Removal of used capital goods - if transaction value duty is more than reversible CENVAT then pay an amount equal to DUTY - every penny counts!

By TIOL News Service

NEW DELHI, MAR 16, 2012: BY Notification 6/2010-CE(NT) dated 27.02.2010 the following proviso had made its appearance in rule 3 (5) of the Cenvat Credit Rules, 2004 -

“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 services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:-

(a) for computers and computer peripherals:

(b) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter.

There was also a sub-rule 5A in rule 3 of the CCR, 2004 which was inserted way back in the month of May, 2005 and the same read -

“(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.”

Now, the Central Government feels that both the above provisions do not go hand in hand and hence notification 18/2012-CE(NT) dated 17.03.2012 seeks to unify the same, but, of course, with added riders in an effort to garner revenue .

It is surprising that the powers to be view that the manufacturers who avail Cenvat Credit on capital goods are potential evaders of CENVAT and hence from times immemorial these Cenvatted capital goods have faced hurdles when they are removed from the factory after “being used”. Not to mention the Larger Bench decision in Modernova Plastyles Pvt. Ltd. [2008-TIOL-1771-CESTAT-Mum-LB] where it is held that ‘ removal of capital goods, whether used or not, is to be done after reversal of Cenvat Credit availed '.

Anyways, coming to the recent amendment being effected w.e.f 17.03.2012 , manufacturers are in for a rude shock.

The proviso clause reproduced above is being omitted and sub-rule 5A is in for a makeover. It would read thus -

“(5A) If the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT credit, namely:-

(a) for computers and computer peripherals:

(b) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter.

Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value .”

In effect, the manufacturer will have to pay - and pay dearly for the “transaction value” will always be disputed by the department.

Note that the words “scrap” and “waste” are separated by an “ OR ” - earlier it was “ AND ”.

Is the manufacturer supposed to concentrate on his business or employ a mathematician to ensure that the calculations are equal to, or less than or more than the CENVAT availed?

By the way, what if the manufacturer sells the used capital goods for a PROFIT?