Reversal of credit u/r 4(5)(a) & rule 4(7) of CCR, 2004 - A Comparative Study
FEBRUARY 27, 2015
By Suhrid Bhatnagar, Superintendent, Central Excise
THE CENVAT Credit Rules, 2004 were brought in vide Notification No. 23/2004-CE (NT), dated 10-9-2004 superseding the CENVAT Credit Rules, 2002 and the Service Tax Credit Rules, 2002. Rule 4 thereof provides the conditions for allowing CENVAT Credit. This paper tries to find the discrepancy in the following two sub-rules of rule 4, namely 4(5)(a) & rule 4(7) by a parallel study of similarities and dissimilarities therein, apparent reasons therefore and legal provisions for recovery contained in the rule; and also to offer some quick solutions to resolve the issue.
The sub-rules read as below -
(5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning [, or for the manufacture of intermediate goods necessary for the manufacture of final products] or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer or provider of output service can take the CENVAT credit again when the inputs or capital goods are received back in his factory or in the premises of the provider of output service.
(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:
Provided that in respect of input service where whole of the service tax is liable to be paid by the recipient of service, credit shall be allowed after the service tax is paid:
Provided further that in respect of an input service, where the service recipient is liable to pay a part of service tax and the service provider is liable to pay the remaining part, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:
Provided also that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, except in respect of input service where the whole of the service tax is liable to be paid by the recipient of service, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:
Provided also that if any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited:
Provided also that CENVAT credit in respect of an invoice, bill or, as the case may be, challan referred to in rule 9, issued before the 1st day of April, 2011 shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9.
Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in sub-rule (1) of rule 9.
Explanation I.- The amount mentioned in this sub-rule, unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.
Explanation II. - If the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.
Explanation III.- In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, "following month" and "month of March" occurring in sub-rule (7) shall be read respectively as "following quarter" and "quarter ending with the month of March".
(A) Drawing parallels:
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Rule 4(5a)
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Rule 4(7)
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Person:
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Manufacturer / Service Provider
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Manufacturer / Service Provider
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Credit taken on:
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Inputs / Capital Goods
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Input services
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Issue:
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Sent to job-worker
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Procured from Input Service Provider
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Condition / time frame:
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Must be received back in 180 days
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Payment must be made within 3 months
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Problem that arises:
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Inputs / Capital Goods not received back in 180 days
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Payment for Input services not made within 3 months
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What is to be done?
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CENVAT credit attributed to inputs / capital goods is to be reversed
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CENVAT credit attributed to input services is to be reversed
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When should the reversal be made:
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Immediately, i.e. on the 181 st day.
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On the 5th day of the following month or quarter, as applicable to the manufacturer / service provider.
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Mode of reversal:
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By debiting the CENVAT Credit Account or otherwise.
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By debiting the CENVAT Credit Account or otherwise.
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When can the reversed credit be again taken?
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When the goods are received back after job-work.
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When payment is made
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Restriction:
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None
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*Credit cannot be taken after six months from the date of issue of any of the documents specified in rule 9(1)CENVAT Credit Rules, 2004 raised for input services.
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Recovery for non-reversal:
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Nothing is provided for this lapse.
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Recovery under rule 14 of the CENVAT Credit Rules, 2004; this includes interest thereon.
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Penal provisions for the lapse:
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Not provided.
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As provided in rule 15 of CENVAT Credit Rules, 2004 read with section 11AC of Central Excise Act, 1944 / section 78 of Finance Act, 1994 may follow, along with other penalties provided in respective Acts.
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* A clarification is sued on this subject vide CBEC Circular No. 990/14/2014-CX-8 dated 19.11.2014, but denial of credit after six months is intentionally mentioned here.
(B) SIMILARITY AND DISSIMILARITY IN THE TWO SITUATIONS
++ In both the situations,CENVAT credit is involved.
++ In the first situation, the manufacturer / service provider who has sent his inputs / capital goods for job-work has a lot at stake as compared to Revenue. His raw materials, semi-finished goods or finished goods as well as the flow of business are at stake, if he does not receive goods or even receives them belatedly. His stake is bigger in monetary and other terms as compared to Revenue, whose stake is generally confined to the quantum of credit involved. Therefore, it is in the interest of the manufacturer / service provider himself to take care of the goods sent on job-work. The limitation of one hundred and eighty days imposed by rules indicates the safeguard measure taken by Revenue.
++ But, in the second situation, the manufacturer / service provider who has procured services, takes credit and does not make payment within three months has not put anything on stake. Rather, he has enjoyed the funds, which should have gone in payment for input services, for greater period. Therefore, while he has not put anything at stake and also enjoyed funds, he has put Revenue under peril by irregularly retaining / utilizing the credit. Further, as per the placement of the proviso in the rule, it appears that even if he makes payment after more than six months from the date of invoice or like documents he loses entitlement of credit. However, it has been clarified by the CBEC vide Circular No. 990/14/2014-CX-8 dated 19.11.2014 that the limitation of six months would apply when the credit is taken for the first time on an eligible document and this limitation would not apply for taking re-credit of amount reversed, after meeting the conditions prescribed in these rules. It is felt that if this would have been the intention, the present last proviso should have been placed as third proviso. In such case, the issue of reversal in case of non-payment of value of input services would have come at the fourth proviso instead of present third, and there would have been no need of clarification.
(C) LEGAL PROVISIONS IN CASE OF LAPSE BY MANUFACTURER / SERVICE PROVIDER
++ The recovery provisions in rule 4(7) treat the payment of wrongly taken credit and recovery thereof as excise duty / service tax since the same is payable by 5th of the following month or quarter as the case may be except for the month or quarter ending March when the same is payable by 31 st. However, the same can be detected by the Department only during the course of audit or verification of records by departmental officers.
++ It may, however, be seen that lapse in following the provisions of rule 4(7) entail recovery provisions under rule 14 of the CENVAT Credit Rules, 2004 and such provisions are nonetheless in consonance of section 11A of the Central Excise Act or section 73 of the Finance Act, 1994. These Acts provide that in the cases where the person pays the amount (with interest) on the basis of his own ascertainment or on the basis of tax ascertained by a Central Excise Officer before service of show cause notice, he shall not be serviced any notice in respect of amount so paid.
++ Looking at the cases where the assessee has made the payment within six months, and had not reversed the credit; he shall be liable for reversal of credit and eligible for re-credit of the same credit, giving the issue a hue of revenue neutrality. However, interest shall be recovered from him and penal actions may also follow.
++ While, if we look into the provisions contained in rule 4(5a), it is found that if the assessee does not reverse the credit attributed to the inputs / capital goods sent to the job-worker and the same are not received back within one hundred and eighty days, no legal action against him is provided. Therefore, in such cases of non-reversal, recovery of the credit and interest thereon and penal action are not provided in the CENVAT Credit Rules, 2004.
++ Further, in a better scenario, if the assessee does not reverse the credit attributed to the inputs / capital goods sent to the job-worker and the same are received back after one hundred and eighty days, no legal provision is available for even recovery of interest under the CENVAT Credit Rules, 2004.
++ Also, in such cases where the equivalent of the attributed credit has not been utilized, rule 14 of CCR, 2004 cannot be invoked; but penal provisions of rule 15 ibid shall certainly come into play because this rule provides for credit wrongly taken ‘or' utilized.
(D) SOME QUICK SOLUTIONS
++ It is felt that in both the cases, firstly, if the job-worked goods are received after one hundred and eighty days and secondly, if the payment against the input services are made after three months but within six months from the date of invoice or like documents, in nutshell, the issue involved remains only that of the interest on the credit taken since in these cases the assessee is eligible for re-credit of the amount debited or paid by him.
++ As per legal provisions, the liability to pay interest is linked with failure to pay duty / tax and, therefore, in such cases, demanding / confirming recovery of the ‘wrongly' availed credit and allowing re-credit of the same shall go hand-in-hand in the orders issued by the adjudicating authorities so that interest in such cases may be recovered from the assessees.
++ It is also felt that to save litigation costs, a procedure may be prescribed that show cause is not required to be issued for cases where the assessee pays interest for the period during which the credit wrongly remained in his accounts, whether utilized or not.
(The author is serving in the department & the views expressed are strictly personal.)
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