Why 57CC?
Let’s have a look at the position prior to 1996 and after.
SCENARIO UNDER THE MODVAT REGIME BETWEEN 01/03/86 TO 03/09/96
Credit of duty not allowed if final products are exempt. No credit of the specified duty paid on the inputs used in the manufacture of a final product shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty.
Question arose whether inputs employed in the manufacture of dutiable final products during which process inputs may go or get contained in waste, refuse or by products and if so, whether credit to that extent on that quantum of inputs contained in such waste, by-products or refuse should be reversed or not. This question was answered by the Tribunal in the case of M/s. Detergents India Ltd. Vs. Collector of Central Excise -1992 (61) ELT 310, wherein the Tribunal held "There is nothing in the rules to suggest that Modvat credit could be taken only for that portion of the inputs which got consumed in the manufacturing process.”
SCENARIO AFTER 04/09/96
INTRODUCTION OF RULES 57 CC: Rule 57C did not allow credit on inputs used in the manufacture of final products if the final product is exempt from the whole of duty of excise or chargeable to nil rate of duty. Occasions arose wherein a manufacturer could be engaged both in the manufacture of dutiable final products and exempted final products using duty paid common inputs. Since Rule 57C did not allow credit on inputs used in exempted final product, manufacturer had to reverse the corresponding input duty on such inputs used in the manufacture of exempted final products. This exercise was approved by the SUPREME COURT in the case of CHANDRAPUR MAGNET WIRES PRIVATE LTD VS COLLECTOR- (). In such a situation, it cannot be said that the assessee has taken credit for the duty paid on the inputs utilised in the manufacture of the final exempted product under Rule 57A. In other words, the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken credit of the duty paid on the inputs used in the manufacture of these goods.
Since the Department and CERA Audit found rampant misuse by the assessees in the case of reversal of inputs used and perhaps as a fallout of the Supreme Court judgement in Chandrapur, Rule 57CC was introduced. Actually, Rule 57CC was introduced to regulate the mechanism involving such manufacturers employing duty paid common inputs in the manufacture of dutiable final products and exempted final products.
Where lies the flaw?
When Rule 57CC was introduced in 1996, the Government should have removed the condition that “ no credit is taken under the modvat credit rules” in the notifications granting full exemption. When Rule 57C provided that there shall be no credit if the final products are exempted and Rule 57CC provided the mechanism for disallowing such credit in cases where dutiable and exempted final products were manufactured out of credit taken inputs, where was the need to say that no credit should be taken while granting the exemption?
This is what happens when you try to complicate laws by simplification. The saddest part of the story is the Supreme Court taking the Government’s lapse as a conscious decision.
Let’s see what further conscious decisions will come now.