Dual benefit by taking credit on inputs and collecting duty on exempted final products
The Hon'ble Comptroller and Auditor General of India has submitted his annual report on taxes. What starts as a casual visit by an innocent looking Audit party ends up with the CAG's report. See what the CAG had to say on this controversial subject that was long ago settled.
Rule 6 of the Cenvat Credit Rules, 2002/2004, envisages that where an assessee manufactures final products, part of which are chargeable to duty and part of which are exempt but avails of credit of duty on inputs meant for use in both the categories of final products and does not maintain separate accounts, he shall pay an amount equivalent to eight per cent (ten per cent from 8 October 2004) of the price charged for the exempted goods. The amount so payable is in lieu of cenvat credit availed of on inputs used in the manufacture of exempted goods and hence the liability is to be borne by the manufacturer himself.
The Ministry had also clarified on 9 September 2002 that where a manufacturer debits an amount equal to eight per cent in terms of rule 6 of the Cenvat Credit Rules, 2002 and collects it from the buyers, then the amount so collected should be deposited to the credit of the Government.Further, the CESTAT in the case of M/s Vimal Moulders (India) Ltd. [2003-TIOL-244-CESTAT-DEL] had held that the amount of eight per cent paid by the manufacturer but collected from the customer was to be deposited with the Government as per the provisions of section 11 D of the Central Excise Act.M/s Fouress Engineering (India) Ltd., M/s Bharat Heavy Electricals Ltd., M/s Crompton Greaves Ltd. (Stamping Division) and M/s Mather and Platt Pumps Ltd., in Bangalore II, Bhopal, Mumbai III and Pune I Commissionerates respectively, had availed of cenvat credit on inputs used in the manufacture of both dutiable as well as exempted goods and did not maintain separate inventory for inputs used in the exempted goods. The assessees cleared exempted goods and paid duty of eight/ten per cent of the value of the exempted goods. However, Rs. 1.89 crore recovered as excise duty from the customers during the period between November 2002 and March 2006 was irregularly retained instead of being deposited with the Government.On this being pointed out (between January 2006 and February 2007), the Ministry in the case of M/s Fouress Engineering (India) Ltd. stated (July 2007) that the CESTAT in various cases had held that once the assessee had paid eight per cent of the value of exempted goods, there was no law prohibiting the assessee from collection of such amount from the buyers. It stated (November 2007) that M/s Bharat Heavy Electricals Ltd. and M/s Mather and Platt Pumps Ltd. had not collected the amount as excise duty but as equivalent to cenvat reversal and hence provisions of section 11D were not applicable. In the case of M/s Crompton Greaves Ltd., the Ministry admitted the audit observation and intimated (October 2007) that the demand of Rs. one crore had been confirmed.Reply of the Ministry is not tenable as it is contrary to its own clarification dated 9 September 2002. Also, the absence of appropriate provisions in the Act leads to unjust enrichment of the assessees by allowing encashment of credit, thereby defeating the very purpose of denial of cenvat credit.
Additionally, the Ministry has not taken appropriate action to make the law explicitly clear and to resolve the anomalous situation which has cropped up due to conflicting decisions of the CESTAT on the same issue.
This is the damning observations of the Audit with which the Opposition parties can, if they want to, rock the government, as the CAG is the ultimate Auditor! But just observe the objection and see how ignorant the Audit is.
They say the law is not explicitly clear leading to conflicting decisions of the CESTAT. But Sir, long ago the CESTAT Larger Bench had clearly decided the issue in favour of the assessee in the Unison Metals Ltd Unison Metals Ltd case - 2006-TIOL-1337-CESTAT-DEL-LB. Now after two years of the Larger Bench Decision, the CAG is telling Parliament that there are conflicting decisions! Obviously they are not aware of the Larger Bench Decision or conveniently ignored it.
Strangely even the Revenue seems to be unaware of the Larger Bench decision as it has not told the Audit about this! Further it has even accepted the objection in the case of Crompton Greaves Ltd and even informed the Audit that a duty of Rs. 1 Crore had been confirmed! [Incidentally that has been stayed by the CESTAT - 2008-TIOL-1060-CESTAT-MUM]
In fact the CBEC had graciously accepted the Larger Bench order and by CIRCULAR NO. 870/08/2008- CX ., Dated: May 16, 2008, 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.”
And for the CAG , the issue is still alive and he has brought the lapse of the ministry to the notice of the Parliament. And the Parliament's Public Accounts Committee can investigate the matter which would cost the nation a few Crores of Rupees – and then finally it would be decided that the issue was settled long ago.
Who will audit the Audit? Can the CAG undertake a study on how much money and time was wasted because of the Himalayan blunders of his auditors?
Just read the observation, “the absence of appropriate provisions in the Act leads to unjust enrichment of the assessees by allowing encashment of credit, thereby defeating the very purpose of denial of cenvat credit.”
This is some English indeed but belies an elementary knowledge of arithmetic.
Please see also - 21.05.2008
From CAG's Report No. CA 7 of 2008 (Indirect Taxes)