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Ships imported for breaking - CVD and Cenvat credit
SEPTEMBER 22, 2014 By S B Parikh IN DDT-2436 dated 12.09.2014, there is an excellent coverage about levy of CVD on ships imported for breaking up. A link to the past Article written by a former Member of CBEC was also given in which the author has narrated the events leading to setting up of Alang Ship Breaking Yard in the year 1982 and which was to keep the rolling mills in Bhavnagar (Gujarat) alive and to generate employment. In TIOL's breaking news dated 12.9.2014, there is an analysis of Gujarat High Court's recent judgement in the case of Shivam Engineering Company - 2014-TIOL-1563-HC-AHM-CUS whereit is held that no Additional Duty of Customs (CVD) is leviable on vessels and other floating structures imported into India for breaking up as per the rates prescribed under heading 89.08 of Central Excise Tariff. As per this landmark judgement, CVD on ships imported for breaking is no longer leviable. I shall discuss implication of this judgement and related issues. Payment of CVD on own volition The goods like steel plates, articles of metals, metal scrap etc. falling under Chapters 72 to 83 obtained from the activity of ship breaking are treated as deemed to have been manufactured and thus subject to Central Excise duty as per Section Note 9 of Section XV of first Schedule to the Central Excise Tariff Act, 1985. There was no dispute in this regard in this case. The said Section Note is as under:
As per the practice that prevailed prior to this judgement of High Court, Importers/ship-breakers situated at Alang Ship Breaking Yard were paying CVD on ships imported for breaking and taking CENVAT credit @85% of CVD so paid, as per the Proviso to sub-rule 3(1)(vii) of the CENVAT Credit Rules, 2004. CENVAT credit so availed was being utilised towards payment of Central Excise duty on the goods falling under Chapters 72 to 83 obtained from ship breaking. Due to availability of CENVAT credit of CVD, the burden of cash payment of Central Excise duty was either nullified or reduced on ship breaking units. After delivery of this judgement, no CVD can be levied by Department on ships imported for breaking. There are many ship breaking units who want to pay CVD due to availability of CENVAT credit. If they do not pay CVD, they have to pay CE duty in cash. They fear that if effect of this judgement will be reversed either by Supreme Court or through retrospective legislative amendment, liability to pay CVD with or without interest may arise in future. So, to be on safe side, many importers/ship breakers want to pay CVD and avail CENVAT credit @85% of CVD so paid. But, after delivery of this judgement of High Court, it is difficult to assess and levy CVD on ships imported for breaking even if importer is ready to pay it on own volition. Now, let us take a look at the CENVAT credit related issues associated with ship breaking activity. Rationale behind restricting CENVAT credit to the extent 85% of CVD paid Clause (vii) of sub-rule 3(1) of the CENVAT Credit Rules, 2004, is as under:
Furniture obtained from ships imported for breaking at Alang (Gujarat) is well-known as ‘Alang furniture' for its low price and durability. Items like furniture, electrical & electronic appliances, ship stores etc. not falling under Chapters 72 to 83 and obtained from ships are considered to be trading items (second hand goods). Such items cannot be considered as ‘input' for ship breaking units and so CENVAT credit of CVD paid on these items is not admissible. Separate import value or cost of these items are not available so as to calculate CVD attributable to them. In order to offset CVD paid on these items in a lump sum manner, CENVAT credit has been restricted to the extent 85% of CVD paid on the entire value of ship. Nonetheless, after delivery of aforesaid judgement, no CVD is payable on ships imported for breaking and so the question of taking CENVAT credit of CVD will not arise. Reversal of CENVAT credit taken on common input services There are common input services like accounting, auditing, banking & financing, insurance, telephone, security etc. on which CENVAT credit of service tax paid is available to ship breaking units. As mentioned hereinabove, ship breakers are engaged in both type of activities i.e. manufacture of excisable goods and trading. The activity of "trading of goods"is covered under Negative list of services, as per Section 66D(e) of the Finance Act, 1994. Consequently, trading of goods is covered under the definition of "exempted service”, as defined at Rule 2(e)(2) of the CENVAT Credit Rules, 2004, being a service on which no service tax is leviable under Section 66B. Ship breaking units taking CENVAT credit on common input services are required to follow provisions of Rule 6 of the CCR, 2004. Separate accounting, as prescribed under Rule 6(2), for aforesaid common input services is not possible. So ship breaking units have to follow provisions of Rule 6(3) by paying amount equal to 6% of value of exempted service or by paying proportionate amount as per formula given under Rule 6(3A). For this purpose, value of exempted service (i.e. trading) needs to be worked out as per the Clause (c) of Explanation I appended to Rule 6(3D) of the CCR, 2004, which is as under (underlining supplied):
In case of ship imported for breaking, separate cost of every item is not available. So, it is not possible to determine the cost of goods sold, for the aforesaid purpose. In absence of actual cost, it appears that presently there is no other option but to calculate the value of exempted service @10% of the sale price of the goods sold for the purpose of payment under Rule 6(3), though it is not prescribed anywhere. To resolve this ambiguity, it is suggested that CENVAT credit on common input services also should be restricted to 85% for ship breaking units and simultaneously they should be kept outside the ambit of Rule 6(3) of the CENVAT Credit Rules, 2004. (The views expressed by the author are his personal views.)
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