JANUARY 21, 2014

By Ch Divakar Rao, Superintendent of Central Excise

THE 'not so performing units' with huge accumulated credits are here for a 'CENVAT credit encashment bonanza' if the present Rule 5 of the CENVAT Credit Rules, 2004 is not amended retrospectively. The earlier Rule 5 was substituted of with 'present Rule. 5 of CENVAT Credit Rules, 2004' by Notification No. 18/2012-C.E.(N.T.), Dt.17.03.2012, w.e.f. 01.04.2012.

The Present status of Rule 5 of the CENVAT Credit Rules, 2004

Rule 5 of the CENVAT Credit Rules, 2004 allows a manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure safeguards, conditions and limitations, as may be prescribed by the Notification in the Official gazette.

(Export turnover of goods + Export turnover of services)
           Refund Amount = --------------------------------------------------------------- * Net CENVAT Credit
                                                               Total Turnover

Notification No. 27/2012 CE (N.T.), Dt. 18.6.2012

The Board issued a Notification. 27/2012 CE (N.T.), Dt. 18.6.2012 under the Rule 5 of CENVAT Credit Rules, 2004. The said Notification among other things prescribed 'Form A', (henceforth referred as 'Form A') which basically spells out as to how the amount of refund granted shall be determined. There is no condition in the said rule or the notification issued under the said rule restricting the refund amount either to 'duty deemed to have suffered on inputs used in the manufacture of exported goods' or to 'duty that should have otherwise been payable on exported goods'. While doing so the intentions of the CBEC may have been to benefit the 'not so intelligent assessee' to take the benefit of such duties.

However, there appears to be a serious flaw in the rule 5 of the CENVAT Credit Rules, 2004 and safeguards, conditions and limitations prescribed under the Notification No.27/2012 CE (N.T.), Dt. 18.6.2012 issued under the said rule.

For ready reference the Form A is reproduced below :

Now to take the advantage of the formula in the Rule and conditions specified in the Notification 27/2012 CE (N.T.), Dt. 18.6.2012, let us say an intelligent assessee having 'non performing unit' with huge accumulated credits (say Rs.1.2 Crore) may obtain inputs worth of Rs.10 crores on which CE duty may have been Rs 1.2 Crore @12% on the last week of the IInd Quarter, i.e. September' 2013 and the duty of Rs.1.2 Crore is taken as CENVAT Credit. Now the assessee has a total CENVAT Credit of Rs.2.4 Crore in his account. Then the assessee exports goods, whose value is just Rs.1 lakh, in the last week of II nd Quarter itself, i.e. September 2013 under LUT/BOND as prescribed under Rule 5 of the CENVAT Credit Rules, 2004. Then, he realizes his export proceeds (BRC) within a week. The assessee has not made any other clearances during that quarter and till 15 th October 2013. Accordingly, the duty credit lying in his credit is Rs.2.4 Crore as on the last day of the quarter as well as say on the date of filing of the refund claim, say October 15 as the assessee makes an application in Form A for refund of CENVAT Credit under Rule 5 of the CENVAT Credit Rules, 2004 debiting Rs.1.2 Crore from CENVAT Credit as required under the Notification.

Now let us see, the quantum of refund available as per the Form. A.

From the above formula of Form A, the assessee becomes eligible for refund of CENVAT Credit of Rs.1.2 Crore on mere export of Rs.1 lakh, which is not certainly the intention of the Board. On submission of the application for refund of CENVAT Credit, the assessee utilizes the balance of accumulated CENVAT Credit of Rs.1.2 Crore for 'making clearances as such' of Rs.10 Crore material on which the CENVAT Credit has already been encashed. By above method, the assessee is able to wipe out total accumulated credit of Rs.1.2 Crore at one stroke. Similarly, other assessees following the same method will be able to encash the total CENVAT Credit even before making any other exports/domestic clearances,except for the single export for the purpose of encashment. The very purpose of restricting the CENVAT credit for payment of duty will be defeated. Unscrupulous and fly by night manufacturers may also take advantage of such refund of CENVAT Credit under Rule5 of the CENVAT Credit Rules,2004 leaving the Department high and dry.

Such flaw in Rule 5 of the CENVAT Credit Rules,2004 and the notification issued thereunder may be corrected retrospectively pegging the refund amount either to 'duty deemed to have suffered on inputs used in the manufacture of exported goods' or to 'duty that should have otherwise been payable on exported goods', if the same is not the intention of the Board. If not, then the assessees may rejoice and accordingly 'enjoy the CENVAT encashment bonanza'.

(The views expressed are strictly personal.)