Two issues of removal of inputs and Capital goods and reversal of credit

[Himansu Sha]

It is usual that the inputs and capital goods are removed by the assessees on which they have availed Cenvat credit on many occasions. May be the inputs or the capital goods after receipt or after use are no longer required by them and need to be disposed. In such type of situations the assessees resort to the procedures prescribed under the provisions of Rule 3(5) of the Cenvat Credit Rules,2004. Some issues emerge while dealing with such situations, which have not explicitly dealt in the said Rules. Before describing the said situations, it is appropriate to produce the relevant extract of rule 3(5) of the Cenvat Credit Rules,2004:

Rule 3(5) of Cenvat Credit rules,2004:

When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9 :

Provided that such payment shall not be required to be made where any inputs[or capital goods are removed outside the premises of the provider of output service for providing the output service :

Provided further that such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products :

(5A) (a) 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 :-

(i)   for computers and computer peripherals :

for each quarter in the first year @ 10%

for each quarter in the second year @ 8%

for each quarter in the third year @ 5%

for each quarter in the fourth and fifth year @ 1%

(ii)    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.

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

Situations

• Reversal of input service credit for the inputs cleared as such:

The inputs are many a times are cleared by the assessees on which they avail the Cenvat credit in the form of input credit and input service credit ( for example -GTA service) for the inward transportation of the goods. For reversal of credit, Rule 3(5) has clearly enunciated for reversing the input credit. It does not prescribe the reversal of the input service credit . It has been a contentious issue as to whether the input service credit needs reversal or not. Under such a circumstance the provisions of Rule 3(5), cannot be read in isolation and the same have to be read harmoniously with the other provisions like  Rule  2(l), 2(h) and 3 of the Cenvat Credit Rules,2004.  Rule 2(l) of the cenvat Credit Rules defines “Input service” as any service  used by a provider of taxable service for providing an output service; or used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal. Rule 2(h) describes final products as excisable goods manufactured or produced from input, or using input service. As per Rule-3 Cenvat Credit of specified Service Tax is admissible on input services if the same is used by the manufacturer for use in, or in relation to the manufacture of final products. A harmonious construction of  the above provisions, would be that  input services to be eligible for credit, needs to be used for manufacture of final product. When the inputs are no longer available for manufacture of the final product, there is no question of the input services being used for the intending purpose which make them eligible for credit. Moreover the word “business” has been deleted from the ambit of the Rule 2(l) of the Cenvat Credit Rules,2004. Hence it is clear that the credit will have to be reversed when the associated inputs are cleared as such.

• The second issue is about the clearance of the capital goods to the sister units. If the capital goods are cleared as such to any other unit, the assessee will have to reverse the proportionate credit as availed and if the said capital goods are cleared after use, the credit will have to be reversed on the  depreciated value after deduction of 2.5% of credit for each quarter or part of use of machine from date of taking of Cenvat credit. Also the provisions of law provides that if the amount so calculated  by the above method 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. The transaction value as provided under Section 4(3)(d) of the Central Excise Act,1944:

“transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods”

For calculating  the  amount for reversal when the capital goods are transferred to their own units, there appears to be more than one school of thought. One section believes that as the goods are not sold but transferred to own unit, the calculation of the amount on the value mentioned in the invoices is not required  as the same is not a sale, but a stock transfer of the goods.  Only reversing the credit on the depreciation method is sufficient to satisfy the needs of the law. Under such a situation, it might happen, the assessee  put a higher price in the invoice, but reverse a small amount.  For an analysis of the issue the definition of sale needs to be looked into.  As per Section 2(h) of the Central Excise Act,1944 

“sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration.”

It appears from the  provisions of Section 2(h) of the Central Excise Act,1944,that  the transfer of the possession of the goods is the ‘essence of sale’ and  the transfer of the goods between the two independent premises  takes place during transfer of  the goods. Further the appearance of word” sold” in the  Rule 9 and Rule 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules,2000 dealing with the valuation of the finished goods cleared to related units   recognise the clearances to related units as sale.  The adjustment of accounts in respective units becomes the consideration received by the recipient and accordingly the entire process of transfer of the possession of the goods is a transaction sale and value as mentioned in the invoices becomes the transaction value. Hence it appears the assessee will have to consider the value mentioned in the invoices for calculating the reversal amount.