MARCH 03, 2015

By K Prathiba & Shivam Mehta

WITH the Budget 2015 having made its arrival with much ado, it would have been surprising and may be even discomforting if the Cenvat Credit Rules, 2004 ("Credit Rules") had not been fiddled with.

Explanations to Rule 6(1) of the Credit Rules have been inserted by notification 6/2015-CE(NT) dt. 01.03.2015 to state that for the purpose of this Rule, exempted goods and final products shall include -

• Non-excisable goods

• cleared for a

• consideration

• from the factory

Further, value of non-excisable goods for the purposes of Rule 6, shall be the invoice value and where such value is not available , such value shall be determined by using reasonable means consistent with the principles of valuation contained in Central Excise law.

Briefly, as per the said amendment, if there are any non-excisable goods cleared from the factory for a consideration, such goods shall be considered to be exempted goods and obligations under Rule 6 have to be met i.e., proportion of credit on inputs and input services attributable to non excisable goods will not be available.This makes the position parallel to services where negative list services are also covered as exempted services and subject to Rule 6.

History

Every amendment in the Budget arouses curiosity in the reader to know the history as to how the department was losing (generally) in the absence of such provisions. This amendment does have a tale of its own. To understand that, let us look into what ‘excisable goods' are since ‘non-excisable goods' has not been defined. ‘Excisable goods" means goods specified in the Central Excise Tariff Act, 1985 ("Tariff") as being subject to a duty of excise and includes salt. Further, Courts have held that for goods to be excisable, the same have to fulfill the twin test of manufacture and marketability.

So, for goods such as electricity which is mentioned in the Tariff but without any rate of duty, the same is considered to be non-excisable. When electricity generated in the factory is used for manufacture of dutiable goods as well as wheeled outside, it was argued that credit on any inputs used for generation of electricity was not subject to Rule 6 as the Rule did not cover non-excisable goods but only exempted goods. Consequently, demand of 6% on the value of electricity has been denied. However, proportionate credit reversal on such common inputs and input services were still demanded under the eligibility provision of the Credit Rules. This argument has now been silenced with the said amendment.But this does not mean that there has not been rise of any further ambiguities.

Consideration monetary, non-monetary

First, the Finance Minister has been kind enough to cover non-excisable goods as exempted goods only when these are cleared for a consideration. So if there is no clearance or no consideration, there is no change. Though there has been no ‘capability of being cleared for a consideration' test, the much disputable term ‘consideration' under service tax has not been defined here. Does that mean one has to resort to the definition under contract law? Also, whether consideration has to be only monetary, in the absence of a prefix to that effect, is a point to ponder.

Invoice value - independent value?

Value for the purpose of Rule 6 shall be the invoice value. What happens if the invoice value is set really low? Is there any need to establish that the invoice value is an independent or un-influenced value, say, when cleared to a related person?

Where the invoice value is not present, value shall be determined using reasonable means and principles of valuation under Central Excise law. What is not clear is whether the alternative is available only where such invoice value is not present, and also what is considered to be reasonable means?

Applicable to dross, skimming, bagasse, etc.

Electricity is a clear example but it appears that the implications of decisions stating that items such as dross or skimming, bagasse etc. are non-excisable will now be seen under this amendment. Whether the argument, which was settled law till now, that inputs contained in waste arising during the manufacture of dutiable products require no reversal as these are not manufactured products, is still open, is itself open to debate?

Goods under State Excise

The new provision seems to cover even those goods which are subject to State Excise law such as goods containing alcohol. But whether the invoice value shall suffice in such cases as well or the valuation principles under relevant State Excise law, if any, shall hold preference, is not clear.

Siblings of Rule 6 to follow suit?

The present explanations inserted in Rule 6 have been clearly stated to be ‘for the purpose of this Rule'. In such a case, whether Rule 7 is also to follow suit or it can be ignored while distribution of credit is undertaken by ISD? Total turnover under Rule 5 to include such non-excisable goods?Such an Explanation under Rule 6 and not in the definition itself could either be a conscious move or a serious omission.

Was it really required- Section 37

The discussion shall be incomplete without raising the doubt for the very need of such a provision. When Section 37(2)(xvi) itself gives power to make rules to provide for the credit of duty paid or deemed to have been paid on the goods used in or in relation to the manufacture of excisable goods, does it not ipso facto mean that credit cannot be extended to non-excisable goods?

The fate as well as impact of this amendment, only time will tell. But this budget poses the poignant question yet again, as to how serious are we to move towards GST given the introduction of such provisions which raise further questions and ambiguities rather than simplifying the existing law.

[The authors are associated with Lakshmikumaran & Sridharan and the views expressed are personal]