TIOL-DDT 16 · the untouched capture
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b><font color="#0000FF" size="3">TIOL-DDT
16</font><br>
23 12 2004<br>
Thursday</b></font></p>
<p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Cenvat
Credit on inputs used in exempted as well as dutiable goods : A controversy
as old as Modvat</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><br>
<b>Yesterday’s</b> 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 <b>IS</b> the law of the land. And <b>TIOL</b>
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 <b>“consciously”</b>
worded not realizing that this consciousness cost pretty revenue. <br>
<br>
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. <br>
<br>
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<br>
<br>
<i>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.</i><br>
<br>
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, <br>
<br>
<i>“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.”<br>
</i><br>
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 <br>
<br>
<i>“the aforesaid instructions are not being followed in the field formations
….</i><br>
<br>
<i>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. <br>
<br>
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.”</i><br>
<br>
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.<br>
<br>
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%. <b>And the Pandora’s
Box opened.</b><br>
<br>
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. <br>
<br>
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%. <br>
<br>
That is the history of this controversial 8% recovery. But is the issue clear
now? </font></p>
<p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Why
57CC?</b></font></p>
<p align="left"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Let’s
have a look at the position prior to 1996 and after. </font></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><font color="#0000FF">SCENARIO
UNDER THE MODVAT REGIME BETWEEN 01/03/86 TO 03/09/96</font></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Credit
of duty not allowed if final products are exempt.</b> 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.<br>
<br>
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.” </font></p>
<p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif">SCENARIO
AFTER 04/09/96</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>INTRODUCTION
OF RULES 57 CC:</b> 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- (</font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2002/2002-TIOL-41-SC-CX.htm">2002-TIOL-41-SC-CX</a></font>)<font size="2" face="Verdana, Arial, Helvetica, sans-serif">.
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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.</font></p>
<p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif">Where
lies the flaw?</font></p>
<p align="left"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> 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?<br>
<br>
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
<b> <font color="#0000FF">lapse</font></b> as a <font color="#0000FF"><b>conscious</b></font>
decision. <br>
<br>
Let’s see what further conscious decisions will come now. </font></p>
<p align="center"> </p>
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<td width="461"><p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Chisholm's
Third Law</b></font></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Proposals,
as understood by the proposer, will be judged otherwise by others.</b></font></p>
<p align="center"><font color="#0000FF" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Corollaries</b></font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">1. If you
explain so clearly that nobody can misunderstand, somebody will.</font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2. If you
do something which you are sure will meet with everybody's approval,
somebody won't like it;</font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">3. Procedures
devised to implement the purpose won't quite work.</font></p></td>
</tr>
</table>
<p> </p>
<p align="left"><span lang=EN-GB style='font-size:10.0pt;font-family:Verdana;
color:red'><b><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Until tomorrow
with more of DDT<br>
<br>
Have a Nice Day</font></b></span></p>
</div>
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