AUGUST 01, 2014

By C S Kalirajan D

IN the Union Budget 2014 – 15 the Hon'ble Finance Minister has reinstated the system of expiry date to Cenvat credit which was in force during 29 th June, 1995 to 31 st March, 2000. In this Budget inter alia the Cenvat Credit (Sixth Amendment) Rules, 2014 has been notified vide Notification No. 21/2014-C.E. (N.T.) dated 11 th July, 2014. The said notification inserts new proviso to Rule 4 of the Cenvat Credit Rules, 2004 (in short ‘ CCR ') to prescribe time period within which a manufacturer or a provider of output service shall avail the Cenvat credit of duties and taxes paid on inputs and input services.

Where was this Restrictive Provision?

Notification No. 28/1995-CE (N.T.), dated 29 th June, 1995 which is antecedent to present Budget Notification had inserted a similar proviso into Rule 57G of the erstwhile Central Excise Rules, 1944 (in short ‘ CE Rules '). The said proviso read as:

"Provided further that the manufacturer shall not take credit after six months of the date of issue of any of the documents specified in first proviso to this sub-rule"

Unfortunately this restrictive amendment was made with immediate effect and thus MODVAT documents (invoice, bills, challan etc.,) which were issued before six months from 29 th June, 1995 but no CENVAT Credit was availed on such documents became infructuous and the duty mentioned therein lapsed. Pursuant to the said amendment the departmental authorities denied Cenvat credit availed based on the documents issued even prior to the amendment which restricted availment of Cenvat credit after six months from issuance of documents.

This action of the authorities was questioned in the case of Osram Surya (P) Ltd., Vs Commissioner of Central Excise, Indore before the Hon'ble Supreme Court of India - 2002-TIOL-64-SC-CX contending that the benefit of the credit which had accrued to them prior to the introduction of the second proviso to the said rule, cannot be taken away by introduction of a limitation because it was a vested right accrued to them prior to coming into force of the said proviso to the Rule. Unfortunately the Hon'ble Supreme Court dismissed the appeal on the rationale that the substantive right has not been taken away by introduction of the proviso to the rule in question but a procedural restriction was introduced which was held to be permissible in law. The Court held that language of the proviso was unambiguous and therefore the restriction would apply to those invoices issued prior to insertion of restriction also. This view has been reiterated by the Apex Court in the case of Samtel India Ltd., v Commissioner of Central Excise, Jaipur - 2003-TIOL-40-SC-CX.

Pursuant to the said amendment in CE Rules in the year 2000 the restriction period of six months was omitted from 01 st April, 2000.

Present Cenvat Credit Rules, 2004 as amended by CENVAT Credit (Sixth Amendment) Rules, 2014:

The restraining provision which was omitted in the year 2000 was given fresh lease of life in this year's Budget vide Notification No. 21/2014 – C.E.(N.T.) dated 11 th July, 2014 and brought the period restriction not only to the inputs but also to input services. After the second proviso to the Rule 4(1) the following third proviso has been inserted.

"Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents in sub-rule (1) of rule 9"

After the fifth proviso to the Rule 4(7) the following sixth proviso has been inserted.

"Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents in sub-rule (1) of rule 9"

It can be inferred from the combined reading of the second proviso to erstwhile Rule 57G of CE Rules and the judgment of the Apex Court in the case of Osram Surya (P) Ltd ., that the present third proviso to Rule 4(1) and sixth proviso to Rule 4(7) of the CCR will be applicable to those Cenvat documents issued even prior to the date from which the restrictive proviso will come into effect (i.e.1 st September, 2014).

Ambiguity with respect to availment of Cenvat credit based on invoice, bills or challans issued by Input Service Distributor (‘ ISD ')

From the definition of ISD provided in Rule 2(m) of the CCR it can be inferred that the ISD is an office of the manufacturer or provider of output service which receives invoice towards purchase of input services and distributes the credit available in such invoices by way of issuing invoice, bill or challan. Therefore, ambiguity may emerge whether the restriction of six months starts from the date of issue of invoice for purchase of input service or issue of invoice, bill or challan by the ISD to distribute credit available on such invoice.

On a combined reading of the sixth proviso to Rule 4(7) of the CCR and 9(1)(bb) & (f) of the CCR it can be inferred that the ISD shall avail Cenvat credit based on the invoices including supplementary invoices within a period of six months from the issuance of such invoice including the supplementary Invoice and in turn issue invoice, bill or challan to distribute such credit at later date based on which the manufacturer or the provider of output service shall avail credit within a period of six months from the issuance of such documents. This slight inconsistency between the definition of ISD as provided in Rule 2(m) and rule prescribing documents eligible for availing Cenvat credit under Rule 9(1) as said above may lead to litigation.

Emerging Pitfalls:

During the insertion of the proviso of six months restriction into the erstwhile CE Rules 1994, the system was not analogous with the present CCR, 2004. When the CE Rules was in force, there was no concept of credit on input services, availment of Cenvat credit based on the documents issued by the ISD etc.,. Without considering these diffentiating aspects the exact restrictive provisos are thrust into the present CCR which would bring following uncertainties where the Cenvat Credit itself may become entitled only after the expiry of six months period.

++ Rule 3(2) & 3(3) of CCR: The manufacturer or producer of final product shall be allowed to take Cenvat credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock on the date on which any goods manufactured by the said manufacturer or producer cease to be exempted goods or any goods become excisable and service providers are allowed to take Cenvat credit of the duty paid on the inputs lying in stock on the date when any service ceases to be an exempted service and used for providing service.

++ Rule 3(5B) of CCR : Cenvat credit which was revered for the reason that the value of inputs or capital goods are written off fully or partially or the provision for write off is being made in the books of accounts can be availed once the inputs or capital goods are put to use.

++ Rule 4(5)(a) of CCR: Principal manufacturer can take the Cenvat credit reversed earlier when the inputs or capital goods are received back in his factory or premises.

++ Rule 4(7) of CCR : Manufacturer or service provider shall be entitled to take Cenvat credit of the amount equivalent to the Cenvat credit paid earlier under this rule for failure to make payment for service within a period of three months.

++ Rule 16 of CE Rules, 2002: Where any goods on which duty had been paid at the time of removal thereof are brought back to any factory for being re-made, refined, re-conditioned or for any other reason the assessee is entitled to take Cenvat credit of the duty paid.

The High Court of Calcutta in the case of Commissioner of Central Excise, Kolkata Vs Rahee Industries Ltd., [2011 (263) ELT 225 (Cal.)] has answered the question referred to the court as when the Cenvat credit was initially availed within the time limit of six months from the issuance of invoice, the subsequent reversal and re-credit was nothing but utilization of CENVAT credit and thus the restrictive proviso under Rule 57G would not apply to these situations.

Relief may be sought from the aforesaid judgment of High Court of Calcutta for the aforesaid pitfalls as the ratio laid down in the judgment would squarely applicable to these rules. However the same may also be disputed by the department on the ground that the rules discussed in the said judgment is different from the present rules in CCR and thus these pitfalls would lead to litigation though it is not an intention of the Finance Minister as understood from his Budget Speech.

It is felt that a suitable clarification/amendment which prescribes that the CENVAT credit shall not be availed after the six months, from issuance of documents specified in sub-rule (1) of rule 9 of the CCR or the date from when the manufacturer or the provider of output service become entitled to such CENVAT credit as per the relevant rules, whichever is later may relieve assessee from vexatious litigations.

Precautions to be taken before 1 st September, 2014:

Transitional period upto 1 st September, 2014 has been provided to enable the manufacturer, service provider and input service distributor to take Cenvat credit on all the earlier invoices on or before 31.8.2014. In the backdrop of the judgment of the Apex Court in the case of Osram Surya (P) Ltd , manufacturers and output service providers should put in place a system to review all pending cases of availing Cenvat credit and take credit before 1 st September, 2014 based on the documents listed in Rule 9(1) of the CCR which are issued on or before 01 st March, 2014.

(The author is a Junior Associate,  Lakshmikumaran & Sridharan & the views expressed in this article are personal.)