Rule 16 of CER, 2002 - Why this Kolaveri Di?
A Netizen writes in -
"Sir, I am a small scale unit engaged in manufacture of Construction equipment namely, Shuttering/Scaffolding/formwork/falsework [Tariff Item 7308] and pay Central Excise duty by availing CENVAT. Our clients are Construction companies. Some of these equipments are of standard dimensions and some are made to order as per the contract executed.
These clients purchase the construction equipment, in most cases on outright basis, and instruct us to deliver the same at the project site. We clear the goods under the cover of Invoice and pay appropriate duty. As and when the projects are completed, which period is from some months to years, they return the equipment manufactured by us and we pay them scrap value.
However, since the items can be reused after remaking & reconditioning, we follow the provisions of Rule 16 of CER, 2002 and take CENVAT credit of duty already paid.
This process of remaking/reconditioning of the equipments requires us to scrub away the concrete stuck to it, welding and fabrication of damaged portion, painting/oiling the same so as to make it fit for re-use as ‘construction equipment'.
Needless to mention, since CENVATTED items have also been used in this process of ‘manufacture' of the ‘construction equipment', which has been given a new lease of life, we reverse the credit on the same the moment they are issued from our materials division.
Since a market exists for these remade/reconditioned equipments, as and when we get buyers we sell them for a value, which is around 50% less than the original price. While clearing this from our factory, we pay Central Excise duty on the value at which it is sold to the buyer, as these are ‘manufactured' goods.
If there is no buyer forthcoming, the remade/reconditioned equipments remain in our factory.
The department recently conducted an Audit and has objected to the manner of our duty payment/CENVAT reversal when the remade/reconditioned construction equipments were cleared from the factory and has instructed us to reverse the CENVAT credit availed when the equipments were returned by the original buyer. In respect of the construction equipment, which have been remade/reconditioned but are still lying in our factory awaiting buyers, the department has sought a similar reversal of CENVAT.
We are of the view that there is nothing in Rule 16, which mandates the above view of the department. The rule 16(2) which applies to our case is worded thus -
"(2) If the process to which the goods are subjected before being removed does not amount to manufacture, the manufacturer shall pay an amount equal to the CENVAT credit taken under sub-rule (1) and in any other case the manufacturer shall pay duty on goods received under sub-rule (1) at the rate applicable on the date of removal and on the value determined under sub-section (2) of section 3 or section 4 or section 4A of the Act, as the case may be."
It is clear that the rule does not mention that if the goods are cleared after undergoing the process of manufacture the duty to be paid should not be less than the CENVAT credit availed when the goods were returned/brought to the factory.
In our case the construction equipments are "products"of heading 7208 inasmuch as they are manufactured out of flat rolled products of iron or non-alloy steel.
It is to be noted that Chapter note 6 to Chapter 72 reads -
"6. In relation to the products of heading 7208, the process of oiling and pickling shall amount to "manufacture".
We request the Board to issue clarifications in the matter."