Payment under Rule 6 of the CENVAT Credit Rules – CBEC clarifies
A recap:
Dutiable and exempted goods- Can the amount of 10% paid on exempted goods be collected from the customers?
TIOL-DDT 124 on 30 05 2005 remarked,
As is well known, a manufacturer having taken Cenvat credit, has to pay an amount equal to 10% of the total price, while clearing exempted goods. Now the question is , can this 10% be collected from the customer and if collected what are the consequences?
First of all it is accepted that this 10% is not duty and so the principles applicable to duty are not applicable here. However no manufacturer would like to absorb this burden of ten percent. He would pass it on visibly or otherwise. What happens if he recovers this amount from his customers by showing it in the invoice?
There have been two types of Audit objections. In one case, the Audit contented that the rules do not permit the manufacturer to collect the ten percent from their customers and if they do, it has to be paid to the Government as required under Section 11D . In another objection, Audit believes that this ten percent has to be added to the price to arrive at the ten percent liability. And Board had, in a communication, felt that such elementary objections had to be pointed by the Central Excise field staff without waiting for wisdom from Audit!
Now take the first case :- Is Section 11D attracted? 11D speaks of any excess amount collected as representing Excise duty. This ten percent is not Excise duty and is not collected as representing Excise duty. Even if Section 11D is attracted, they have paid the ten percent to the Government, says the Tribunal in NU- WAVE SHOES v COMMISSIONER OF C. EX., NEW DELHI ( ). The Tribunal observed that "This makes it clear that the appellants have not retained the amount collected from the customers and that they have passed on the amount to the Government as provided under Section 11D of the Central Excise Act. Hence the charge of contravention of the provisions of Section 11D is not sustainable"
So 11D is out. Then should this 10% collected from the customer be added to the price to arrive at the ten percent? This will lead to absurd situations. Suppose the price is Rs 100 and the manufacturer collects ten percent from the customer. Now Audit would want this ten percent to be added to Rs. 100 and the amount to be paid should be Rs. 11 (10% of 110). But then if the assessee passes on this additional one Rupee also? Then the price has to be taken as 111 and 10% has to be calculated. This will go on and on till --- till infinity! No! we must stop it somewhere. Why not at the beginning? The point is, he collected Rs 110 and 10% has to be paid on that. But 110 includes 10%. It is 100 + 10. Elementary arithmetic? Not to Audit and some Commissioners!
After Audit raised this objection and the department routinely, as it is the wont, confirmed the demands, the issue reached the Tribunal. As mentioned earlier, the Northern Bench of the Tribunal in the Nu-Wave case held that the 8% (then) collected is credited to the Government and so there is no violation. The Northern Bench in another decision in VIMAL MOULDERS (I) LTD ( ), differed from the Nu Wave Shoes case, with due respect of course! Similarly the Western Bench of the Tribunal in P.T. STEEL INDUSTRIES ( ) disagreed with the Nu wave Shoe case with due respect of course!
But in a recent case, the Bangalore Bench of the Tribunal had no such problem and it followed the NU- WAVE SHOES case. In Commissioner of Central Excise, Hyderabad -I v Pennar Industries Limited ( ) the Tribunal observed that,
"The respondents had correctly debited 8% of the sale value of the exempted goods. This amount is not considered as duty. There is no law, which says that they should not collect this amount of 8% from the buyer of the goods. Section 11D of the CE Act, 1944 will be attracted only when duty is collected and not paid to the exchequer."
Absolutely fine and correct! There is no law against colleting this 10% from the customer. If it is not to be collected, why should any manufacturer avail the exemption at all? They can as well pay full duty and collect it from their customers! This can't be the purpose of the exemption notification. But then what happens to the Northern Bench decision in VIMAL MOULDERS and the Western Bench decision in P.T. STEEL INDUSTRIES?
Naturally the case had to reach a Larger Bench which it eventually did.
The Larger Bench emphatically held that Section 11D has no application. Unison Metals vs Commissioner of Central Excise-
While this was going on, on May 9 th , the Chandigarh Commissioner booked a case and issued a press release as we reported in TIOL-DDT 359 - 10 05 2006 ,
Yesterday the Chandigarh Central Excise Commissioner issued a press note that manufacturers supplying pipes to water projects in Punjab and Himachal Pradesh have evaded excise duty to the tune of Rs. 4.5 Crores. They were availing the exemption and still collecting this 10% from the state governments and according to him failed to pay this 10% to the government. The Commissioner observed another modus operandi - the manufacturer, to keep the mischief under cover, inflated the prices of goods to the extent of 10 per cent, and showed the clearances at nil rate of duty. Any problem?
As per the Larger Bench decision, the assessee had not evaded duty at all and the procedure followed by him was correct and perfectly legal? That raises a pertinent question, "should the department rush to the Press tarnishing the image of the assessees when they book cases on such technical grounds?"
CBEC has now reacted and clarifies that:-
“it is clarified that as long as the amount of 8% or 10% is paid to the Government in terms of erstwhile rule 57CC of the Central Excise Rules, 1944 or rule 6 of the CENVAT Credit Rules, the provisions of section 11D shall not apply even if the amount is recovered from the buyers. However, it may be noted that the CENVAT credit of the said amount of 8% or 10% cannot be taken by the buyer since such payment is not a payment of duty in terms of rule 3(1) of the CENVAT Credit Rules, 2004. Therefore, the said 10% amount should be shown in the invoice as “10% amount paid under Rule 6 of the CENVAT Credit Rules, 2004” .
BETTER LATE THAN NEVER!
CBEC Circular No. 870/08/2008- CX ., Dated: May 16, 2008