CENVAT Credit Rules - Formulated Rule 6
THE reversal of CENVAT Credit when both dutiable and exempted goods are manufactured and/or taxable and exempted services are provided, had resulted in mind boggling litigation. A Supreme Court Judge, who as a High Court Judge stated in the Court after hearing Rule 6, "why do they make such complicated laws that even lawyers and judges don't understand. How do they expect assessees or even their officers to understand?" Almost the entire rule is amended to make it simpler clearer without actually changing the substance of the statute.
The ridiculous situation of the amount of credit to be reversed, was best highlighted by the Tribunal in THYSSENKRUPP INDUSTRIES Vs COMMISSIONER OF CENTRAL EXCISE, PUNE - ; the Tribunal noted the case as:
In the present case, it is a fact that the total Cenvat Credit taken on common input services only Rs. 2.07 crore (approximately) whereas if we apply the formula, the amount of credit required to be reversed works out to Rs. 8.62 crore. But if we consider the first option of payment of an amount @ 5% of the value of the exempted services, the liability of the appellant would work out to about Rs. 13 crore which is much higher than that arrived at by applying the formula.
For taking a credit of Rs. 2 Crores, they had to pay either about 9 crores by one calculation and 13 crores by another.
In this situation, the Tribunal expressed its helplessness by stating, "If the formula leads to an anomalous situation, the remedy lies in amending the provisions of the statute and the judiciary is helpless."
Writing in our columns, Ankit Shah observed, "It seems that the Tribunal has opened the gates of litigation & only a clarification from the Central Board of Excise & Customs in favour of the assessee should provide some relief as a soothing balm. But, the CBEC rarely is known for such generosity!"
Thankfully, the Board has found the balm and applied it.
The highlights of the new Rules:
1. a manufacturer who exclusively manufactures exempted goods for their clearance up to the place of removal or a service provider who exclusively provides exempted services shall pay (i.e. reverse) the entire credit and effectively not be eligible for credit of any inputs and input services used.
2. When exempted and dutiable goods are manufactured or exempted and taxable services are provided, the assessee has two options - (1) pay an amount equal to six per cent of value of the exempted goods and seven per cent of value of the exempted services, subject to a maximum of the total credit taken or (2) pay an amount as determined under sub-rule (3A).
3. The amount to be paid will not exceed the total credit taken.
4. Sub-rule (3A) prescribes the procedure and conditions for calculation of credit allowed and credit not allowed and directs that such credit not allowed shall be paid, provisionally for each month. There is a simple formula and if you are not scared by simple algebra, you will have no problem.
The most important point is that at last it is by law stipulated that for the sin of taking a small credit, you will not be asked to sell your factory.
The Board has really solved a longstanding irritating litigation - fairly and in favour of the assessee and the Government. This is a welcome change from the adversarial era to the facilitation age.