CENVAT Credit on Ships for Breaking
AS per the proviso to Rule 3(1)(vii) of the CENVAT Credit Rules,
CENVAT credit shall not be allowed in excess of 85% of the additional duty of customs paid under sub-section (1) of section 3 of the Customs Tariff Act, on ships, boats and other floating structures for breaking up falling under tariff item 8908 00 00 of the First Schedule to the Customs Tariff Act.
But why this restriction of 85% credit on ships and boats? This was brought out in 2011 Budget and the TRUJS then explained:
The process of obtaining goods and material mainly melting scrap and re-rollablescrap of steel, by breaking up of ships, boats and other floating structures is deemed to be a process of manufacture in terms of section note 9 of Section XV of the Central Excise Tariff. In the breaking of ships, a number of used serviceable articles such as pumps, air-conditioners, furniture, kitchen equipment,wooden panels etc. are also generated. These are generally sold as second hand goods by ship breaking units but no excise duty is payable as they do not emerge from a manufacturing process. At the same time, ship breaking units are allowed to avail full credit of additional duty of customs paid on the ship when it is imported for breaking. It has been reported by the field formations that this anomaly is resulting in misuse of the Cenvat credit scheme. Rule 3 of the CCR has been amended to prescribe that Cenvat credit shall not be allowed in excess of 85% of the additional duty of customs paid on ships, boats etc. imported for breaking.
Three years later, the Gujarat High Court in the case of Shivam Engineering Company - held that no Additional Duty of Customs (CVD) is leviable on vessels and other floating structures imported into India for breaking up.
So there was no CVD leviable ever on the ships imported for breaking up - 85% credit notwithstanding.
Now the Government has removed this 85% clause with effect from 1.3.2015, but why 1.3.2015?
Please also see
1. Ships for Breaking Up - Not Excisable; therefore no CVD-High Court - DDT 2436 12.09.2014
2. Excise duty on ships for breaking - do they manufacture ships just for breaking up? - DDT 541 29 01 2007
3. The largest ship-breaking yard on the planet.
4. Ships imported for breaking - CVD and Cenvat credit