Credit of duty paid on goods returned form SEZ

[CA Akash Phophalia]

Manufactured gods sent to SEZ or developer of SEZ are exempted. But when such goods are received back and removed in DTA, excise duty is required to be paid. This article aims at enlightening readers whether after payment of excise duty such paid duty will be eligible as credit to the assessee existing in DTA.

Introduction

SEZ are established to promote exports of our country. In order to ensure competitive prices in the international market, government has always come up with measures to give relaxation in the taxation scheme. In the light of relaxation scheme of government, when manufactured goods are cleared to the developer or any unit in SEZ, excise duty is exempted on such clearances. However, when the same are received back by the manufacturer as goods returned due to one or more reasons and/or removed in Domestic Tariff Area (DTA), duty is required to be paid on it. Manufacturers normally avail of Cenvat credit as inputs on the goods so returned because when such goods are cleared in the DTA, manufacturer is required to pay excise duty on it. Now, the moot question is whether the manufacturer is eligible to claim credit of such duty paid or not is discussed here with the help of one recently decided case law Rathi Steels Ltd. v. CCE.

Issue

Assessee manufacturer cleared finished goods to M/s DLF Ltd (SEZ Developer) under bond without payment of duty. The said goods were returned to the assessee by M/s DLF Ltd (SEZ Developer) under bonded Challan for replacement within the specific time frame. However, assessee failed to replace the same within the time frame so provided. On failure of the assessee to replace the manufactured goods in the time permitted, M/s DLF Ltd. (SEZ Developer) deposited the Excise duty, and claimed reimbursement from assessee. Assessee availed of Cenvat credit of the said duty paid by it to the SEZ developer. But the department objected the said credit.

Facts

The assessee is manufacturer of bars and rods of steel and iron etc. cleared and supplied MS Bars (TMT)/Reinforcement Steel to M/s DLF Ltd (SEZ Developer) under ARE-1 procedure without payment of duty. The goods so supplied were found to be defective and after obtaining permission from the SEZ Authority, the purchaser- SEZ Developer returned the goods vide pre-authenticated Challan under rule 27(9) of SEZ Rules, 2006 wherein the Challan is marked "for removal of defective goods to domestic tariff area for replacement, not for sale defective material for replacement, material removed under permission”. Accordingly, the total goods supplied was returned. As the assessee manufacturer could not replace the defective goods within the time permitted, M/s DLF (SEZ Developer) deposited the duty liability with GAR Challan after obtaining permission from SEZ authorities. Thereafter, M/s DLF Ltd. claimed the reimbursement of the said duty of Excise paid, from the assessee. The assessee then took Cenvat credit of the said duty paid by showing the same in their Cenvat register. The goods so received back from DLF SEZ were entered in the daily stock register and thereafter removed on payment of duty to a separate set of buyers. However, on objection of the department it reversed the said credit. Thereafter, assessee made an application before the Commissioner, praying that it should be allowed to take Cenvat credit of duty paid by it to the SEZ Developer for the defective goods, which were returned to them and could not be replaced. On such application the Revenue disagreed.

The assessee urged that it was entitled to take the Cenvat credit. Rule 16 of Central Excise Rules, 2002 carved out a special provision to cater to a situation where duty paid goods are received back by factory/manufacturer for being remade, refined, reconditioned or any other reason. In the present facts it is undisputed that the assessee had received back the goods from the SEZ Developer on payment of duty for being reconditioned etc. It is further admitted fact that the assessee had entered the goods in the stock register and thereafter removed the same on payment of duty to other buyers. It is further urged that under the provisions of Rule of Cenvat Credit Rules, particularly Rule 3, the goods has been admittedly received on payment of duty, the assessee is entitled to take Cenvat credit of the same. Further it is not a case of clandestine removal, the goods were removed under proper ARE -1 procedure under bond to the SEZ Developer. Further, the said developer under proper procedure returned the goods, under bond, for replacement and when the said goods could not be replaced within the given time, the said SEZ Developer paid the duty which have been claimed from the assessee and the said claim have been admitted and entertained by the assessee. Accordingly, the assessee should be held entitled to take the Cenvat credit under Rule 3 of Cenvat Credit Rules read with Rule 16 of Central Excise Rules, 2002. It is further urged that under Rule 9 of Cenvat Credit Rules, Challan is one of the duty paying documents on which credit can be taken.

Conclusion

In the light of the facts it is undisputed that the goods were removed under bond under the procedure as permissible under law. Further, the goods were again received back, being defective, under proper procedure and permission. Also, the duty was paid by the SEZ Developer on non-fulfillment of the condition of the bond, as the assessee could not return the goods within the stipulated time. Such duty was admittedly paid and the assessee accepted the same. Accordingly, the procedure of Rule 16 of Central Excise Rules, 2002 does not come in the way in denying the credit. Assessee is entitled to take credit under Rule 3 of Cenvat Credit Rules as it had admittedly received the goods under proper documents reflecting the duty involved and the said duty have been admittedly paid on the removal of the goods, being the SEZ Developer, to the assessee.

CA Akash Phophalia

9799569294

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Discussions to this article

[JAIPRAKASH RUIA]

Dear Sir,

Very good article.

Please clarify the duty liability if the material short received by the SEZ unit.