Inventories defined and Rule 3 (5B) of CCR

INVENTORIES defined and read in terms of Rule 3 (5B) of CCR;

Inventories are assets (current assets) which encompass

a) RAW MATERIALS … held for use in the production process or in rendering of services

b) Stores, maintenance supplies, loose tools and consumables … awaiting use in the production process

c) WORK-IN PROGRESS … in the production process

d) FINISHED GOODS … produced

One may, in this regards, like to question that on what inventories and why / how the rule 3 (5B) of the CCR (post budget 2011) will be applicable. Our opinion as follows;

RAW MATERIAL à Yes, the provisions of said rule 3 (5B) of the CCR will be squarely applicable. The said rule clearly stating that “if the value of input or capital goods before being put to use … …” is clear enough to include raw materials held for use in the production process or in rendering of services.

• In that case, if the value of inputs (categorized as Raw materials) on which CENVAT credit is taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account then the manufacturer or the service provider, as the case may be, shall pay an amount equivalent to the CENVAT credit taken in respect of said inputs

Stores and consumables, Loose Tools and maintenance supplies à This category comprises of cenvatable inputs (such as paints, oils, lubricants, thinner, etc., are categorized as Stores and consumables) and cenvatable capital goods (such as inserts, grinding wheels, drills, brazed tools, tool holders, spares parts of machineries, etc., are categorized as Loose Tools and maintenance supplies). In our opinion this category (like the category of Raw material) will also fall within the domain of Rule 3 (5B) of the CCR

• In that case, if the value of inputs (as Stores and consumables) or capital goods (as Loose Tools and maintenance supplies) before being put to use, on which CENVAT credit is taken, is written off fully or partially or where any provision to write off fully or partially 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 said inputs or capital goods

WORK-IN PROGRESS and FINISHED GOODS à Insofar, there is no specific provision in the CENVAT Credit Rules to demand reversal of credit taken on inputs which have gone into the production process (i.e., semi finished goods) and the finished goods which have also been written-off PARTIALLY in the books of accounts.

However, C.B.E. & C. vides its Circular No. 907/27/2009-CX., dated 7-12-2009 has already clarified the issue related to reversal of CENVAT credit on WIP / Finished Goods written off FULLY in the books of accounts.

• As far as finished goods in concerned, it is stated that excise duty is chargeable on the activity of manufacture or production. Even though liability for payment of tax has been postponed to the time of removal of goods for the factory, but still the legal liability to pay the excise duty has been fastened on the goods, when it has been manufactured or produced. Therefore, normally all goods manufactured suffer excise duty at the time of removal, but if the manufactured goods are destroyed due to natural causes etc., Rule 21 of Central Excise Rules, 2002, provides for remission of duty. Further, Rule 3(5C) of CENVAT Credit Rules, 2004, also requires reversal of credit on the inputs when the duty is ordered to be remitted under the said Rule 21. Therefore, if the goods have been manufactured, a manufacturer is liable to pay excise duty unless duty is remitted under Rule 21. Thus, if the value of finished goods is written off (Note: ‘fully’ written off as per the referred board circular), the manufacturer would be liable to pay excise duty or he would be required to reverse the credit on the inputs used, if duty has been remitted on finished goods.

• As regard writing off work in progress (WIP), it is stated that if the WIP has reached the stage, when it can be considered as manufactured goods, in that case, the same treatment as applicable to finished goods, discussed above would apply. However, if the activity carried out on the WIP goods cannot be considered as amounting to manufacture, in that case, the said goods should be considered as input and the treatment for reversal of credit applicable to input would be applicable.

REMARKS:

(a) That the referred board Circular No 907/27/2009-CX dated 7.12.2009
has almost clarified the issues related to reversal of CENVAT credit on WIP/ finished goods written off fully in the books of accounts. But technically speaking, there is an issue related to reversal of CENVAT credit on WIP/ finished goods written off partially in the books of accounts.

(b) We may however in this very regards opine that it’s just a matter of time that the board shall, thru a new board circular bring more clarity in lieu of the referred existing board circular by clarifying the issue related to reversal of credit taken on inputs which have gone into manufacture of work in progress semi finished goods (WIP) and finished goods which have also been written off fully or partially or where any provision to write off fully or partially has been made in the books of account fully in the books of accounts.

In view of the foregoing, we state and submit that under the present circumstances,

Ø  The gamut of Rule 3 (5B) for the reversal of CENVAT credit covers inputs or capital goods (wherein the value of inputs or capital goods on which CENVAT credit is taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account. Accordingly, we suggest that CENVAT reversals may be quantified and remitted to the department.

[Re-iterate that provided the said input or capital goods is subsequently used in the manufacture of final products; the manufacturer shall be entitled to take back the CENVAT credit so paid as aforesaid]

Ø  This apart, the present board Circular No 907/27/2009-CX dated 7.12.2009 is technically limited to clarify issues related to reversal of CENVAT credit on WIP/ finished goods written off fully in the books of accounts. Hence, presently the CENVAT reversals on WIP and Finished Goods should be restricted only to the WIP and Finished Goods written off fully in the books of account. Accordingly, we suggest that for those WIP and Finished Goods written-off partially or provided for partially in the books of account, CENVAT reversals are avoided with.