the untouched capture
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1254 </font></strong><br>
<strong>09.12.2009 <br>
Wednesday </strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Reversal of CENVAT Credit on WIP/ finished goods written off in books of accounts - Board Clarifies </font></strong></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>GOVERNMENT</strong> 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 ... </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The CENVAT Credit relatable to inputs or final products written off has been a bone of contention for far too long. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Way back in 1995, by<em><strong> <a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/1995/excircular101.htm" target="_blank">Circular No. 101/12/95-CX, dated 22-2-1995</a></strong></em>, CBEC pronounced, </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Subject of this Circular read as, <strong><font color="#FF6633">Fraudulent availment of Modvat credit - Preventive measures</font></strong> – Why would any assessee write off materials he bought with precious money and what is the fraud in it? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Board Circular spurred all concerned into action - Show Cause Notices, Audit Objections, adjudication, appeal etc,. And Consultants made good money. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Board issued a further clarification after seven years. In <a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/2002/excircular645.htm" target="_blank"><em><strong>Circular No. 645/36/2002-CX., dated 16-7-2002</strong></em></a>, CBEC clarified, </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">I am directed to refer to Board's <strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/1995/excircular101.htm" target="_blank"><em>Circular No. 101/12/95-CX.8, dated 22-2-95</em></a></strong> which stipulates reversal of Modvat (Cenvat) credit taken on the inputs which are subsequently written off being obsolete or unfit for use. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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 <strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/1995/excircular101.htm" target="_blank"><em>Circular 101/12/95-CX, dated 22-2-95</em></a></strong>. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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: </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(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. </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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:- </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">5B) If the value of any, </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(i) input, or </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(ii) capital goods before being put to use, </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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: </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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)? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Board clarifies that:- </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ As far as finished goods are concerned, excise duty is chargeable on the activity of manufacture or production. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ 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. </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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? </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Heads I win, tails you lose! </font></p>
<p><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/2009/excircular907.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBEC Circular No. 907/27/2009-CX., Dated: December 7, 2009 </font></strong></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">DEPB - whether 'Door mats/Rubber mats' are covered under DEPB entry serial No.507 of Product Group 'Chemicals' in DEPB Rates Schedule – DGFT clarifies </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>REPRESENTATIONS</strong> were received from Trade and Industry earlier as to whether “Door mats/Rubber mats” are covered under the DEPB entry serial No.507 of Product Group “Chemicals” in the DEPB Rates Schedule. The High Court of Kerala had directed to issue clarification in this regard. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">DGFT has clarified that the product “<em>Doormat/Rubber mats</em>” is not covered under the DEPB entry meant for the product “Rubber Compounded Sheets/ Rings/Gasket” mentioned in the DEPB rate schedule. </font></p>
<p align="justify"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=46&filename=notification/dgft/2009/dgft09cir018.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">DGFT Policy Circular No. 18 /2009-2014 Dated: December 8, 2009 </font></strong></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Fake Indian Currency Notes (FICNs) pushed into India through neighbouring countries </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>AVAILABLE</strong> inputs indicate that high quality Fake Indian Currency Notes (FICNs) are printed in a neighbouring country and pushed into India through neighbouring countries. Such inputs also indicate that, inter alia, activists of Lashkar-e-Taiba (LeT), a terrorist outfit, organized criminal networks and syndicates are reportedly involved in infusion and circulation of FICN in the country. To address the multi-dimensional aspects of the FICN menace, several agencies such as the RBI, the Ministry of Finance, the Ministry of Home Affairs, the Intelligence Agencies of the Centre, the Central Bureau of Investigation (CBI), etc. are working in tandem to thwart the nefarious activity related to FICNs. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><br>
Apart from the above, the State Governments have been asked to set up dedicated and well-equipped Cell under senior level supervision to comprehensively monitor and deal with organized crimes including FICN, besides other administrative measures. Further the offences under IPC relating to counterfeit currency have been includes in the Schedule to the National Investigation Agency Act, thereby empowering the National Investigation Agency to investigate and prosecute such offences. The issue has also been taken up consistently with the neighbouring countries in the bilateral fora. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">This was stated by Ajay Maken, Minister of State in the Ministry of Home Affairs , in written reply to a question in the Lok Sabha yesterday. </font></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Jurispruden</font><font color="#FF6633" size="5">tiol</font><font color="#006600"> – Thursday's cases</font></strong></font></strong></font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left"><strong><font color="#663399">Central Excise</font></strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Irregular CENVAT Credit - penal clause would not be attracted to facts of every case unless a categorical finding of fraud, collusion, willful-mis statement etc. with intention to evade payment of duty have been recorded- High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>PENALTY</strong> under section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section. It is evident that penal clause would not be attracted to the facts of every case unless a categorical finding of fraud, collusion, wilful misstatement etc. with the intention to evade payment of duty have been recorded. In the absence of such a finding, the imposition of penalty is not automatic and cannot be levied. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Income Tax </strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Sec 195 - payments to non-residents - whether assessee-payer can decide taxability of income in hands of non-residents before he decides to deduct tax at source - assessee pleads for referring issue to Special Bench - since assessee's appeal relating to other AY already admitted by HC, no need to refer it to Special Bench: ITAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>WITH</strong> cross-border transactions becoming a routine affair for most business-doing entities in the economy, the Section 195 of the Income Tax Act has become one of the hottest issues for litigation. This Section states that tax is to be deducted at source from any payment made by way of interest, royalty, fees for technical services or any other sum to a non-resident. Now, the contentious issue is whether the assessee-payer has the liberty to decide the chargeability of income in the hands of the non-resident. If no, then TDS is to be made on all sorts of payments, including reimbursements, made to non-residents. If yes, the assessee-payer may consider the taxability of the payment being made to a non-resident before he decides whether TDS is to be made or not. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Customs </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Forged licences, in law are no licences; Even goods attempted to be cleared on strength of forged licences, are liable to be confiscated; Redemption fine amount should not be just sufficient to wipe out profits but it should be more than that – High Court </font></strong></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">WHERE</font></strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> import is not prohibited, adjudging officer has no choice or discretion and it is mandate of law that he shall give an offer to the party to pay fine in view of the confiscation. Even if the option of payment of redemption fine may be given to the importer, the fine amount should not be just sufficient to wipe out the profits but it should be more than that. If the person is required to pay only the amount which he has saved by not paying the premium for securing genuine replenishment licence, he will never feel pinch of being caught. He may commit same wrongs repeatedly and as and when he is caught, he may pay amount equivalent to the premium. In our considered opinion, redemption fine should be more than that. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">See our columns Tomorrow for the judgements </font></strong></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until Tomorrow with more <strong>DDT</strong> </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice day. </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <a href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com </a></font></p>
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