FEBRUARY 25, 2013

By C T Krishna Murthy, Advocate

I. WHERE a manufacturer pays duty on goods manufactured by him which is not payable due to wrong classification or because the said goods are wholly exempt or chargeable to nil rate of duty or non excisable or for whatever be the reason and passes on such an amount as CENVAT credit to the receiver of goods who takes or utilizes such input credit, the department is initiating proceedings against the manufacturer or the provider of output service under Rule 14 read with s. 11A of the CEA, 1944 and also seeking penal and interest provisions.

II. The litigation initiated by the department is clearly against the provisions of law and the law laid down by the judicial precedents of the Hon'ble High Courts and Tribunals. The issue raised by the department is clearly due to misconception of the provisions and by not following the settled judicial pronouncements. This requires urgent attention of Government of India to bring necessary amendment to put an end to the harassment to the trade and also to reduce the workload of the department and higher appellate authorities.

III. The relevant provisions of law in CENVAT Credit Rules, 2004 are explained below:

(1) Rule 3 (1): As per sub rule (1) of Rule 3 of CENVAT Credit Rules, 2004 -

A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as CENVAT credit) of -

- duties of excise and certain cesses specified in sub clauses (i) to (xi) of the said sub rule (1) -

Paid on

(i) any input on capital goods received in the factory of manufacturer of final product or premises of the provider of output service ...

(2) Sub rule (1) of Rule 9 provides the documents on which the CENVAT credit shall be taken by the manufacturer or the provider of output service

(3) Sub rule (5) of Rule 9 is extracted below -

“5… and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit”.

(4) Rule 14 provides for the recovery of CENVAT credit wrongly taken or erroneously refunded along with interest and the provisions of Sections 11A and 11AA of the Central Excise Act, or Sections73 and 75 of the Finance Act, are made applicabl e mutatis mutandis for effecting such recoveries.

IV . Now it is to be analysed as to how the department is in error in initiating proceedings as mentioned in Para I supra supported with case law -

1. The first aspect which has a bearing on the issue is to understand the correct meaning of the words - “the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacture or provider of output service taking such credit” as provided in sub rule (5) of Rule 9.

“The burden of proof regarding the admissibility of CENVAT credit” as envisaged in sub rule (5) of Rule 9 does not cover “the burden of proof regarding excisability / dutiability of the product”.

Admissibility of the CENVAT credit is to be taken care of by the purchaser whereas excisability and dutiability is to be taken care of by the manufacturer-supplier under the provisions.

Under Rule 3 of CCR a manufacturer shall be allowed to take credit of the “duty paid” but not “duty payable”.

The department lacks clarity on this point even though the law is settled on this point.

The Madras High Court in the case of CCE CHENNAI-I Vs CEGAT, CHENNAI- 2006 (202) E.L.T. 753 (Mad.) in para 4 of the judgment held as follows -

“ 4. A perusal of Section 57A( 1) shows that the terminology used therein is ‘paid' and not ‘payable'. This distinction, in our opinion, is important because it indicates that we have to take into account the factual state of affairs. In other words, we have to consider whether the duty has actually been paid on the raw material and not whether duty was payable or not. In the present case, it is not in dispute that the assessee's supplier in fact that paid the duty on the raw materials supplied to the assessee and the department accepted this excise duty...”

The Punjab & Haryana High Court in the case of CCE CHANDIGARH Vs RANBAXY LABS LTD - 2006-TIOL-438-HC-P&H-CX took the same view.

(2) Inspite of the above settled case law, the CBEC issued Circular No. 940/01/2011 CX Dt. 14.01.2011 holding that the duty paid on exempted goods cannot be termed as “duty of excise” under Rule 3 of CENVAT Credit Rules, 2004 and CENVAT credit cannot be allowed to downstream units treating it as the duty paid by the manufacturer.

When a manufacturer pays duty which is not payable it is for the officers having jurisdiction over the manufacturer to take necessary action to recover the same from him. Further, apart from this legal aspect, a manufacturer receiving several inputs into his factory it is not just and correct and also not practical to burden him with the legal liability of verifying the Excisability , Dutiability of the products received by him.

Having paid duty on the products at the factory of the manufacturer and passed on to the vendee-manufacturer, the words “duty paid” as per Rule 3 of CENVAT Rules for the purpose of taking CENVAT Credit, cannot be questioned at the receiver end whether “duty” is paid correctly or not under the provisions of Section 3 of the Act. It is the vendees' responsibility to see that the credit is taken by him of the “duty paid” as shown in the invoice which is in accordance with sub rule (1) of Rule 9.

(3) It is very clear from the following judgments that credit on inputs cannot be denied on the ground that the inputs are not liable to duty -

(i) CCE Hyderabad Vs Tube Investments of India Ltd 2003-TIOL-295-CESTAT-MUM

(ii) INDIAN OIL CORPORATION LTD. Vs CCE GUNTUR 2006 (206) E.L.T. 533 (Tri.- Bang.)

(iii) NEEL METAL PRODUCTS LTD. Vs CCE DELHI-III 2009-TIOL-63-HC-P&H-CX

(4) In the following High Court judgments viz.

i. Marico Limited Vs Union of India 2012 (282) E.L.T 180 (Ker.)

ii. Century Rayon Vs Union of India 2002 (142) E.L.T.319 ( Bom.)

iii. Indichem Vs Union of India - 2003 –TIOL-412-HC-AHM-CX

it is held that circulars and clarifications issued by the department cannot operate when the field is occupied by Tribunal judgments. On the issue under consideration there are not only Tribunal Judgments but also High Court judgments as cited in para 1 supra. Therefore the circular dated 14.01.2011 is contrary to the judgments. Though the judgments refer to Rule 57A there is no change in the present Rule 3 of CCR that “duty paid” on the inputs is to be taken as CENVAT Credit.

Conclusion:

(i) To sum up, when there is a case where duty is not payable under Section 3 of the Act by the vendor manufacturer yet he has paid the same and passed on to the vendee on a proper invoice, it is quite legal for the vendee to take the credit under Rule 3 of CCR, 2004.

(ii) Therefore CENVAT Credit Rules are to be amended to provide for recovery of such amount only from the manufacturer who paid duty that is not payable and passed on the CENVAT credit.

Suggestions:

It is suggested that a proviso be inserted in Rule 14 providing for such recovery from the manufacturer who manufactured the inputs. Recovery can be made as an “amount” but not as “duty” for having passed on duty which is not payable.

Further, the Circular Dt. 14.01.2011 is not correct in bringing Section 11D into picture as section 11D is applicable only where a person is liable to pay duty under this Act or the Rules made there under and has collected any amount in excess of the duty assessed or determined and paid on any excisable goods under this Act or the Rules made there under from the buyer of such goods as representing duty of excise. Therefore, the “amount” so collected from manufacturer who manufactured the inputs, may be credited to Consumer Welfare Fund by making necessary amendment to Section 12C of the Act in this regard.