I have written this article to discuss some issues relating to Rule 3(5B) of CENVAT Credit Rules, 2004 [for short CCR, 2004]
A short background for introduction of this rule
It is not unusual that manufacturers are stuck with non-moving stocks of inputs such as raw materials and components, or semi-finished goods or finished goods 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. The stocks are not physically destroyed but retained in the hope that they can be put to better use at a suitable time.
CBEC has always taken a view that utilization of Credit taken on inputs that have been written off for stock account purposes will amount to abuse of the scheme and that the Credit taken on inputs of such stocks must be reversed.
This lead to introduction of Rule 3(5B)
What does Rule 3(5B) say?
Rule 3(5B) of CCR, 2004 reads as follows: [amendments in bold effective from 7-7-2009]
If the value of any,
i. input, or
ii. capital goods before being put to use,
on which CENVAT Credit has been taken is
i. written off fully or
ii. where any provision to write off fully has been made in the books of account,
then the manufacturer or service provider shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods:
However, if the said input or capital goods is subsequently used in the manufacture of final products or provision of taxable services, the manufacturer or output service provider 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.
Here attention should be given to the following
1. write off or provision to write off should be made fully, when only part write off is done, then the manufacturer or output service provider need not pay CENVAT credit
2. Capital goods should be written off before being put to use and fully written off. If they are partly written off and removed as scrap, then duty has to be paid on transaction value.
Issues clarified in Circular 907/27/2009-CX dated 7-12-2009
Issue 1: Whether CENVAT Credit has to be reversed on credit taken on inputs contained in the finished goods which are written off fully
The matter has been examined. Rule 3(5B) of the CENVAT Credit Rules, 2004, provides that if the value of any input on which CENVAT credit has been taken is written off fully in the books of accounts, then the manufacturer is required to reverse the credit taken on the said input. 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, in that case, a manufacturer is liable to pay excise duty unless duty is remitted under Rule 21.
Therefore, if the value of finished goods is written off, 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.
Issue 2: Whether CENVAT Credit has to be reversed on credit taken on inputs contained in the WIP which are written off fully
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.
B Uday Kiran,
CA – Final [Existing]
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