MAY 09, 2007

By R Raghavendra Rao

NOTIFICATION 67/95 CE is a well known exemption notification in Central Excise for more than a decade. Whenever any excisable goods are manufactured by the assessee, in the course of manufacture of those goods, intermediate products may also arise which are also excisable. To avoid paying excise duty on such intermediate goods and again on the final products, this notification was issued to exempt such intermediate goods manufactured by an assessee in his factory. However this notification has a proviso which reads as under:

Provided that nothing contained in this notification shall apply to inputs used in or in relation to the manufacture of final products which are exempt from the whole of duty of excise leviable thereon or are chargeable to Nil rate of duty.

That means, if no excise duty is payable on the final products, then this exemption is not allowed. All such manufactures have to pay duty on the excisable intermediate goods emerging in the course of manufacture of exempted final products.

Fine! But what happens if an assessee is engaged in manufacture of both exempted and dutiable final products? Can the exemption under 67/95 be allowed for dutiable goods and denied for exempted goods? This tricky issue has resulted in an amendment to this notification vide 31/2001-Central Excise, Dated : June 1, 2001 by which the vice of the above proviso has been made inapplicable to the goods manufactured by a manufacturer of dutiable and exempted final products, after discharging the obligation prescribed in rule 6 of the CENVAT Credit Rules, 2001. ( even now this reads as CCR 2001 though it should be CCR 2004)

While inserting the above amendment, someone must have thought that the obligation under rules 6 is only payment of 10% on the price of the exempted goods in which case the exemption under 67/95 can be allowed. But the fact that the obligation under rule 6 also means maintaining separate accounts for exempted and dutiable goods and not taking credit on the inputs used in exempted goods . If such option is exercised, what are the consequences if the exemption under 67/95 is allowed? Let us analyze.

Manufacturer 1: He is engaged in manufacture of only one product, say a life saving drug, which is completely exempted. In the course of manufacture, an intermediate excisable product emerges. He can not claim exemption under 67/95 as his final product is exempted. So finally he has to pay duty on intermediate goods used in the manufacture of his exempted final products.

Manufacturer 2: He is engaged in manufacture of some other dutiable products along with the life saving drug, which is exempted. The other products are cleared on payment of duty. He is maintaining separate accounts for inputs used in manufacture of the exempted product and not taking credit. Like the manufacturer 1 above, he also gets intermediate product which is excisable. But as per the wordings of 67/95, he need not pay duty on such intermediate product as he is discharging the obligation under rule 6 by maintaining separate accounts!

The crux of the issue is while manufacturer 1 is denied exemption under 67/95 and pays duty on the intermediate product, in the second case, the manufacturer merrily clears the exempted product and can claim exemption for the intermediate product also   as the vice of proviso to 67/95 is not applicable to him. But is this the real intention? Or is it only a mis-understanding that discharging obligation under rule 6 means only payment of 10% amount?

How can only the one category of   manufacturers just because they have not been manufacturing another dutiable product be asked to pay duty on the intermediate products and the other manufacturers can get away with the same by simply maintaining separate accounts and not taking credit? What about the duty liability of their intermediate product? Why the wording in 67/95 was " discharging the obligation under rule 6" instead of "paying the amount at 10% on the exempted product"?

There is yet another example to demonstrate this monstrous notification. Take the case of an independent distillery manufacturing rectified spirit from molasses purchased from the open market. Such distillery has to procure molasses on payment of excise duty and obviously can not take cenvat credit as there is no excise duty on rectified spirit. But when the rectified spirit is manufactured by a composite Sugar factory, the molasses manufactured by the sugar unit can be consumed in manufacture of rectified spirit by availing the exemption under 67/95 CE though rectified spirit is not dutiable for the simple reason that such manufactures satisfy the condition of " following the procedure under Rule 6 of the Cenvat Credit of maintaining separate account and not taking credit ". In a recent case of M/s Godavari Sugar Mils Ltd ( 2007-TIOL-602-CESTAT-BANG) notification 67/95 was analyzed by the Learned members and it was concluded that :

Notification 67/95 grants exemption from payment of duty on an intermediary product which is captively consumed for manufacture of excisable goods.  Molasses is an excisable product.  When molasses is used in the manufacture of some other excisable product, then the molasses captively consumed need not discharge any duty burden.  However, the entitlement to Notification 67/95 is subject to a condition.  The condition is that the final product should be dutiable or otherwise the exemption would not be applicable.  Our attention was invited to amendment to Notification No. 67/95 Central Excise by Notification No. 31/2001 Central Excise dated 1.1.2001.  In terms of the said amendment, the appellants are entitled for the benefit of exemption Notification in a situation where there is manufacture of both dutiable and exempted final products, provided the manufacturer discharges the obligation prescribed in rule 57 AD of the Central Excise Rules, 1944, which is pari materia with Rule 6 of the Cenvat credit rules, 2002.  What is the obligation under Rule 6 of the Cenvat Credit rules, 2002? The obligation under rule 6 of Cenvat Credit Rules , is that when a manufacturer uses input both for exempted and dutiable final products, he should maintain separate accounts because no Cenvat credit is available for the inputs used in exempted products.  There is an option for the manufacturer not to maintain two separate accounts. Where the final product is ethyl alcohol and other spirits denature of any strength, it is sufficient if the Cenvat credit attributable to inputs in the exempted product is reversed or paid.  Therefore, the appellants are entitled to the benefit of Notification No. 67/95 in respect of molasses used captively for manufacture of Rectified Spirit and Denatured Spirit.

So finally when an independent distillery has to obtain molasses only on payment of duty, a composite sugar factory can use the molasses without payment of duty by claiming exemption under Notification 67/95 which is clearly discriminatory against individual distilleries.

Notification 214/86 is also identically worded creating similar undue advantage to the manufacturers of both dutiable and exempted goods vis a vis manufacturers of single exempted product. Hope these two notifications are reviewed immediately to clear these anomalies.

(The views expressed are personal of the author)