Availment of CENVAT Credit when certain activities do not amount to Manufacture – CBEC clarifies
IN almost every CAG report, we find a repeated objection on CENVAT credit. The audit discovered that in many cases the process undertaken did not amount to manufacture, but the assessees had availed CENVAT Credit on the inputs and paid duty on the final products. In such cases, the amount paid to the Government is not duty and it is only “deposit” and this resulted in irregular passing of CENVAT Credit to the “downstream manufacturers”. Way back in 2004, the Supreme Court held in case of Narmada Chematur Pharmaceuticals Ltd such payment of duty is revenue neutral. However, the CAG as well as the revenue can afford to not to accept the judgements of the Supreme Court, they continue to raise this kind of objections resulting in show cause notices.
In the Budget of 2007, a new Section 5B has been inserted in the Central Excise Act, 1944, empowering the Government to regularize the credit taken in cases where the process is held as not amounting to manufacture by a court. Though under this Section, CENVAT credit has been regularized for metalisation of plastic films, ( Notn 22/2008 CE(NT) dated 2.5.2008) there are many other cases where the process was held as not amounting to manufacture and it is a fertile area for many audit objections and show cause notices.
Board has received references from the field formations that though certain activities including connectorising, testing, repacking and relabeling of feeder cables, cutting of HR/CR coils into sheets or slitting into strips do not amount to manufacture, such processors are taking CENVAT credit and justifying their CENVAT availment on the ground that they are paying duty on final products.
And it has been clarified that:
In view of the provisions of Section 5B of the Central Excise Act, 1944, if an assessee, who has paid excise duty on a product under the belief that the same is excisable, but subsequently the process of making the said product, is held by the Court as not amounting to manufacture, in such cases, the Central Government may issue an order for non-reversal of such credit in past cases.
In view of the above, after examining the matter, the following instructions are issued by the CBEC:
(i) In cases where the process undertaken by an assessee indisputably does not amount to manufacture, the department should inform the assessee about the correct legal position and advise him not to pay duty and not to avail credit on inputs.
(ii) If the assessee has already paid duty, and in a situation where there is no manufacture as held by the Courts subsequently, and facts of the case are covered by the provisions of Section 5B of the Central Excise Act, 1944, the assessee is at liberty to approach the Central Government for issue of appropriate notification for regularization of the CENVAT credit availed.
So, in the coming days we many see many notifications issued under Section 5B and the “ irregular passing of CENVAT Credit to the downstream manufacturers” will go down in the history.
But the important question is what will happen if the assessee takes credit even after the court order holding the process as not amounting to manufacture? How the credit will be recovered? In many cases, the duty paid on the final product will be more than the credit availed. When we are fast approaching the GST regime, shouldn't we accept if someone pays duty on value addition instead of fighting over the “irregularity of passing the Credit to downstream manufacturers”?
CBEC Circular No. 911/2010, Dated: January 14, 2010