Export oriented units and Cenvat Credit - yet another confusion
Rule 17 of the Central Excise Rules had a provision that payment of duty by EOUs shall be by debiting the account current required to be maintained for this purpose. This rule has been amended with effect from 6.9.2004 to provide for duty payment even from cenvat credit. In fact there was never a bar for EOUs from taking credit from 2001. The only restriction was they were not allowed to use the credit. This view was affirmed by the Tribunal in a recent case - 2005-TIOL-947-CESTAT-BANG. But the issue now is slightly different. Once the EOU is allowed to use the credit, they should naturally be allowed to take credit. Board had in Circular No. 54/2005 - cus dated 13.10.2004 clarified that they are indeed eligible to take credit. Paras 4 and 5 of the Board circular are worth a recall.
4. At present, EOUs ( including STP/EHTP units) are allowed to import as well as procure goods from domestic tariff area without payment of duty. Therefore, there was no necessity for extending CENVAT credit facility to them. However, some EOUs have to procure their raw materials on payment of duty also. As a trade facilitation measure, it has been decided to allow EOUs (including STP/EHTP units) an option either to procure the goods from DTA without payment of duty under CT-3 procedure or to procure the goods on payment of duty and avail CENVAT credit. The credit could be utilized by them as per the Cenvat Credit Rules, 2004, including payment of duty on their DTA sales .
5. The EOU’s can also take credit of the Service Tax borne by them which will in effect provide them relief from Service Tax.
Now after the Board gave this clarification, fertile minds in the department put to work their interpretative brains and came up with the preposterous conclusion that the EOUs will have to necessarily follow either of the procedure of getting the goods without payment of duty or getting them on payment of duty and taking credit. They cannot follow both! That is if they choose the cenvat credit option, they cannot get their goods under CT 3 without payment of duty. In fact in some places, the department has asked the EOUs to exercise their option as to which option they want to follow. As great minds think alike, this opinion in the department is spread right across the country and into small places like Roha in Maharashtra and Mangalagiri in Andhra Pradesh where departmental officers are not allowing credit on duty paid inputs secured by EOUs if they have procured some inputs without payment of duty.
What the learned departmental officers fail to understand is that the Board has not given any clarification. It had only explained the legal position after the amendment which allows the EOUs to take credit and utilise it. The following elaboration would make it clear:
• As per Rule 3 of the Cenvat Credit Rules, a manufacturer or producer of final products is allowed to take the credit of duty paid on the inputs.
• There is no restriction in the rule in relation to EOUs. They are also manufacturers registered under Central Excise.
• As per Rule 17 of the CE Rules, EOUs can use the credit to pay duty for DTA clearances
• EOUs can get their inputs without payment of duty under CT-3. This is an exemption notification and there is no stipulation that the EOU shall avail this for all their inputs.
• Nowhere in the rules or instructions is there a mention that if the EOU gets some inputs on payment of duty, they cannot get other inputs without payment of duty.
There is no question of exercising any option - both the options are eminently available. The officers who had asked some EOUs to exercise the option have not specified as to how long the option would be valid and whether they can shift options and if so how often. And if they choose to change from one option to the other will the credit lapse? In a notice issued by an officer, the EOU was asked to reverse the entire credit taken with interest or pay back the duty on the goods received without payment of duty. These officers are importing their understanding of the SSI notifications where there is a mandatory requirement of exercising an option and continuing with that option for a financial year. But in this case there is no such requirement and the EOUs can get some raw materials on payment of duty and take cenvat credit and get some some raw materials without payment of duty under CT-3. Actually from the same supplier they can get part of the goods on payment of duty and part without duty. There is absolutely no bar.