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Transfer of CENVAT by adopting excess valuation of inputs is illegal in law

DECEMBER 12, 2012

By A Netizen

IN the early nineties, after the MODVAT scheme had started its journey on the Indian soil, many manufacturers of lighting fittings (Ch. 94) were faced with a glut of MODVAT credit in their RG23A Part-II register, the reason being they took credit on Plastic granules (Ch. 39) where the rate of duty was 25% but the rate of duty on their final product was only 5%. So, every such manufacturer came out with ways and means to ‘encash' this excessive MODVAT credit lying in his accounts – the best way out was by misclassifying the final product itself under chapter 39 itself so that it is charged to a higher rate of duty! Those were the days when manufacturers avoided the SSI exemption of Rs.30 lakhs and paid full rate of duty from the first clearance by availing MODVAT. When this payment of duty on own volition was objected to by the department, both at the manufacturer's end and that of the consignee who had taken credit of such ‘deposit', help came in the form of the decision in the case of Everest Convertors decision of the Tribunal delivered in the year 1995 [ 2002-TIOL-129-CESTAT-KOL ]. Just a year prior to this decision, the SSI notification itself allowed such ‘foregoing of exemption' and after more than a decade the Government enacted sub-section (1A) to section 5A of the CEA, 1944 banning such payments when the goods were exempted absolutely – SSI notification is obviously out of its ambit.

The moot point is a manufacturer never wishes to see his MODVAT/CENVAT slush with Credits which he cannot use. Nevertheless, the Central Government has also provided the refund mechanism in certain cases but the assessee always tries out ingenious ways to convert this credit into hard cash.

One such manufacturer's story is what reached the High Court. This assessee cleared the inputs “as such” at higher prices and paid higher excise duty – of course from the accumulated CENVAT credit. The department could easily see through the game plan. But, there were different schools of opinion in the subject matter – what is wrong if an assessee is paying more duty by adopting higher valuation? was the general perception. However, others said that by this ‘route', the assessee was allowing his consignee manufacturer to avail higher CENVAT credit and was also emptying his fat CENVAT account and this is not proper – logically, whether legal or not.

Convinced that there was no section which catered to such a misfeasance and the closest that one could be used was section 11D of the CEA, 1944, the department issued a demand notice.

The assessee pleaded before the adjudicating authority that whatever has been collected from his consignee has been deposited with the government and there could not be anything more to be given.

The Commissioner did not agree, but the CESTAT did!

Holding that the provisions of Section 11D of the CEA, 1944 are not at all applicable in the present case, the order was set aside and the appeal was allowed with consequential relief. [See 2007-TIOL-1036-CESTAT-AHM ].

The department was not ready to take things lying down although fully aware that there were many decisions on the subject matter of payment of duty on own volition and which were against the Revenue. Notable amongst those were the Supreme Court decisions in Narmada Chematur Pharmaceuticals Ltd. [ 2004-TIOL-113-SC-CX-LB ] by referring to the decision of the Supreme Court in the case of Narayan Polyplast [ 2004-TIOL-110-SC-CX-LB ] but these decisions did not figure in the proceedings .

All said and done, a Tax Appeal came to be filed before the Gujarat High Court in the year 2007 by the CCE, Ahmedabad-II .

The decision on this Tax appeal came some time back and the assessee is in mourning!

The department has WON .

The following are the extracts from the Order of the High Court which will now onwards be carried as a prized possession by all the Audit/Preventive and the Range formations.

+ It is not in dispute that the respondent cleared the goods as such. Since no manufacturing activity was undertaken, question of collection of excise did not arise. While clearing the goods after 1-3-2003, the respondent had to follow the procedure laid down in the amended Rule 3(4) of Rules, 2002 and thereafter Rule 3(5) of the Rules of 2004. Such rules required that on clearance of goods on as such basis, the assessee should have paid an amount equal to the credit availed in respect of such inputs and that such removal should have been made under the cover of an invoice referred to in Rule 9. To the extent the respondent reversed the CENVAT credit in its account on clearance of goods without any manufacturing activity on the credit taken upon purchase of goods, even the Department raises no objection. It is the later portion, namely, collection of higher amount in the guise of excise duty and depositing it with the Department in form of CENVAT credit which is at issue. Firstly, Rule 3(5) of the Rules did not permit collection of higher excise duty from the purchaser or deposit thereof with the Department in form of CENVAT credit.

++ Since no manufacturing activity was undertaken by the respondent, the goods removed on as such basis were not thereafter exigible to excise duty. The respondent under the statutory provisions applicable, therefore, could not have collected any charge from the ultimate purchaser in form of excise duty. The question of adjusting CENVAT credit for depositing such amount so collected did not arise.

++ None of the clauses (a) to (e) of Rule 3(4) of the CCR, 2004 cover a situation where the amount has been collected from the purchaser under the title of excise duty which can never be categorized as such since no manufacturing activity was carried out by the respondent. Utilization of CENVAT credit for such purpose, therefore, was wholly impermissible. The decisions of the Apex Court cited before us and that of the Rajasthan High Court [ Dai Ichi Karkaria Ltd. ( 2002-TIOL-79-SC-CX ) , Eicher Motors Ltd. ( 2002-TIOL-149-SC-CX ), Shankeshwar Fabrics 2002(142)ELT42(Raj.)] at best may suggest that the payment made through CENVAT credit is as good as actual payment, however, such payment should be for the purpose for which it is authorized under the Rules.

++ From the above statutory provisions, it can be seen that whenever any duty has been collected in excess of excise duty payable or in any manner as representing duty of excise, such person has to pay the same to the Central Government forthwith. In the present case, the respondent had collected certain amount from the purchasers representing the same as excise duty. Undisputedly, such amount could not have been collected as excise duty. The same, therefore, had to be forthwith paid to the Central Government in terms of Section 11D of the Act. The same not having been done, the Department was within its right to seek recovery thereof.

++ The view of the Tribunal that in any case the respondent could have encashed the unutilized credit in the CENVAT account and that, therefore, the same did not make any difference to the Department, in our view, suffers from fallacy . Firstly, as noted, Rule 5 of the Rules, 2004 permitted refund of CENVAT credit under certain circumstances which provides that such refund shall be allowed subject to such safeguards, conditions and limitations as may be specified by the Central Government by notification. It can, thus, be seen that grant of refund is neither automatic nor a matter of course. Nothing has been brought on record to suggest that the respondent was entitled to such refund as a matter of right. Secondly, utilization of CENVAT credit for the purpose of payment of unauthorizedly collected so called excise duty was not permissible under the Rules. The contention of the Department that by doing so, the respondent passed on CENVAT credit to the purchaser to be availed by them ultimately which credit such purchasers were not entitled to cannot be brushed aside .

The departmental appeal was thus allowed. [See 2012-TIOL-929-HC-Ahm-CX ]

Now, the Central Board of Excise & Customs would be all smiles and will be gearing up to issue a Circular communicating this decision to the field formations to initiate action in ‘similar' cases and proudly proclaiming that this decision endorses its earlier Circular 940/01/2011 – CX dated 14.01.2011.

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Sub: Transfer of CENVAT by adopting excess valuation of inputs

Dept has already started issuing Notices to assessees who has taken credit for reversal alongwith interest

Posted by james pg