Belated Happy Notification

BELATED ‘HAPPY NOTIFICATION’

By CA. Pradeep Jain

CA. Preeti Parihar

Monu Toshniwal, C.S.

INTRODUCTION:

Won’t it hurts when a manufacturer knows that he is paying duty on the non-dutiable/ non-excisable goods. Yes, it hurts, when one is duly registered, paying duty, taking Cenvat, filing returns, facing show cause notices every now and then and one day Court says “your process does not amounts to manufacture”. The poor assessee stops all these, but the show cause notices does not leave his leg. The duty so paid is gone and cannot be refunded as its incidence has been passed one. And now the department comes up with the show cause notice saying “give back Cenvat as you are not eligible to take it as your product is not dutiable”. So, nothing is left with the assessees. They can only look at the Courts to say something in their favour or to look at the Central Government to be merciful on them. In case of the process of drawing of wires from wire rods, the same thing happened. However, the issue pertains to year 2003-04 and government has slowly and slowly issued a notification in September, 2010 saying that the assessees need not reverse the credit in such cases. This piece of articulation is here for analyzing the entire journey of this issue.

BRIEF HISTORY:-

The entire excise law depends on the activity of ‘manufacture’. The word ‘manufacture’ is defined very comprehensively under section 2(f) of the Central Excise Act, 1944. The definition covers those activities through which a new product with distinct name, character and use emerges or those which are deemed as ‘manufacture’. But inspite of this certain processes have been a matter of litigation. One such process is drawing wires from wire rods. Prior to year 2003, the situation was ambiguous as there was no final verdict whether this process will amount to manufacture or not. As usual, the assessees always said no, but department was continuously issuing the show cause notices by saying that the process amount to manufacture. However, in the year 2003, a landmark judgment was given by the court of last resort holding that the process of drawing wires from wire rods does not amount to manufacture.

SUPREME COURT SAYS ‘NO MANUFACTURE’:-

In case of Technoweld Industries in [2003(155) E.L.T. 209 (S.C.) the hon’ble Supreme Court held that the process of drawing wires from wire rods does not amount to manufacture as the product remains the wire even after the process so undertaken. It was decided that a product should not be considered excisable merely because wires and wire rods are covered by two separate entries under Central Excise Tariff Act, 1985. While deciding the case, hon’ble Supreme Court referred and relied upon the ratio of decision given by hon’ble Tribunal in the case of Jyoti Engineering Corporation [1989(42) E.L.T. 10 (Tribunal) wherein it was held that Drawing wires of lesser gauge from wires of higher gauge does not amount to ‘manufacture’ hence not liable to any further duty.

NO MANUFACTURE, NO CREDIT: SAYS BOARD:-

After the decision given by hon’ble Apex court, Board issued Circular No. 754/70/2003-CX dated 9.10.2003 wherein it was clarified that the credit is not allowed on those inputs which are exclusively used in the manufacture of the exempted finished goods. Though this Circular referred inputs falling under chapter-28 and 29 used exclusively for the manufacture of exempted goods falling under chapter-30. Yet, the ratio of this circular was squarely applicable in the case of those assessees whose process was held as ‘no manufacture’. Thus, in the shed of this circular, the very “prompt” Revenue officers initiated recovery proceedings for credit availed on inputs used for manufacturing wires from wire rods.

DRAWING WIRES IS DEEMED MANUFACTURE:-

Budget, 2004 inserted note no. 10 in the Section XV of the Central Excise Tariff Act, 1985, thereby adding one more item in the list of processes amounting to deemed manufacture. This amendment was effective as from 9.7.2004. Thus, as from this date, the process of drawing wires from wire rods was to be deemed as manufacture whether or not this process changes name, character and use of the product. As such, wires emerging from wire rods were dutiable w.e.f. 9.7.2004 and credit was allowed undisputedly on them. But this amendment resolved the unseen future litigations, not the litigations prior to this date. Prior to this period, between 29.5.2003 to 8.7.2004, department had initiated the proceedings against the assessees who had paid the duty on wires and availed the Cenvat Credit. It was alleged that since the process does not amount to manufacture, credit on inputs cannot be availed. Proceedings have also been initiated against the buyers of those wires who have availed the credit of the so called duty. However, can the proceedings be initiated against the buyer for any error related to duty payment committed at the end of the supplier. Certainly not and there are a series of judgments which says the same thing. Some of the cases deciding this fact are as follows:-

Ø Parasrampuria Synthetics Ltd. vs. CCE, Jaipur [2005 (191) ELT 899 (Tri.-Del.)] – In this case it was held that for any error relating to payment of duty at part of supplier, the issue should be raised against the suppliers; not at the end of the buyers.

Ø Bhuwalka Pipes Pvt. Ltd. Versus Commissioner Of C. Ex., Belgaum [2007 (220) E.L.T. 854 (Tri. - Bang.)]- In this case, credit was duly allowed to the buyer who suffered the incidence of duty in respect of Cenvat goods which were dutiable but later held to be non-dutiable.

Ø CCE, Guntur Vs M/s Subhodaya Chemicals Ltd [2010-TIOL-1119-CESTAT-BANG] - In this case, duty was paid by the supplier on 'sulphur' which attracts 'NIL' duty. It was held that credit is allowable to buyer as the recipient cannot re-classify or re-assess duty liability on the inputs so received.

Ø CCE, Chandigarh Vs M/s Guwahati Carbons Ltd [2010-TIOL-609-HC-P&H-CX] - In this case, the supplier had paid duty in excess of the actual liability, but the credit of entire duty paid was allowed to the buyer.

But these decisions are not followed by the Revenue officials who continue to issue show cause notices to recover the Cenvat Credit from the buyer inspite of these decisions. Similar thing happened with the wires drawn out of wire rods. During the impugned period, the buyers were loaded with the show cause notices which proposed to deny the credit on the grounds that the amount representing the duty on the wires is not a duty of excise, as such credit cannot be allowed.

RETROSPECTIVE AMENDMENT IN RULE 16:-

The Taxation Laws (Amendment) Act, 2006 was enacted w.e.f. 13.07.2006. In this enactment, Rule 16 of the Central Excise Rules, 2002 was amended retrospectively and it was declared that the wire drawing units will be treated as assessees for the period 29.05.2003 to 08.07.2004. The clauses of this Act were clarified vide Circular No.831/08/2006-CX dated 26.7.2006. In this circular it was clarified that the duty paid by the assessees during this period was deemed as a duty paid under the Act and the credit was allowed. Since the amount paid as representing duty was deemed as duty, the buyers were also allowed the credit of the same.

SECTION 5B OF CENTRAL EXCISE ACT, 1944:-

Looking at the increase in no. of like cases where a product on which duty was paid, is subsequently declared as non-dutiable; government brought an important amendment in the Central Excise Act, 1944. The amendment was brought in year 2007 under section 5B of Central Excise Act, 1944. In this section it was prescribed that in the cases where the Cenvat Credit is availed and excise duty is paid on the final product, but subsequently, the process of making the said product is declared as non-dutiable by the Court, Central Government may issue the notification to order for non-reversal of such credit allowed to the assessee. The non-reversal may be subject to conditions as notification may prescribe. Thus, the Central Government was given power to issue the notification regarding non-reversal which was to apply in cases where the assessee has not filed refund claim of excise duty so paid. It seems that this section has suddenly stroked the mind of government, so comes the notification no. 28/2010-Central Excise (Non-Tariff) dated 1.9.2010.

NOTIFICATION NO. 28/2010-CE(NT) DT. 1.9.2010:-

The Central Government has exercised the powers given in section 5B and have issued the notification no. 28/2010-Central Excise (Non-Tariff) dated 1.9.2010. It is prescribed in the notification that the assessee who has paid duty on drawing wires from the wire rods (falling under chapter 72) need not reverse the credit taken on inputs, capital goods and input services. However, this notification allowed the credit only if three conditions were satisfied:-

Ø Cenvat Credit should have been taken upto 8.7.2004.

Ø Excise duty has been paid on removal of said final product

Ø Refund claim of the Excise duty so paid is not preferred by him.

This notification further says that if the buyer of wires has taken the credit of excise duty so paid upto 8.7.2004, it will not be required to be reversed. In other words, if bill issued by the wire drawing unit is prior to 8.7.2004, the buyer will not be required to reverse the credit.

THE ‘LATE LATIF’ NOTIFICATION:-

The government has issued the notification in favour of assessees in year 2010 related to matter of year 2003-04. Isn’t strange that Government has allowed the non-reversal but subject to some conditions. The condition precedent for non-reversal of credit is the non-claiming of refund of duty so paid. This condition is specified in the section 5B itself, then where’s the need of including it once again in the notification? And what if the benefit of this notification is not taken and the refund is preferred? Will it be given with interest and to whom - the manufacturer or the buyer? Perhaps not to manufacturer as he has passed on the incidence to the buyer. What will happen in cases where the demand of reversal of credit has been confirmed against the buyer or manufacturer? No answer, neither by the notification nor by any circular. And the master question - who benefited the most by this late latifi - the manufacturer, the buyer, the Government or someone else? Yes, someone else – the consultants, who have collected handful during this time.

BEFORE BIDDING BYE…

The beneficiary provisions conferring powers to Central Government have become “The Lost World”. These sections either remain behind the curtains or in cases where the curtain is put up and the power is used, it is done just like picking a drop from the ocean. In this case also, the powers are used, but too late, notification is issued, but with lot of deficiencies and many more was there to be added other than conditions. Still more, many other like cases are pending for the processes other than drawing wires from rods. It would be better if the general notification was issued for such cases. But not done, still given the ray of hope to the other similar assessees that they need to knock at the doors of Government and say “Jaago….Jaago” and use powers under section 5B of the Central Excise Act, 1944.

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