Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

Rule 6 or Erstwhile Rule 57CC has been matter of litigation from the date when it has come into force. It has created huge demands when it was applied to job work provisions. This Rule says that if one is availing credit on common inputs and manufacturing both exempted and dutiable goods then either he has to maintain separate records or has to reverse the Cenvat/ Modvat credit at a specified rate. Now, while doing the job work, if a manufacturer takes the credit on consumables like oil, lubricants then he has to reverse the cenvat credit at the rate specified (8/10/5 % -rate prevailent from time to time) not only on job work charges but on the value of exempted goods. It has created panic in the industry as it has lead to huge demands. But the department is happy as all its targets has been fulfilled. We have already wrote an article on the matter titled- “ Job work- Good job for Consultants”

Relevant Legal Provisions: -

Rule 6 of the Cenvat Credit Rules, 2002

Rule 6. Obligation of manufacturer of dutiable and exempted goods.

(1)The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

Provided the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12 B of the Central Excise Rules, 2002 on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

(2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

(3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:-

(a) if the exempted goods are-

1. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act;

2. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;

3. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;

4. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;

5 . final products falling within Chapters 50 to 63 of the said First Schedule,

6. Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity.

7. Goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the erstwhile Ministry of Finance (Department of Revenue), namely:-

a) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June, 1992;

b) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th March, 1995;

c) No. 63/95-Central Excise, dated the 16th March, 1995, G.S.R. 255 (E), dated the 16th March, 1995;

d) No. 64/95-Central Excise, dated the 16th March, 1995, G.S.R. 256 (E), dated the 16th March, 1995; the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I. - The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

Explanation II. - If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.

(5) The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either-

1. cleared to a unit in a free trade zone; or

2. cleared to a unit in a special economic zone; or

3. cleared to a hundred per cent. export-oriented undertaking; or

4. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

5. supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or

6. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.

7. gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper of zinc by smelting".

The Commissioner of Central Excise, Thane v/s M/s Nicholas Piramal (India) Ltd

[2009-TIOL-649-HC-MUM-CX]

Brief Facts of the Case: -

- Respondent-assessee is engaged in the manufacture of Vitamin A falling under Chapter heading 29.36 and animal food supplement falling under Chapter heading 23.02 of the First Schedule to the Central Excuse Tariff Act, 2985.

- The product Vitamin A was liable to excise duty and product animal food supplement was attracting nil rate of duty and was not liable to excise duty.

- The respondents were first using the inputs in manufacturing Crude Vitamin A which was an intermediate product. Crude Vitamin A was further used in the manufacture of Vitamin A, a dutiable final product and Animal food Supplement, an exempted final product cleared without payment of duty.

- The respondents took cenvat credit for duty paid on inputs received in the factory. Before removing the animal food supplement, the respondents, in their cenvat credit, debit/reversed the credit to the extent inputs were used in the manufacture of crude Vitamin A which in turn was used in the manufacture of animal feed supplement. According to them, thus at the earliest available opportunity they had surrendered the credit going into the exempted final product. The respondent thus did not take advantage of the credit availed on inputs used in the manufacture of exempted final product.

- The Department issued 3 show cause notices covering period March 2002 to December 2003 for recovery of amount equivalent to 8% of the total price of the exempted goods cleared by the respondent. The Commissioner confirmed that the sum as paid by the assessee and imposed equal penalty.

- The respondent filed an appeal before the Tribunal. As there were conflicting views of CESTAT, the matter was referred to Full Bench. The Full Bench of the Tribunal by impugned order held in favour of the assessee (respondent).

- The Revenue has come in appeal before the High Court against the impugned order of the Tribunal.

Appellant’s Contentions: -

Ø The Revenue contended that on a perusal of Rule 6 and a literal construction, would make it clear that whenever inputs are used both for manufacture of exempted products as also dutiable products, a person seeking to avail of credit on inputs in respect of dutiable products would have to comply with the requirements of Rule 6 (2) of the Rules. On failure to maintain separate accounts for receipt, consumption and inventory of inputs and input services meant for use in the manufacture of dutiable products etc, the assessee who opts not to maintain separate accounts will have to pat duty as set out under Rule 6(3). The Revenue contended that in the instant case, the majority judgment of the Tribunal has not considered this aspect. Therefore, the judgment clearly discloses an error of law which is apparent and consequently, is liable to be set aside and the order-in-original is required to be restored.

Respondent’s Contentions: -

Ø The Respondent-assessee contended that as the inputs were used firstly in the manufacture of an intermediate product, it is not possible for the assessee to maintain books as required. In these circumstances, it is submitted that once the assessee reverses the cenvat credit in so far as exempted products are concerned before the clearance of the said goods, what would be attracted is Rule 6 (1).

Ø It is further submitted that if Rule 6 (2) is construed in the manner sought to be contended on Revenue’s behalf, it will cause great hardship to a manufacturer and in such an event, the Court considering the object of the Rule and the apparent provision should give a meaning which can give effect to the purpose of the Act and the rule itself. In that context, it is submitted that the Tribunal was right in taking the alternative view that as the petitioner has complied with the requirement of Rule 6 (1) no duty was payable in terms of Rule 6 (3).

Ø Respondent relied upon the judgment in Chandrapur Magnet Wires Pvt Ltd v/s Collector of Central Excise [1996 (81) ELT 3 (SC)] to support their contention that Rule 6 (1) should not be read literally but is capable of an alternative consideration, namely that if an assessee reverses the credit on inputs used in the manufacture of final products before the goods leave the factory, then Rule 6 (1) is complied.

Ø Reliance was placed on the judgment delivered in the case of Commissioner of Central Excise, Nagpur v/s Ballarpur Industries Ltd [2007 (215) ELT 489 (SC)].

Ø Respondent next relied upon the judgment in CCE v/s Bombay Dyeing & Mfg. Co. Ltd [2007 (8) SCC 177].

Ø It was further submitted that sub-rule (3) of Rule 6 was attracted only when the assessee does not want to comply with sub-rule (1) of Rule 6 by reversing the credit. In other words, it is only when the assessee wants an exemption as also credit that the assessee has to comply with Rule 6 (3) (b).

Ø It was further submitted that the option to pay 8% or 10% under sub-rule (3) was not available to goods covered under Rule 3 (a). Rule 3 in so far as (a) is concerned is in respect of exempted goods set out therein. On failure to maintain accounts the rule imposes on the manufacturer a burden to pay an amount equivalent to the credit attributed to the inputs used in relation to the manufacture of such final products at the time of clearance from the factory.

Ø The respondent further pointed out illustrative cases of the hardship that would be occasioned if the interpretation sought to be advanced by them is not accepted. Reliance was placed on judgment of K. P. Varghese v/s ITO [1981 (4) SCC 173] to contend that the interpretation, which is manifestly absurd and if unjust results follow that interpretation has to be avoided.

Ø Respondent next relied upon the judgment of CIT v/s J.H. Gotla [(1983) 4 SCC 343].

Ø It was contented that unreasonable results cannot be intended by the legislature. Reference was made to the judgments in CIT v/s National Taj Traders [1980 (1) SCC 370], Bhudan Singh v.s Nabi Buz [1969 (2) SCC 481] and Tirath Singh v/s Bacchittar Singh [1955 (2) SCR 457] to support this contention.

Ø It was submitted that Section 5A enables the Government to exempt products in public interest and such public interest cannot be lost off, sight while interpreting Rule 6 to be used as a tool of oppression to extract an amount which is much beyond the remedial measure. Rule 6 cannot be interpreted in the manner which frustrates the exemption and in effect taxes the exempted product in an indirect manner. Rule 6 at any rate cannot run counter to Section 5A.

It was further contended that Section 5A was an enabling provision, empowering the Government to exempt products from duty in the public interest. Where a product has been exempted in public interest, any interpretation of subordinate legislation should not result in that produce being taxed indirectly since it is well settled that what cannot be done directly cannot be done indirectly as well. Reference was made to maxim ‘quando aliquid prohibetur fieri, prohibitur ex directo et per obliquum’ which means “whenever a thing is prohibited, it is prohibited whether done directly or indirectly.”

It is submitted that Rule 6 is a part of delegated legislation enacted under Section 37 (2) (xvia). This section enables Central Government to make rules providing for credit paid on the goods used in or in relation manufacture of excisable goods. Rule 6 cannot be employed as a charging section thus going much beyond the mandate of giving credit.

Ø It was next submitted that revenue is mistaken in assuming that Rule 6 (3) (b) id the only method of complying with the bar imposed by section sub-rule (1). Rule 6 (3) (b) is only a convenient mode and not the only method of proving that sub-rule (1) has been complied with. Any other method complying with the mandate of sub-rule (1) of Rule 6 is not precluded by Rule 6 (3) (b). Rule 6 (3) (b) is thus directory and not mandatory. Reliance was placed on Thermax Private Ltd v/s CC [1992 (61) ELT 352 (SC)], Lakshmiratan Engineering Works v/s Assistant Commissioner (Judicial) [1968 (21) STC 154 (SC)], J. K. Manufacturers Ltd v/s STO [1970 (26) STC 310 (AIIFB)].

Ø It was further submitted that the Assessing Officer under a taxing statute are familiar with estimation/quantification of amount of expenditure/income etc as part of the assessment functions. Hence, only justification given in budget circular for enactment of Rule 57C is not correct. Therefore, the method prescribed in Rule 6 (3) (b) is only directory and not mandatory.

Ø It is also submitted that apportionment on some reasonable basis is not new to tax but a familiar thing. Reference has been made to the judgment in Commissioner of Income Tax v/s Best and Co [AIR 1966 SC 1325] to contend that difficulty in apportionment cannot be a ground for taxing the whole receipt or exemption of the whole receipt. It was also submitted that a coordinate Bench of this High Court in CCE v/s Concept Pharmaceuticals [2008 (225) ELT 181 (Bom)] had accepted a similar contention that the credit of duty paid on common input is taken initially and thereafter reversed, to the extent used in the manufacture of exempted final product, demanding an amount equal to 8%/ 10% under Rule 57CC is not maintainable.

Ø It is submitted that prorate credit has been statutorily provided in Cenvat Credit Rule 2004 w.e.f. 01.04.08 and the principles and basis enshrined in those rules can be applied for the past period. It is only a rule of evidence and such rules of procedural law, they can be applied for the period prior to 01.04.2000 also. Reliance was also placed on Commissioner of Wealth Tax v/s Sravan Kumar Swarup [1994 (210) ITR 886 (SC) and on Commissioner of Wealth Tax v/s Lakshmipat Singhania [1978 (111) ITR 272 (Alld)].

Ø Lastly, it was submitted that the availing credit is not irrevocable act and the assessee had the option to surrender the credit availed. An assessee can surrender the benefits availed under a particular provision and avail benefit conferred by some other provision. Reliance was placed on Share Medical Care v/s UOI [2007 (4) SCC 573].

Question for Consideration: -

The issue involved in the appeal is as under: -

Whether the Hon’ble Tribunal was right in allowing the assessee for reversal of credit taken, instead of insisting upon the assessee to pay an amount equal to 8% or 10% of total price of the exempted goods as per the Rule 6 (3) (b) of the Cenvat Credit Rules, 2002?

Order of the High Court: -

The High Court analysed the Rule 6 as well as large number of judgments cited by the parties and held as under: -

v The High Court held that Reversal of cenvat credit is not a substitute for payment of amount equivalent to 8% of the total price of the exempted goods. The Larger Bench decision of the Tribunal reported at 2008-TIOL-1877-CESTAT-MUM-LB is overruled.

v On a plain reading of Rule 6 (1), it is obvious that if inputs are used in the manufacture of exempted goods, credit is not allowed except in the circumstances mentioned under sub-rule (2). A manufacturers who avails of the Cenvat credit in respect of inputs used in the manufacture of final products which are chargeable to duty as also exempted goods, the manufacturer has to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs used for manufacture of dutiable final products and the quantity of inputs used for the manufacture of exempted goods and takes cenvat credit only on that quantity of inputs which are used in the manufacture of dutiable goods. A plain reading of this rule does not lead to any ambiguity, absurdity or defeat the provisions of the Act.

v Rule 6(1) and Rule 6 (2) read together mean that inputs used in the manufacture of exempted products no cenvat credit is allowed. It may however happen that the inputs used in the manufacture of both exempted and dutiable goods, in which event if the register as required is maintained the credit can be taken for the quantity of inputs used in the manufacture of dutiable goods. If records are not maintained as required, the duty has to be paid in terms of Rule 6 (3).

v The presumptive tax payable in terms of Rule 6 (3) has been recognized and accepted by the Apex Court in Ballarpur Industries case while construing Rule 57CC. Rule 6 (1) does not lead to the construction that if the manufacturer without maintaining the books, does not take credit for the duty paid on inputs for manufacture of exempted goods. Rule 6 (1) is satisfied. Rule 6 (1) is satisfied only when the requirements of Rule 6 (2) are satisfied, what requires register to be maintained for separate accounts for receipt, consumption and inventory of the inputs. Rule 6 (3) then provides that if separate accounts are not maintained then the amount as set out thus has to be paid by a manufacturer who does not maintain accounts.

v Merely because an assessee contends and it may be factually true that in some instances the rule cannot be followed in the matter of maintaining accounts that cannot be said to be a tool of oppression to extract that amount which is beyond the remedial measures. A power to give benefit, encompasses within itself, the power to put conditions and restrictions under which credit is available. Power to give benefit also carries with it power to take or withdraw it.

v Rule 6 makes it clear that in so far as inputs used in the manufacture of exempted goods, no cenvat credit is allowed. The rule making authority however noting that inputs may be used both for manufacturing final products which may be dutiable and other final products which are exempt, has provided that such manufacturer will be given credit in so far as inputs used for manufacturing of dutiable goods, if accounts are maintained in terms of the rules.

v Therefore merely because the assessee contends that he is willing to forego credit on inputs used in the manufacture of exempted final product, does not warrant a departure from the requirements of Rule 6 (2) and Rule 6(3). The rules contemplate that on failure to maintain accounts in terms of Rule 6 (2) the consequences would be in terms of Rule 6 (3) (a) or (b).

v The legislature in so far as machinery for levying of tax had left it to the delegate to make the rule. The delegate has made the rule. An assessee seeking to take advantage of Rule 6, is fully aware of the requirements of the rules including Rule 6(1).

v The Court cannot read into the said rule something different or render otiose the words which we have earlier set out. The rule mandates specifically that an assessee seeking to avail Cenvat credit in respect of inputs used in the manufacture of exempted goods, the only method to which he can avail of is by following sub-rule (2). Rule 2 provides for maintaining of records.

v The rule is not directory in nature but is mandatory.

v Once the law itself has been laid down, the circumstances under which credit can be availed, it is that method by which the credit can alone be availed. Reliance placed by assessee on Share Medical Care v/s UOI is misplaced. It is not open to an assessee to contend that some other method is also available and the assessee has the choice of claiming credit or reversing the same. Such an argument is devoid of merits considering the clear language of Rule 6 (1) and is consequently rejected.

v The judgment of Chandarpur Magnate’s case is also not applicable as the said judgment has not considered either the interpretation of the Rule 57C or Rule 57CC. The issue for consideration therein was whether availing of modvat credit on inputs used in the manufacture of exempted final product in terms of the rules as then in force.

v The High Court has also given justification for non-applicability of the various judgments cited by the Appellant.

Decision of the High Court: -

The Impugned order of the Larger Bench of the Tribunal set aside. Appeal allowed.

Comments & Conclusion: -

The High Court held that the provisions of Rule 6 (3) are required to be mandatorily followed. If an assessee doesn’t maintains separate records and uses common inputs or input services for manufacturing dutiable and exempted goods, and avails cenvat credit on the common inputs, then he is required to reverse or pay an amount equivalent to 8% of the total price of the exempted final product. He cannot follow any other method.

It will create panic in the industry. If the same is implemented then the industry who has taken the credit will have to reverse the huge amounts. The gravity can be seen from the fact that the credit is taken only on consumables and they have to reverse the credit on complete value of exempted goods. We have come across a situation where the credit taken was only around 28,000 but the amount to be reversed came to Rs. 65 Lakhs. If the same is implemented then it will lead to closure of such a SSI unit.

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PJ/CASE STUDY/2009-10/021
08 December 2009

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PJ/CASE STUDY/2009-10/021 08 December 2009

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PJ/CASE STUDY/2009-10/021
08 December 2009