FEBRUARY 12, 2015

By Rajesh Pandey

THE issue: As per the provisions of Rule 4(2) of Central Excise Rules, 2002, in respect of molasses procured from a khandsarisugar factory, the person who procures the said molasses from such factory or otherwise for use in the manufacture of any commodity, whether or not excisable, the duty on the said molasses is required to be paid by the procurer of such molasses. In such a case, for the procurer of molasses, such molasses is an input which is used by him in the manufacture of any product thereafter. If such a procurer has sufficient credit balance in his CENVAT Credit account, then he may like to utilize the said CENVAT Credit for payment of duty on the molasses procured by him.

One View: The utilization of CENVAT Credit is governed by Rule 3(4) of the CENVAT Credit Rules, 2004 and this Rule permits utilization of CENVAT Credit only for the payment of duty on any final product or on inputs removed as such or on capital goods removed as such or for payment of Service Tax on any output service or towards reversal of CENVAT Credit under rule 16(2) of the Central Excise Rules 2002. In other words, the CENVAT Credit lying in balance in the account of the procurer of molasses cannot be utilized for payment of duty on molasses procured from a khandsari sugar factory, which is required to be paidin terms of Rule 4(3) of the Central Excise Rules 2002. This view is resulting in issuance of Show Cause Notices to the procurer of molasses.

Contra View : However, assesseesrely upon the wordings of the said Rule 4(2) of the Central Excise Rules, 2002 wherein it is mentioned that duty is required to be paid by the procurer of molasses by treating the said procurer as the producer of molasses. They say that the provisions of Rule 4(2) of the Central Excise Rules, 2002 have created a legal fiction whereby the procurer of molasses becomes the producer of molasses and is required to pay the duty on the said molasses; that once the procurer of molasses is treated as the deemed producer, as per the said provisions of Rule 4(2) of the Central Excise Rules, 2002, the molasses has to be treated as the deemed final product of the procurer, so as to make him liable to pay duty on the same. In other words, assessees say that by virtue of Rule 4(2) of the Central Excise Rules, 2002, molasses is a final product of the procurer for the purposes of Central Excise duty and accordingly, when the provisions of Rule 3(4) of the CENVAT Credit Rules are applied, the said molasses has to be treated as the final product of the said procurer and accordingly utilization of CENVAT Credit for payment of duty on the same is proper. By harmonious reading of Rule 4(2) of the Central Excise Rules, 2002 and Rule 3(4) of the CENVAT Credit Rules, the assessees say that by shifting the duty liability on the procurer of molasses, it becomes a case of captive consumption of molasses and, therefore, duty paid by debit in CENVAT Credit account is correct.

Thus it is clear that there is a need for clarity on this issue. Depending upon which of the above two views is found correct, one of the following two amendments may be considered to avoid litigation on this issue.

If the first view is found correct, then the following amendment may be considered:

An Explanation may be inserted under Rule 4(2) of Central Excise Rules, 2002 clearly stating that such procurer of molasses shall not be eligible to utilize CENVAT Credit lying in balance for payment of such duty.

If the contra view is found correct, then the following amendment may be considered:

Provisions of Rule 3(4) of the CENVAT Credit Rules 2004 may be amended or an Explanation may be inserted under the said Rule 3(4), so as to enable utilization of CENVAT Credit for payment of duty on the molasses by the procurer of molasses in terms of Rule 4(2) of Central Excise Rules 2002.

Alternatively, in the CENVAT Credit Rules, 2004, the definition of “manufacturer” or "producer" may be amended by inserting following sub-clause (iii) in Clause (naa) of Rule 2 of the CENVAT Credit Rules:

"(iii) in relation to goods falling under Heading 1703 of the First Schedule to the Excise Tariff Act, includes a person who is liable to pay duty of excise leviable on such goods under sub-rule (2) of rule 4 of the Central Excise Rules, 2002;"

(The author is Commissioner, Service Tax (Appeals), Pune & the views expressed are strictly personal.)