Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2010-11/01

Case Study

Introduction: -

Rule 5 of Cenvat Credit Rules, 2004 is a great exception to the whole Central Excise Law as it provides that the Cenvat Credit can be refunded in cash. If an exporter takes the credit on input or input service and final product is cleared for export under bond or letter of undertaking then the unutilised Cenvat credit will be lying with him. If he is not able to use this credit for payment of duty of excise on final product cleared for home consumption or payment of service tax on output service then the manufacturer can claim refund under Rule 5 ibid. The case discussed below is of such aggrieved assessee who was a 100% EOU and had no domestic tariff area sales. He has unutilized cenvat credit lying with him and he applied for the refund claim. But it was rejected on the ground that the final product of 100% EOU was exempted and as such he was not eligible to take the credit. Hence, the refund should not be granted to him.

M/s Raj Polymers & Chemicals v/s Assistant Commissioner, Jodhpur

[Order-in-Appeal No. 105(KKG)CE/JPR-II/2010, Dated: 28/03/2010]

Relevant provisions:-

Rule 5 of Cenvat Credit Rules, 2004

Refund of CENVAT credit.- Where any input or input service is used in the final products which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate products cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,

(i) duty of excise on any final products cleared for home consumption or for export on payment of duty; or

(ii) service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification:

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty:

Provided further that no credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill, under the Provisional Collection of Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on any output service.

Explanation: For the purposes of this rule, the words ‘output service which is exported’ means the output taxable services exported in accordance with The Export of Service Rules, 2005.

Rule 17 of Central Excise Ru9les,2002

Removal of gods by a Hundered Percent Export Oriented Unit to Domestic Tariff Area- Where any (1) goods are removed from a hundred per cent. export-oriented undertaking to domestic tariff area, such removal shall be made under an invoice by following the procedure specified in rule 11, and the duty leviable on such goods shall be paid by utilizing the CENVAT credit or by crediting the duty payable to the account of the Central Government in the manner specified in rule 8.

(2) The unit shall maintain in the form specified by notification by the Board appropriate account relating to production, description of goods, quantity removed, and the duty paid.

[(3) The unit shall submit a monthly return, in the form specified, by notification, by the Board, to the Superintendent of Central Excise, within ten days from the close of the month to which the return relates, in respect of excisable goods manufactured in, and receipt of inputs and capital goods in, the unit.]

(4) The proper officer may on the basis of information contained in the return filed by the unit under sub-rule (3), and after such further enquiry as he may consider necessary, scrutinise the correctness of the duty assessed by the assessee on the goods removed, in the manner to be prescribed by the Board.

(5) Every assessee shall make available to the proper officer all the documents and records for verification as and when required by such officer

Brief Facts of the Case: -

- Appellant are a 100% Export Oriented Unit engaged in the manufacture and export of Guar Gum.

- The appellant had filed refund claim under Rule 5 of the Cenvat Credit Rules, 2004 read with Notification No. 5/2006 CE (NT) on the ground that they were working as 100% EOU and had exported their entire products and they were not able to utilize the Cenvat Credit/ Service Tax taken on input and input services used in the manufacture of final products cleared for export under bond or letter of undertaking.

- Show cause notice was issued to the appellant proposing to reject the refund claim on the alleged ground that the final product of 100% EOU is exempted by virtue of Exemption Notification No. 24/2003-CE dated 31-3-2003.It further said that the no credit is available if the final product is exempted. As the credit is not admissible to 100% EOU and hence there is no question of unutilised credit.

- Reply to the show cause notice was filed by the appellant on the ground that-

(1) Rule 17 of the Cenvat Credit Rules,2002 specifically specifies that 100% EOU is eligible

to avail the Cenvat Credit and can be utilized to make payment of duty for goods

cleared in DTA.

(2) If the law did not intend to provide the refund claim of unutilized credit to the exporters there was no need to amend the Cenvat Credit Rules and also add that it could be claimed for each calendar month.

(3) CBEC has issued various circulars for extending the benefit to the exporters. They are-

(A) Circular No. 799/32/2004-CX dated 23.09.2004 [Petroleum products removal to Export Oriented Units- Clarifications]

(B) Circular No. 54/2004Cus dated 13.10.2004 [EOU and Gems & Jewellery Export Promotion schemes –Amendments by Foreign Trade Policy]

(C) Circular No. 828/5/2006-CX, dated 20-4-2006 [Exports- Refund of unutilized credit/ rebate claims- simplified procedure]

(D) Circular No. 220/54/96-CX dated 4-6-1996 [Modvat- Export Goods –Cash Refund allowed]

The analysis of above circulars makes it clear that 100% EOU are allowed to take refund of unutilized Cenvat Credit and deptt. is bound to follow these circulars.

Case referred was- Collector of Central Excise, Vadodara vs.Dhiren Chemical

Industries.

The circulars issued by the Board are binding on the Deptt. Cases quoted are-

(a) L.G. Industries vs CCE, Rajkot[2002 (148) E.L.T 43 (Tri- Mumbai]

(b) Shri Baidyanath Ayurved Bhawan Ltd. vs CCE, Vadodara[2003(156) ELT 971 (Tri. _Mumbai)

(d) Commissioner of Customs, Tuticorin vs L.T Karle &Co. [2007 (207) ELT 358 (MAD.)

(4) We are rightly claiming the refund on the basis of cases

M/s Malbros Stone Exports v/s CCE, Jaipur [2007-TIOL- CESTAT –DEL]

Anz International vs. The Commissioner of Customs, Bangalore [2008-TIOL-346-CESTAT- BANG]

- The Adjudicating Authority rejected appellant’s claim on the ground that as no goods are exported under bond and the goods exported so no refund or credit of input appear to be eligible under Cenvat Credit Rules, 2004. Case referred here was –Seva Systems Pvt. Ltd. 2007 (7) S.T.R 242 (Commr. Appl).

- Aggrieved by the order-in-original passed by the Adjudicating Authority, appellant has filed appeal before the Commissioner (A).

Appellant’s Contention: -

Appellants have challenged the order-in-original on the ground that they were entitled to take the Cenvat Credit as per Rule 17 of the Cenvat Credit Rules,2002. Rule 17 provides a right to 100% EOU to make the payment for DTA sale from the Cenvat Credit. DTA sale is an additional facility provided to 100% EOU and there is no difference made for 100% EOU and 100% EOU making DTA sales. So it can be said that 100% EOU is eligible to take the Cenvat Credit and use it in the payment of duty if DTA sale is affected or claim the refund under Rule 5 of Cenvat Credit Rules, 2004 if no DTA sales is there.

Appellant contended that there were many provisions in the Central Excise Act, 1944 and the rules there under which provide that Cenvat Credit is allowed to 100% EOU. If there was an intention of law to not provide Cenvat Credit they would have not amended the Cenvat Credit Rules, 2004 and included this provision.

Appellants were in the contention that Notification No. 5/2006-CE dated 14.03.2006 issued under Rule 5 provision (b) specifically allows the refund claim to EOU and says it can be filed for each calendar month.

Appellant further contended that Board Circulars mentioned above are very clear about refund to 100% EOU and such circulars are binding on the department. The case cited was Dhiren Chemicals [2002 (139) ELT 3(SC)]

Appellants relied upon the judgments given in the following cases: -

- M/s Malbros Stone Exports 2007-TIOL-1282-CESTAT-DEL

- M/s Anz International 2008-TIOL-346-CESTAT-BANG

- M/s Mehta Stone Export House 2008 (227) ELT 325 (Tri)

Appellants contention was that if the final product was to be sold to DTA it was neither exempted nor charged to Nil rate of duty, therefore he could not be denied the benefit of Rule 5 of Cenvat Credit Rules, 2004 on this ground. The case law referred was

M/s Tata Tea Ltd. Vs. CCE Cochin 2006 (200) EST 81 (Tri. Bang.)

The judgement on which the Adjudicating Authority is relying is not applicable in instant case like M/s Sewa Systems (P) Ltd. ,2007 (7) STR 242 (Comm. Appl) is related to Export of Services where a different procedure need to followed under Export of Services Rules, 2005.

The case of M/s Bhati &Co. Jodhpur 385 (HKS)/CE/Jpr-II/207 where the assessee applied for a rebate claim after paying the duty and here the case is filing of refund under Rule 5 of Cenvat Credit Rules, 2004.

In M/s Hindustan Petroleum Corporation Ltd. [1995 (77) ELT 256 (SC)] the case was related to Rule 18 &19 of Central Excise Rules, 1994 and the case here speaks about Rule 5 of Cenvat Credit Rules, 2004.

Reasoning of the Order-in-Appeal: -

The learned Appellate Authority held as under: -

The Commissioner (A) held that there was no case saying that if any DTA clearance Cenvat credit will not be allowed and this will not be criteria to deny Cenvat credit if the assessee ever made DTA clearances.

The learned Commissioner (A) further found that it was very clear that the manufacturer can take credit as and when the inputs are received in the factory and Rule 17 says that they can pay duty from that on making DTA clearances. The Rule 5 of Cenvat Credit Rules, 2004 is very much clear that if the credit remains unutilized refund can be taken by fulfilling such conditions and limitations as prescribed by the Central Govt. in its Notifications and it should be made clear that the assessee has not claimed rebate or taken refund under their prescribed rules.

The Notification no. 24/2003CE (NT) dated 31.3.2003 provides an exemption to 100% EOU from the payment of duty if certain conditions are fulfilled. The notification is a conditional notification and duty liability under this will be discharged if all the conditions are fulfilled. If it was an unconditional notification there was no requirement to export under bond.

It was further taken into consideration by the Commissioner (A) that Rule 6 of Cenvat Credit Rules, 2004 disallows the Cenvat credit if the final products are exempted. But here Cenvat credit cannot be denied if the goods are cleared as export under bond in terms of Central Excise Rules, 2002. Here he said that in addition to the dutiability of the goods cleared under DTA the exported goods also falls under the sub rule (6) of the Rule 6 and as such credit on input/ input services cannot be denied.

Section 5A of Central excise Act 1944 does not apply to 100% EOU because it is applicable where the exemption granted is absolute that is without any conditions.

Consequently, the Commissioner (A) held that the appellant was entitled to avail the Cenvat Credit and take the refund of the unutilized balance.

Decision of the Appellate Authority: -

Impugned order set aside. Appeal allowed.

Comments: -

Earlier the cenvat credit was not allowed to 100% EOU. The reason was very clear as they can procure the inputs and capital goods at nil rate of duty. As such, there was no need for cenvat credit. Afterwards, then commerce minister Mr. Kamal Nath announced that 100% EOU will be exempt from levy of service tax. But this was not acceptable to Finance minister and no notification was issued to implement this proposal. The matter went to PMO. Thereafter, the Finance ministry allowed the cenvat credit to 100% EOU. The ministry clarified that 100% EOU will utilize this cenvat credit in DTA clearances but if they are not able to utilize the same then the refund under Rule 5 will be allowed to them.

But the scheme does not convenience the Central Excise department. They came up with the new idea and said that when the goods cleared by EOU are exempt by a notification then the cenvat credit cannot be allowed and as such there is no question of refund under Rule 5. But this decision has clarified that the refund of unutilized credit will be allowed to EOU. ALL IS WELL WHEN ENDS WELL. But who will teach the officers at grass root level. All the schemes by the Government fails in lack of positive approach at the level so called field formation. We have seen the fate of refund of service tax of exporters. The government should formulate such a scheme where the interference of Government officers is least. If the exemption from service tax was provided then there was no objection. But the exemption by way of refund is new terminology used by the department now-a-days. This is very difficult to get the same. Let us hope that the board will bring scheme which will benefit the assessee directly.

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PJ/CASE STUDY/2010-11/01
07 April 2010

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PJ/CASE STUDY/2010-11/01 07 April 2010

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PJ/CASE STUDY/2010-11/01
07 April 2010