FEBRUARY 25, 2010

Removal of inhouse manufactured capital goods, aged 10 years, to sister concern - My quandary

By Shashank Chandrasekhar

AS a manufacturer, I do not claim any small scale exemption. I avail Cenvat credit on various inputs. Some inputs I have used to manufacture capital goods which in turn are used in the factory of production. As per explanation 2 to rule 2(k) of the Cenvat Credit Rules, 2004, inputs includes goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.

These capital goods are used for manufacture of final products which are cleared on payment of central excise duty. In terms of notification 67/95-CE, dated 16.03.1995 (as amended), such capital goods are exempted from central excise duty.

I have used these capital goods for more than a decade in my present factory. Technically speaking, these capital goods do not have any depreciated value as on date.

Now, I intend to remove these ‘capital goods' to a sister concern of mine where these would continue to be used in the production or manufacture of other final products.

I am unable to decide the manner of removal of these goods from the excise point of view but know for sure that if I remove it without payment of any duty/reversal of Cenvat credit, the departmental authorities are going to go hammer and tongs.

So, I have tried to find a solution myself by applying the following reasoning –

1. Admitted these are ‘capital goods' but they have not suffered any excise duty upon manufacture due to the exemption notification in vogue. But the fact of the matter is that I had taken Cenvat credit on the inputs which went into the manufacture of these capital goods ten years ago.

+ Rule 3(5) of the CCR, 2004, second proviso thereto reads -

Provided also that if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit.

+ As mentioned, since no credit has been taken on these capital goods, the aforesaid clause does not come into the picture.

+ Rule 3(5A) of the CCR, 2004 reads –

(5A) If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value.

+ Since the capital goods are not being cleared as waste and scrap and moreover no credit has been availed by me, even this rule does not come to assistance.

2. I, therefore, go back to the genesis of the issue and that is that these capital goods were exempted by virtue of the notification 67/95-CE which warranted me to use the same in the manufacture of final products which are cleared on payment of duty. As removal of these capital goods would result in violation of the primary condition of this exemption notification 67/95-CE, it follows that I would be required to pay Central Excise duty on this “capital goods” when I clear it to my sister concern .

2.1 Here again, the valuation would be a matter of concern inasmuch as rule 8 of the Valuation Rules, 2000 would come into play. It reads –

“8. Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such goods.”

2.2 Incidentally, the cost of production referred above would be the one prevailing at the time of manufacture of the goods and which as mentioned is ten years ago. I am clueless.

3. All said and done, some times I think of being devilish and clearing the capital goods under a simple challan. Finding that the only way the department would be able to pin me down is by invoking the charge of non-fulfillment of notification 67/95-CE but being well aware that the limitation factor under section 11A of the CEA, 1944 would come into play, I reluctantly would like to follow this forbidden path! Not to mention that the Hon'ble Bombay High Court in Bombay Hospital Trust vs. Commissioner of Customs(ACC), Mumbai [2006-TIOL-170-HC-Mum] may spoil my plans.

But being a law abiding citizen, I would request the learned netizens to guide me. It goes without saying that if the Central Board of Excise & Customs clarifies the matter, I would be deeply indebted. Or else an amendment be made in the CCR, 2004 this Union Budget.

(The views expressed are strictly personal)