Cenvat Credit on inputs used in exempted as well as dutiable goods : A controversy as old as Modvat
Yesterday’s DDT on the subject evoked expected reactions – surprise and shock. How did the Supreme Court judgement in Orissa Extrusions escape the attention of law watchers and the Board? Was the Supreme Court right? And did the Tribunal correctly follow the Supreme Court? Is it not simple logic and law that if the final product is exempted no modvat/cenvat credit is to be allowed on the inputs. Is it not the very basis of foundation of the Modvat Scheme? I had a tough time explaining to many that whether you liked it or not, the judgement of the Supreme Court IS the law of the land. And TIOL was not commenting on the issue but simply reporting it. There were some ardent supporters of the Government who wrote in that whatever the government does, there are clever lawyers to look for loopholes. Agreed, but what baffles everyone is that there was no corrective steps taken by the Government even after the Supreme Court judgement was delivered in 1999. Absolutely nothing has been done in the last five years or perhaps the Board was basking in the glory of the Supreme Court judgement that the notification was “consciously” worded not realizing that this consciousness cost pretty revenue.
The issue, regarding credit when the inputs are used in the manufacture of dutiable as well as exempted final products, is as old as the Modvat rules itself.
As early as in April 1986, vide Board’s F. No. B. 22/3/86-TRU, dated the 10th April, 1986, it has been clarified that
Modvat credit is not available if the final products are exempt or are chargeable to nil rate of duty. However, where a manufacturer produces along with dutiable final products, final products which would be exempted from duty by a notification (e.g. an end-use notification) and in respect of which it is not reasonably possible to segregate the inputs, the manufacturer may be allowed to take credit of duty paid on all inputs used in the manufacture of the final products, provided that credit of duty paid on the inputs used in such exempted products is debited in the credit account before the removal of such exempted final products.
The above instructions were apparently not very clear or there was some doubt somewhere about its implementation that Board by circular No. 5/87, dated 7-1-1987 invited reference to the Board’s instructions dated 10.4.1986 and asked the Collectors for a report,
“A detailed report on the practice being followed in your respective Collectorate, with regard to the implementation of the aforementioned instructions, may be furnished to the Board urgently.”
Following Board instructions was never a favourite pastime with the Commissioners. Seven years later in Circular No. 5/93-CX-8, dated 26-5-1993, Board informed that it has been noticed that
“the aforesaid instructions are not being followed in the field formations ….
in a case reported by the Audit, an assessee cleared certain quantities of pharmaceutical product as “Physician samples” without payment of duty availing exemption. However, the credit of duty availed on inputs used in such exempted products was not reversed, resulting in irregular availment of MODVAT credit.
It is once again reiterated, that the aforesaid instructions of the Board contained in Circular No. 5/87-CX-6, dated 7-1-1987 may please be followed scrupulously so as to avoid such lapses resulting in loss of revenue.”
It took three more years for these instructions to be made more mandatory by rules. In 1996, the controversial and by now notorious rule 57CC was introduced. This rule was to come into effect from 1.8.1996. It may be of interest to note that originally it was proposed to get back 20% on the exempted final product. There was understandable uproar all over the country and a very responsive Government, by Notification No. 20/96-C.E. (N.T.), dated 31-7-1996, that is just a day before the rule was to come into force, made it effective from 1.9.96. A two month respite. Vide Notification No. 26/96-C.E. (N.T.), dated 31-8-1996, rule 57CC was replaced by a new rule 57CC with effect from 4.9.96.
This was the first of the series of new rules dying before their birth. The new rule made certain clarifications and certain explanations and more importantly reduced the amount payable to a fairly reasonable 8%. And the Pandora’s Box opened.
The entire Modvat rules were amended (along with rule 57CC of course) by Notification No. 6/97-C.E. (N.T.), dated 1-3-1997 and a corrigendum vide M.F. (D.R.) F. No. B-42/1/97-TRU, dated 10-3-1997.
After a lull of three years there was another change with the entire Modvat rules proposed to be revised from 1.4.2000, by Notification No. 11/2000-C.E. (N.T.), dated 1-3-2000. But this also did not materialize. These rules actually did not come in to existence and a new set of rules were brought in by Notification No. 27/2000-C.E. (N.T.), dated 31-3-2000. Our rule 57CC now became Rule 57 AD but with all the frills of 57CC in tact. One more year of these rules and then came the Cenvat Credit Rules 2001 with effect from 1.7.2001, later the Cenvat Credit Rules 2002 from 1.3.2002 and now the latest Cenvat Credit Rules 2004. Rule 6 of the new rules deals with this 8% recovery which is now made 10%.
That is the history of this controversial 8% recovery. But is the issue clear now?