Reversal of Cenvat Credit if inputs/capital goods are partially or fully written off: Rule 3 (5B)

Manoj Pala , Last updated: 29 September 2012
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Sub-rule (5B) of Rule 3 of the CCR provides that if the value of any:

(i) input, or

(ii) capital goods 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 (w.e.f., 1.3.2011) has been made in the books of account, then the manufacturer or service provider is required to pay an amount equivalent to the CENVAT credit taken in respect of said inputs or capital goods.

However, if these are subsequently used in the manufacture of final products or the provision of taxable service, the manufacturer or output service provider can take credit of the amount paid earlier.

Further in relation to the above said Rule 3 (5B). We may please like to clarify the treatment of Central Value Added Tax (CENVAT) Credit in respect of stocks of goods whose value is written off fully or partially in the books of accounts as under;

Yes, Rule 3 (5B) boldly states that if unused inputs or unused capital goods are written-off fully or partially in the books of account, CENVAT Credit should be reversed.

However, we wish to state and submit that if the value of inputs is partially written-off / reduced in accounts / provided for in accounts but such inputs are capable of and available for use, there would be no question of reversal of the CENVAT credit availed. In simple words, the very requirement of CENVAT Credit reversals u/r 3 (5B) is not applicable when general provisions made in books of account

It is not unusual that manufacturers are often stuck with non-moving stocks of inputs such as raw materials and components, due to change of models or change of processes or poor feedback from customers or obsolescence, etc. In such cases, the best accounting practices suggest writing off the value of such stocks in the books of accounts, instead of carrying their value in the books as assets. Such stocks capable of and available for use are not physically destroyed but are retained in the hope that they can be put to better use at a suitable time.

In effect, we may therefore state that when the stock of unused inputs or unused capital goods is written off fully or partially for the reason that such stock is obsolete/damaged/unfit for use or is physically unavailable, then the CENVAT Credit is required to be reversed in terms of Rule 3 (5B) of the CCR. However, when general accounting provisions are made in financial records for such stock of inputs which are physically available and capable of use, then CENVAT Credit is not required to be reversed

In this very context, in principle, we may further refer to the following clarification given by CBEC w.r.t., the MODVAT/CENVAT Credit on inputs/capital goods written-off

Circular No.645/36/2002-CX

16th July, 2002.

F. No. 267/29/2002-CX-8

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise & Customs

Subject: Admissibility of MODVAT/CENVAT credit on the input/capital goods which are written off being obsolete or unfit for use.

I am directed to refer to Board’s Circular No.101/12/95-CX.8 dated 22.02.95 which stipulates reversal of MODVAT (CENVAT) credit taken on the inputs which are subsequently written off being obsolete or unfit for use.

2. The Audit Report for 1998-99 has pointed out a case involving Hyderabad III Commissioner ate where credit taken on inputs was not reversed although the inputs were written off by the assessee as being obsolete. The Department admitted the objection in accordance with policy decision conveyed vide circular 101/12/95-CX dated 22.2.95.

3. The Board observes that the subject matter of reversal of MODVAT (CENVAT) credit in the event the Inputs/ Capital Goods are written off/ partially written off in the books of accounts is being raised often. Accordingly, the Board has examined the issue of admissibility of credit taken on written off inputs/ capital goods including partial write off and has decided as follows:

(i)	In cases, where unused inputs are fully written off, Board’s instructions dated 22.2.95 shall apply i.e. the credit availed must be paid back.
(ii)	In cases where the value of the inputs is partially written off / reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of CENVAT credit availed.
(iii)	In respect of capital goods viz. components, spare parts etc. which are written off before use and hence are not proposed to be used, the CENVAT credit availed will have to be paid back on the same lines as applicable to "inputs" as mentioned in (i) above.

4. Trade and field formation may please be informed suitably.

5. Receipt of the same may be acknowledged.

6. Hindi version will follow.

OUR FINAL CONCLUSION

On a harmonious analysis of the issue in the light of the intention behind the insertion of Rule 3(5B) in the CENVAT Credit Rules, and the provisions of the Circular No.645/36/2002-CX dated 16.07.02, it is finally stated that the reversal of CENVAT credit availed on the unused inputspartially written off is required, if the inputs are not capable of use OR unfit for use (becoz of being obsolete, damaged or physically unavailable) in the manufacture of finished goods. And accordingly, CENVAT Credit will not be reversed in situations where the value of inputs are partially reduced in financial records but the same are capable and available of being used in the manufacture.