Restoration of issue of "Written off" goods"
Introduction
Writing off the Inputs and Capital Goods for the stock account purpose in the books
of accounts and reversal of CENVAT Credit has always been a matter of dispute between
the assessees and the departmental authorities. This issue was clarified with the
introduction of the Circular No. 645/36/2002-CX.,dated 16-7-2002 which has been
explained in detail in this article. This issue was there, as it is. unresolved
in its entirety and a new issue arose relating to the CENVAT burden in case of "Writing
Off" of WIP and Finished goods in books of accounts. We in this article have made
an endeavor to elucidate the issues relating to such "writing off" of value
of goods and the CENVAT burden thereon.
Issue in case of Inputs and Capital Goods:
The CENVAT burden in case of Writing off of the Inputs and Capital Goods, as being
obsolete or unfit for use, in the books of accounts was clarified by introduction
of Circular No. 645/36/2002-CX.,dated 16-7-2002. Under this Circular the Government
clarified the CENVAT Credit issues and the procedure to be adopted in different
situations in case of writing off.
The Circular classified the different situations into 3 categories and their respective
treatments, as follows: -
Situation 1: -
In this situation Government specified that in the cases where unused inputs are
fully written off in the books of accounts and where they are not capable of and
are not available for use in the manufacture of finished goods then the assessee
is required to pay back the credit availed on such Inputs.
Eg: - ABC ltd. is dealing in product X for which an input named "R" is required
whose credit is availed in the records amounting to Rs.100. According to the aforesaid
situation if the Input "R" is written off in the books of accounts of ABC ltd.
then in such a case ABC ltd. will have to pay back the amount of Rs.100 by reversing
the Credit taken in the RG 23 A PART II register or by paying the amount in cash
to the Department.
Situation 2: -
In this second situation Government clarified the treatment of CENVAT in cases where
the value of the inputs is partially written off or reduced in the accounts of the
assessee, but they are still capable of and available for use in the manufacture
of finished goods. In such cases it clarified that no payment of
CENVAT credit availed is to be done and there will be no liability on the assessee
till the goods are removed or used in the circumstances other than those specified
above.
Eg: - Taking the same example as above if the input "R" is written off partially
or its value is reduced in the books of account of ABC ltd. but they are still capable
of and available for use in the manufacture of finished goods then in such a case
there will be no liability on ABC ltd. to pay back. Hence, the Credit on the same
will be allowed.
Situation 3: -
In this last situation the Government illuminated the situation in case of writing
off of capital goods viz. components, spare parts etc. It stated that in case where
the Capital goods are written off before use and as thus are not proposed to be
used in the manufacture of final products, then in such situation the CENVAT credit
availed will have to be paid back.
Various Judicial Pronouncements on this issue: -
Various Hon’ble Courts and Judicial authorities have given their judgments on
the said matter minimizing the litigations on the admissibility of CENVAT Credit
or not. Various cases of vital importance in this matter are produced as under:
-
- Hindustan Zinc Ltd V/s COMMR. OF C. EX., VISAKHAPATNAM
[2005 (191) E.L.T. 724 (Tri. - Bang.)]
In this case appellant had written off the 75% of the value of the inputs/spare
in accounts and seeking the same fact the respondents contended to reverse the MODVAT
as per rule 57-I of the Central Excise Rules read with Rule 57AH (1) & (2). The
Bangalore Tribunal relying on the Board Circular No. 645/36/2002-CX., dated 16-7-2002
held that the MODVAT shall be validly admissible to the appellants.
- Oswal Agro Mills Ltd V/s Collector Central Excise
[1992 (60) E.L.T. 479 (Tribunal)]
In this case the respondent argued that the appellant has showed quantity issued
in RG 23 A Part-1 but the same was still unused and laying in stores. The respondent
further contended that the intention of the appellant was to use the said input
for any other purpose instead of manufacturing and hence, appellant has to reverse
the duty on the same.
On the contention of respondent the appellant replied that the issued quantity has
not actually consumed upto the date, therefore the excessive stock shown in the
store. The Tribunal relying on the appellant’s contention allowed the appeal.
- Ashok Leyland Versus Commissioner of Central Excise, Chennai
[2005 (191) E.L.T. 277 (Tri. - Chennai)]
The appellant was denied the Credit on the ground that certain inputs have been
written off in the balance sheet. The appellant in reply to the contention of the
Departmental arguments stated that the inputs in question were still in stock and
denial of credit of demand of duty cannot arise in such a case and mere writing
off in the balance sheet is no ground for reversal of credit. The Chennai Tribunal
allowed the appeal seeking to the merits of the case and evidences as produced by
the appellant.
- Commissioner of Central Excise, Indore Versus Kinetic Motors Co. Ltd.
[2005 (183) E.L.T. 300 (Tri. - Del.)]
In this case the Respondent had written off the Value of inputs in the books of
accounts after termination of the collaboration contract but inputs were still lying
in their factory premises and as per Rule 57F there was no time limit specified
for the utilization of the inputs by the respondent. The Hon’ble Tribunal held
that the credit cannot be denied to the respondents for having failed to utilize
the inputs for a long time, when those had not been removed by them from the factory
as such.
However the appellant contended that since the collaboration of the respondents
with M/s. Honda Motors stood terminated, the use of the inputs lying in the factory
of the respondents had become impracticable and impossible and as such, they are
liable to reverse the Modvat credit of the amount in question, on those inputs even
if the same were lying in their factory.
CESTAT held that the credit could be denied under the rule only on two grounds,
firstly for having not used the inputs in the manufacture of goods; and secondly
for having removed the inputs as such and thus, merely writing off value of the
inputs in their books, they could not be denied the credits, when inputs were still
lying in their factory premises.
Rule 3(5b) of CENVAT Credit Rule, 2004
In the case of "AMBUJA CEMENTS LTD. Versus UNION OF INDIA", Punjab and Haryana
High court has held that the clarifications issued by CBEC are binding only on revenue
authorities and not on the assessees. This led to emergence of various judicial
pronouncements which nullified the said circular, hence, in order to make the clarification
under the circular binding on the assessees the Government introduced sub-rule (5B)
in Rule 3 of CENVAT Credit Rule, 2004 which is reproduced as under: -
"If the value of any,
(i) input, or
(ii) capital goods before being put to use,
on which CENVAT credit has been taken is written off fully or where any provision
to write off fully has been made in the books of account, then the manufacturer
or service provider, as the case may
be, shall pay an amount equivalent to the CENVAT credit taken in respect of the
said input or capital goods:
Provided that if the said input or capital goods is subsequently used in the manufacture
of final products or the provision of taxable services, the manufacturer or output
service provider, as the case may be, shall be entitled to take the credit of the
amount equivalent to the CENVAT credit paid earlier subject to the other provisions
of these rules."
Thus, covering the scope of all the situations the Government clarified all the
related aspects as are related to capital goods and inputs, but so far as the cases
related to writing off of Finished goods and Work in progress is concerned the issue
remained unresolved. To clarify this situation Government introduced the new Circular
no. 907/27/2009-CX, Dated: 07/12/2009 read with Rule 21 of Central Excise Rules,
2002.
Issue in case of WIP and Finished Goods
By issuing this Circular Board wants to clarify that liability to pay excise duty
is on the manufacture of the goods but for the sake of convenience, the liability
is postponed till the removal of goods i.e. duty is collected at the time of removal
instead of manufacturing. Whereas if the goods are destroyed due to natural calamities
like earth quake, fire, flood etc, then Rule 21 of Central Excise Rules, 2002 relating
to remission of duty can be availed by the assessee. The said rule as follows:
"21. Remission of duty.-
Where it is shown to the satisfaction of the Commissioner that goods have been lost
or destroyed by natural causes or by unavoidable accident or are claimed by the
manufacturer as unfit for consumption or for marketing, at any time before removal,
he may remit the duty payable on such goods, subject to such conditions as may be
imposed by him by order in writing:
Provided that where such duty does not exceed ten thousand rupees, the provisions
of this rule shall have effect as if for the expression "Commissioner", the
expression "Superintendent of Central Excise" has been substituted:
Provided further that where such duty exceeds one thousand rupees but does not exceed
one lakh rupees, the provisions of this rule shall have effect as if for the expression
"Commissioner" , the expression " Assistant Commissioner of Central Excise
or the Deputy Commissioner of Central Excise, as the case may be," has been substituted:
Provided also that where such duty exceeds two thousand five hundred rupees but
does not exceed five lakh rupees, the provisions of this rule shall have effect
as if for the expression "Commissioner", the expression " Joint Commissioner
of Central Excise or Additional Commissioner of Central Excise, as the case may
be, " has been substituted."
The above rules clarifies if the finished goods is written off in the books, then
the manufacturer is liable to pay the excise duty on the same and if he remitted
the duty on the finished goods in virtue of Rule 21, then he requires to reverse
the input credit on the same.
However the Circular No. 907/27/2009-CX, Dated: 07/12/2009 clarified the situation
as regard to reversal of credit taken on inputs which have gone into manufacture
of work in progress (WIP), semi finished goods and finished goods which have also
been written off fully in the books of accounts. The Circular clarified as under:
-
Situation 1: -
It provides that if the value of finished goods is written off, the manufacturer
will be liable to pay excise duty or he will be required to reverse the credit on
the inputs used, if duty has been remitted on finished goods.
Eg: - We assume that XYZ ltd. is manufacturing a product named "A". Now, According
to the Situation if the product "A" is written off in the books of account then
the assessee has two options, firstly either he can pay the duty else he can avail
the benefit of remission under Rule 21 and will subsequently have to reverse the
credit on the inputs used therein.
Situation 2: -
In case of writing off work in progress (WIP), it clarified that if the WIP has
reached the stage, when it can be considered as manufactured goods, then in that
case, the same treatment as applicable to finished goods, discussed above in situation
1 will apply.
Eg: - We assume that XYZ ltd. is manufacturing a product named "A" which passes
through a number of processes to become a Final Product. Now, According to the Situation
the product "A" has reached that stage of processing where it can be called
as good as manufactured goods. Hence if it is written off on the books of account
then it will be treated as Finished goods and the treatment applicable to written
off finished goods will be applicable to the same.
Situation 3: -
However, if the activity carried out on the WIP goods cannot be considered as amounting
to manufacture, then in that case, such goods shall be considered as input and the
treatment for reversal of credit applicable to input will apply.
Eg: - Taking the same example as above, according to the Situation the product "A"
is processed to a stage where it cannot be called as manufactured goods and if it
is written off in the books of account then it will be treated as Inputs and the
respective treatment will be applicable to the same.
Conclusion
Before wrapping up we would like to submit that Government issued Circular no. 645/36/2002-CX.,
dated 16-7-2002 but the judicial authorities pronounced their judgments against
the said Circular and as a result of this all the Board came up with the amendment
in Rule 3 of CENVAT Credit Rules, 2004 to make it a legal binding on all the assesses.
The same story is being repeated by the Board with the issuance of Circular no.
907/27/2009-CX, Dated: 07/12/2009 wherein it has clarified the treatment of CENVAT
Credit in case of written off of WIP or Finished goods. But there is no clearance
from factory in this case also. As such, legally duty or reversal can not be demanded.
Consequently, as the Board Circulars are not binding on assesses, the round of litigation
will once again start and hence, the History will repeated itself. Now, the issues
will be again be decided against the said circular and the Board will later on come
up with Notification in this matter. And moreover it can be retrospective also.
The Question which arise now is why not "Notification" itself is issued in the
initial step only; so that unnecessary time and money which will be wasted, can
be avoided?
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The article is written by:
CA. Pradeep Jain
Deepak Mohnot
Jitesh Bhandari
CAclubindia
