"Eligible" covers Non-eligible also

[Pradeep Jain]

Introduction:

This year the Budget 2010 announced on 26.02.2010 has given benefits to Small Scale Units. These benefits have been given not only to those units which are availing the small scale exemption under Notification No. 8/2003-CE dated 01.03.2003 but also to the units who are eligible to avail the benefit under the said Notification. We have already written an article "Large benefits to small scale units" which was published in our website www.capradeepjain.com. In this second piece on same issue, we intend to take a deeper look at definition of "eligible units" and analyze the same.

Changes introduced for Small Scale Units: -

First of all let's look at the changes made by the Budget 2010 affecting the small scale units. The Notification No. 5/2010-CE (NT) has amended the provisions of Central Excise Rules, 2002. Rule 8 of the Central Excise Rules provides for the manner of payment of duty. Rule 8 (1) has been amended to provide that a small scale manufacturer will have to pay excise duty on a quarterly basis by substituting the second proviso and Explanation. As to which unit can be said to be a small scale unit has been provided in the Explanation 1 to the second proviso to the Rule 8 (1). The relevant provisions substituted by Notification No. 5/2010- CE (NT) are reproduced hereunder for ready reference:

"Provided further that where an assessee is eligible to avail of the exemption under a notification based on the value of clearances in a financial year , the duty on goods cleared during a quarter of the financial year shall be paid by the 6th day of the month following that quarter, if the duty is paid electronically through internet banking and in any other case , by the 5th day of the month following that quarter , except in case of goods removed during the last quarter, starting from the 1st day of January and ending on the 31st day of March, for which the duty shall be paid by the 31st day of March.

Explanation.1. - For the purposes of this proviso, it is hereby clarified that an assessee shall be eligible, if his aggregate value of clearances of all excisable goods for home consumption in the preceding financial year, computed in the manner specified in the said notification, did not exceed rupees four hundred lakhs.

Similarly, Rule 12 (1) of the Central Excise Rules, 2002 has been amended to provide that the unit which is a Small scale manufacturer will be required to file quarterly returns instead of monthly returns. Although the units opting for the notification 8/2003 were already filing quarterly returns but now they have to file it before 10^th of end of quarter where as they were filing by 20^th of end of quarter. But this facility will be a benefit for the units eligible for such benefit.

Further, Notification No. 6/2010-CE(NT), dated 27.02.2010 further amends the Cenvat Credit Rules, 2004. Rule 4 prescribes the Conditions for allowing Cenvat Credit. Sub-rule (2) of Rule 4 provides that 50% of the credit of capital goods is to be availed in the year of purchase and the remaining 50% is to be availed in the subsequent financial year. Now, vide Notification No. 6/2010-CE(NT) it is provided that the small scale manufacturers can take and utilise 100% cenvat credit in respect of capital goods in the same financial year in which the said capital goods has been purchased. The relevant provisions added by the said Notification in sub rule (2), in clause (a), after the second proviso are re-produced hereunder for ready reference:

"Provided also that where an assessee is eligible to avail of the exemption under a notification based on the value of clearances in a financial year, the CENVAT credit in respect of capital goods received by such assessee shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year.

Explanation.- For the removal of doubts, it is hereby clarified that an assessee shall be "eligible" if his aggregate value of clearances of all excisable goods for home consumption in the preceding financial year computed in the manner specified in the said notification did not exceed rupees four hundred lakhs.";

Definition of Eligible units: -

The aforesaid provisions say that the benefit will be available to "Eligible units". The definition of "eligible units" is given in the explanation attached to the main provision. The aforesaid explanation provide that the "eligible unit" will be the unit having aggregate value of clearances of all excisable goods for home consumption in the preceding financial year when computed in the manner specified in the said notification, does not exceed Rupees 4 Lakhs.

Thus, if a unit has an aggregate value of clearances not exceeding Rs. 4 Lakhs in the preceding financial year then it can be said to be an eligible unit for availing the benefits of small scale unit.

Computation: -

Notification No. 8/2003-CE, dated 01.03.2003, provides the exemption from payment of duty upto Rs. 150 Lakhs to units which are small scale units. The Notification also prescribes the conditions under which the benefit of exemption under the same will be available.

Condition in (vii) of Para 2 of the Notification provides as under: -

(vii) the aggregate value of clearances of all excisable goods for home consumption by a manufacturer from one or more factories, or from a factory by one or more manufacturers, does not exceed rupees four hundred lakhs.

Further, Para 3A of the said Notification provides the manner of computation of aggregate value of clearances which is as under: -

3A. For the purposes of determining the aggregate value of clearances of all excisable goods for home consumption, mentioned in clause (vii) of paragraph 2 of this notification, the following clearances shall not be taken into account, namely:-

(a) clearances of excisable goods without payment of duty-

(i) to a unit in a free trade zone; or

(ii) to a unit in a special economic zone; or

(iii) to a hundred percent. export-oriented undertaking; or

(iv) to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

(v) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the erstwhile Ministry of Finance (Department of Revenue) No.108/95- Central Excise, dated the 28^th August, 1995, vide number GSR. 602 (E), dated the 28^th August, 1995.

(b) clearances bearing the brand name or trade name of another person, which are ineligible for the grant of this exemption in terms of paragraph 4.

(c) clearances of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods;

From the above provisions it is clear that the clause 3A of Notification No. 8/2003-CE prescribes the manner for computation of the aggregate value of clearances in the preceding financial year. It provides as to which clearances are not required to be considered for computation of the aggregate value and which are to be considered by the assessee availing exemption under the said Notification. It clearly says that clearances of all excisable goods cleared for home consumption (clearances in India) shall be taken into consideration. This has two implications. One is that all excisable goods, whether exempted or dutiable, shall be taken into consideration. Secondly, only goods cleared in India is to be considered. The value of export goods will not considered for the same. Further, it provides for the list of goods which are not to be considered for computing the aggregate value of clearances. The clearances to 100 % EOU, EHTP/STP, SEZ unit or unit in Free Trade Zone or to UN /International organization, which are without payment of duty are not to be considered for computation. Similarly, the clearances of goods bearing brand name or trade name of another person are also ineligible for grant of exemption under this Notification. Also, the clearances of specified goods which are used as inputs for further manufacture of specified goods within the factory of production of the specified goods are also not to be considered for computation of aggregate value of clearances.

This is the manner of computation prescribed for the units availing benefit of SSI exemption under Notification No. 8/2003-CE, dated 01.03.2003.

The same method of computation applies for the eligible units also.

Beneficiaries: - The beneficiaries to whom the benefits of the amended provisions of Central Excise Rules, 2002 and the Cenvat Credit Rules, 2004 will be available are as under: -

a. Units not opting for SSI exemption: - There are units whose turnover is less than Rs. 400 Lakhs in preceding financial year and their product is listed in notification 8/2003. Thus, they are eligible to take the benefit of exemption notification. But they do not opt for the same and pay the duty from the beginning. Normally, units have industrial customers opts for the same. They intend to remain in the Cenvat chain and pass on the duty incidence incurred on the inputs.

b. Units not covered in the SSI exemption:- The list of products covered under SSI exemption is given in the notification 8/2003 itself. Many products are not covered under this list. Now, the units will be having aggregate value of clearances less than Rs. 4 crore. Such units will also be covered under the eligible units as aggregate value of clearances of last financial year is less than Rs. 4 crore and they have not opted for SSI exemption. This is another thing that they are not eligible to opt for the same. But this thing will not be acceptable to the Central Excise department.

c. Units having 100% export and nil home consumption: - As already said that for computing aggregate value of clearances of all excisable goods only the clearances in India will be taken and export clearances will not be considered. The units, who are exporting their entire production, will get benefited from the same. They will be eligible for this benefit. The benefit of quarterly payment is not beneficial for them as there is no duty liability on them. But they will get the benefit of taking 100% credit on capital goods.

Conclusion:

From the above analysis it becomes crystal clear that the benefits of new provisions is available only to units who are availing SSI exemption but many more units whose aggregate value of clearances in preceding financial year is less than Rs. 4 crore. This will cover not only those units which are eligible for SSI benefits but has foregone the same. But it will available to units who are not at all eligible for SSI exemption. But the definition of "eligible units" is giving the benefit of these provisions to them. But the same will not be acceptable to the department. The units falling under the second category supra may have to face litigation as the Department will not digest it easily that the said units are eligible for the benefits under the amended provisions.

Before parting:-

It is to be taken care that insertion of a new provision effects the other provisions in many ways, some predictable and other unpredictable. Well, irrespective of predictability or otherwise, law and litigation are twins and they will go together, it is immaterial how perfectly a provision is drafted.