MARCH 10, 2015

By Anjali Hirawat, Advocate

CENVAT Credit scheme (earlier known as the MODVAT scheme) is designed with the objective to avoid cascading effect i.e. not to collect duty on duty. Therefore, the assessee (manufacturer / service provider) is allowed credit of the excise duty paid on the inputs and capital goods and service tax paid on the input services for payment of excise duty on the final product or service tax on the output service, as the case may be.

However, the eligibility to take credit on the inputs has been always subject to the conditions / procedures laid down in the scheme. The time limit for taking credit on the inputs has had a long legislative history, with its fair share of litigation.

Legislative history

The period of limitation for taking input credit was introduced for the very first time by way of insertion of the second proviso to Rule 57G of the erstwhile Central Excise Rules, 1944 on 29.6.1995. The proviso read thus: “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”.

The Supreme Court in the case of Osram Surya (P) Ltd. – 2002-TIOL-64-SC-CX dealt with the above proviso. It was held that the proviso is prospective in operation and the time limit of six months for taking input credit will be applicable even in respect of credit accrued prior to 29.6.1995. The reasoning adopted by the Supreme Court was that the condition imposed by the proviso is only procedural in nature and does not take away the substantive right of credit.

The above restriction remained in the statute book till 1.4.2000. Post 1.4.2000, the Rules (Cenvat Credit Rules, 2001/2002/2004) did not prescribe any outer time limit for taking credit on the inputs, however,it recognised the earliest point in time when such credit may be taken i.e. when the inputs are received. The said position was also clarified by t he Central Board of Excise & Customs vide Circular No. 345/2/2000-TRU dated 29.8.2000 .

However, the revenue always contended that the assessee ought to take the credit on the inputs immediately on its receipt and sought to deny credit on this ground. This led to litigation all across the country.

The Courts consistently held that credit cannot be denied on the ground it was not taken immediately on receipt of the inputs, especially when the Rules do not provide for any time limit for the same.Few illustrative decisions are listed hereunder:

1. Philips India Ltd. v Commissioner – 2005-TIOL-827-CESTAT-BANG

2. SGS India Pvt. Ltd. v CCE – 2011-TIOL-979-CESTAT-MUM

3. Steel Authority of India Ltd. v CCE – 2013-TIOL-1425-CESTAT-DEL

In Budget 2014, the time limit for taking input credit was re-introduced in Rule 4 of Cenvat Credit Rules, 2004 by way of insertion of a proviso. The proviso provided that an assessee shall not take credit after six months from the date of issue of document specified in Rule 9.

In the present Budget, the time limit has been extended to one year from six months. This appears to have been done as a trade facilitation measure and in line with the ‘ease of doing business' mantra of the Government in the current Budget.

Applicability of the extended time limit

The extended time limit of one year for taking input credit is effective from 1.3.2015. The revised time limit is prospective in nature nevertheless it would be applicable to inputs received prior to 1.3.2015 as well as Rule 9 documents issued prior to 1.3.2015, as long as the credit is taken within one year from the date of issuance of the document. This view draws support from the decision of the Supreme Court in Osram Surya (P) Ltd.

The following illustration will further clarify the position. Where an input invoice was issued on 1.9.2014 and the time limit for taking credit expired on 1.3.2015 i.e. six months from the date of the invoice, the assessee will now be able to take the credit by availing the benefit of the extended time limit.

Reason for re-introducing the time limit for taking input credit

Where an assessee does not take the credit on inputs immediately it does not cause any prejudice to the revenue. In fact, in such a situation, the assessee may fail to take the credit in future. It also results in less CENVAT credit balance available for utilisation for payment of duty, which might lead to cash outflow.

Then, what could be the reason behind having a statutory time limit for taking input credit? In view of the many legislative changes and the wavering stand of the Government, there does not appear to be any clear-cut policy on the issue.

The probable reason for re-introducing the time limit could be to facilitate the verification of credit eligibility by the revenue, which becomes difficult in cases where the credit is taken after lapse of many years and thereby, check possible revenue leakage.

Another important reason could be to streamline the taking of input credit and freeze the credit available to the assessee. When GST is introduced, the transition provisions provided therein will undoubtedly take care of the credit lying in balance with the assessee. Necessary provisions will also be required to address the issue of taking input credit on the basis of documents issued prior to the introduction of GST. However, where an assessee would claim input credit on the basis of documents issued long back in time (on the ground that the statute did not provide for any time limit for taking input credit then) it could lead to unnecessary complications. Thus, the re-introduction of time limit for taking input credit could be yet another step towards the transition to the GST regime.

[The author is associated with Lakshmikumaran & Sridharan and the views expressed are personal.]