Cenvat availed capital goods cleared as such – The full circle – it took the Board 13 years to reach where it started from
You receive Capital Goods into your factory/service premises and avail Cenvat Credit on the excise duty paid on those goods. For some reason, you want to get rid of the blasted machinery. You simply can't throw it away. You have to return the Cenvat Credit taken. You are ready. But how and how much? Is clearing a machine after using it for five years, clearance as such? What if the machine becomes scrap? Are you a scrap manufacturer?
The present position is that if you remove the capital goods as such, you are required to pay an amount equal to the Credit taken. If you had purchased a machine in 1994 for Rs. 1 Crore and the Credit taken was Rs. 20 lakhs and if you sell that machine for Rs. 10 lakhs now, you will be required to pay an amount of Rs. 20 Lakhs! No fool would sell that machine!
The Government has realised the folly and now amended the Cenvat Credit Rules to stipulate that
“if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit;”.
So, now if the machine is cleared after 10 years, there is absolutely no requirement of paying/reversing the Cenvat Credit taken. And there is a 2.5% depreciation for every quarter. A very wise, logical and friendly decision indeed, but this was exactly the position 13 years ago. After several simplification and confusion exercises and innumerable court cases, government has come back to where they started – in the process making a few millionaire consultants!
Though the Board richly deserves our unbridled applause, it is really sad that it takes so long for logic to set in.
Let's take a quick tour down memory lane on this provision.
1. Rule 57 S as was introduced by Notification No. 4/94 CENT dated 1.3.2004,
57S.(1) Manner of utilisation of the capital goods and the credit allowed in respect of duty paid thereon. The capital goods in respect of which credit of specified duty has been allowed under rule 57Q, may -
(i) be used in the factory of the manufacturer of the final products; or
(ii) be removed, after intimating the Assistant Collector of Central Excise, having jurisdiction over the factory and after obtaining dated acknowledgment of the same, from the factory for home consumption or for export on payment of appropriate duty of excise leviable thereon or for export under bond, as if such capital goods have been manufactured in the said factory:
Provided that where the capital goods are removed from the factory for home consumption on payment of duty of excise, or for export on payment of duty of excise, such duty of excise shall in no case be less than the amount of credit that has been allowed in respect of such capital goods under rule 57Q.
So duty had to be paid as if the Capital goods were manufactured in the factory and this duty was supposed be not less that the Credit taken. So even if you sell the machine at a loss, you were required to pay back the entire Credit and the kind government would get a cut in the profit if you make one.
2. Notification No. 23/94-C.E. (N.T.), dated 20-5-1994. A new proviso was inserted
“Provided further that where the capital goods are removed after being used in or in relation to manufacture of final products from the factory for home consumption on payment of duty of excise or for export under rebate on payment of duty of excise, such duty of excise shall be calculated by allowing deduction of 2.5 per cent of credit taken for each quarter of a year of use or fraction thereof, from the date of availing credit, except where such capital goods are sold as waste and scrap, the duty leviable shall be at the rate applicable on such waste and scrap”;
The concept of depreciation of 2.5% was introduced, which is now brought back after thirteen and a half years! And please note that if the capital goods were sold as scrap, duty applicable to scrap was to be paid. There are hundreds of cases on this issue.
This position continued for a reasonable period, when in 2000, the Board went overboard with massive simplification meant exclusively to make consultants rich. All established and settled issues were resurrected and given freedom to frighten every devil fearing assessee.
In the year 2000, Modvat gave way to Cenvat and
3. Notification No. 27/2000-C.E. (N.T.), dated 31-3-2000 had an explanation to Rule 57AB
Explanation. - When inputs or capital goods are removed from the factory, the manufacturer of the final products shall pay the appropriate duty of excise leviable thereon as if such inputs or capital goods have been manufactured in the said factory, and such removal shall be made under the cover of an invoice prescribed under rule 52A..
So in 2000, we are back to “as if manufactured in the factory” and “appropriate duty”
Then came the Cenvat Credit Rules 2001 and the
4. Notification No. 31/2001-C.E. (N.T.), dated 21-6-2001 had a provision
When inputs or capital goods, on which CENVAT credit has been (4) taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 or section 4A of the Act, as the case may be, and such removal shall be made under the cover of an invoice referred to in rule 7.
Now it became such goods, rate applicable on the date of removal and the value under Section 4/4A. There were hundreds of disputes on whether the value was the value at which they were bought originally or the value at which they were cleared after use. The Cenvat Credit Rules, 2002 with effect from 1.3.2002 had a similar provision that lasted just a year.
5. By Notification No. 13/2003-C.E. (N.T.), dated 1-3-2003, the provision was changed to
“(4) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 7.”;
Now it is back to the amount of credit! And this litigated position remained for the last four and a half years even through the Cenvat Credit Rules, 2004.
And now the government stipulates,
“Provided also that if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit;”.
This was what we started with in May 1994. Congrats CBEC – it requires exceptional courage to admit in 2007 that what was done in 1994 was after all the right position.
NOTIFICATION NO. , Dated: November 13, 2007