Cenvat credit

Dear All,

Please resolve my following query?

B Ltd. is a manufacturer of personal and home care products for which it requires Raw Material Labsa 90%. For the said requirement, it approached A Ltd. to provide the same.

Being a manufacturer, A Ltd. sold 40MT 90% Labsa (FG) to B Limited as per terms agreed. However at the time of quality inspection at the Factory Gate of B Ltd. it was found that the purity matter is 86% only.

Now B Ltd. issues Debit Note to A Ltd. on the basis of Less Quality received. B Ltd. has the point that its input-output ratio shall get change (effectively output will get down) because of receiving lesser active matter i.e. less purity or less quality.

Q. 1 Is B Ltd.justified as per law?

Q. 2 Can B Ltd. reverse Cenvat due receiving of less active matter?

Q. 3. If the answer of above two is yes, Can A Ltd. take credit of Cenvat on account of reversal of Cenvat Credit by B Ltd. through Debit Note.

What will be its other consequences? Please also share any high court decision regarding the same case.

Regards,

Nandan Singh Thakur

From the central excise point of view, query 1 needs no comments. Because it is a quality problem. Naturally nobody wants to receive an inferior material as it affects their finished products. As regards to the point no.2, debit note has been issued in money terms i.e., they might have reduced the amount payable to the supplier. In such a case, the proportionate credit has to be reversed as the particular transaction carries lesser value than what is actually charged. As regards to the question no.3, supplier has to file a refund claim with the department for refund of differential amount of duty as they can not taken input credit on the basis of a debit note. Even the purchaser can not issue any invoice enabling the supplier to take credit because there is no any movement of raw material and it is only a quality problem.

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NANDAN SINGH THAKUR

C.V.R.SARMA

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