Clearances of used capital goods – Should the whole credit be reversed?
When inputs and capital goods are procured by the assesses and credit taken, there may be occasions when they have to be cleared (as such). So our visionary lawmakers had planned provisions for clearances of inputs or capital goods, at the time of making the modvat rules. But subsequent wisdom did not match the original vision. There was always confusion on how to get back the credit taken. First it was as if the goods are manufactured in the factory – this involved even filing of classification and price lists. The law was changed many times – but consistently judicial opinion was that whatever be the provisions of your law, in such cases the amount of credit taken should be reversed.
Over a period of time that became the accepted law; now the legal position is that whenever capital goods are cleared as such, the amount of credit taken originally has to be paid back. This leads to ridiculous situations. Suppose a machine was bought for Rs. 1 crore in 1994 and a credit of Rs. 20 Lakhs was taken. If the machine is sold for Rs. 5 Lakhs (the book value will be far less or even zero) in 2005, the manufacturer has to pay back the amount of Rs. 20 Lakhs credit he had taken in 1994. He can never sell that machine! Sometime back there was a provision for allowing depreciation on the value of these old machines for reversal of credit. But now it is straight paying back of the whole credit.
The Tribunal has come to the aid of such manufacturers who are forced to sell their old machines. In a path breaking order, the Bangalore Bench of the CESTAT has held that these used old machines are not capital goods “ cleared as such” and so they need not pay back the credit. As there is no other provision to collect duty or credit on such used machines, they need to neither reverse credit nor pay duty.
As usual TIOL was the first to raise this issue way back in 2003. Please see our archive story and a detailed analysis of the case in today’s TIOL special.
But this raises another question. A corollary of the Tribunal’s order!.
If a manufacturer gets a machine in March 2005, takes half the credit in March and the other half in April and uses the machine for six months, he sells off the machine in October 2005, can he do it without payment of duty and without reversing any credit? Logically there is nothing wrong in this as the cenvat chain is broken. Nobody is simply going to throw away a machine. If the machine were to be used in another factory, that manufacturer would have got the credit, if duty was paid. Then what happens if that manufacturer is an SSI unit? Laws are really complicated and Lawmen more complicated!