Inventories are measured at the lower of cost or net realizable value (NRV). If the NRV falls below the recognized costs pf an inventory item, the respective inventory items must be measured. Inventory write-downs should reflect the estimated loss in value. NRV values are not constant and may change. The measurement of inventories should therefore be subject to ongoing review.
The need to write downs inventories to a NRV below the cost may be the result of damage, obsolescence (technology changes), deterioration, changes in price levels, excess quantities and other causes. The loss should be recognized in the period in which the loss occurs.
The amount of write down (provision) is based on the expected usefulness or marketability. Criteria for inventory usefulness or marketability are:
1. Quantity risks (e.g., in the case of slow moving or surplus items)
2. Technical risks (e.g., in the case of technical obsolescence, impaired usability, inventories destined for scrapping)
3. Price risks (e.g., caused by changes in price level)
We may now in the context like to pen the relevant portion of Rule 3 (5B) of the CCR … which states that if the value of any,
1. input, or
2. 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 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.
Provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of taxable service, 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 other provisions of these rules.
The word “partially” has been inserted in the rules vides the notification no. 3/2001-C.E. (N.T.), dated 1-3-2011 w.e.f., 1-3-2011. It may be noted that prior to insertion of this word “partially”, the word “fully” was there. By stressing upon these words, we wish to point out that in yester years (i.e., pre-budget 2011) the word “fully” was there and the provisions / write-offs / write downs in inventory were made up to say 95% but not cent percent and there by avoided the CENVAT reversal which was so required only wherein inventory write downs were made fully i.e., 100%. But in this post budget 2011 scenario, it has been expressed that if the value of any input or capital goods before being put to use (on which CENVAT benefit is taken) is written off fully or partially or where any provision (in full or part) has been made in books of account (i.e., write downs to inventory in particular), then the manufacturer shall have to pay an amount equal to the CENVAT credit taken in respect of such inputs or capital goods.
And 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.
That CENVAT credit on inputs / capital goods is predominantly on its “use concept” (i.e., used in the factory of the manufacturer). Although CENVAT credit can be taken immediately on receipt of inputs / capital goods in to the factory premises but this CENVAT credit is eventually dependent on the actual use of such inputs / capital goods in or in relation to the manufacture of dutiable final products. The said 'use' concept can be vetted from the rules itself in the manner that (a) if the inputs or capital goods on which CEVNAT credit is taken are removed as such, then the CENVAT credit so taken has to be reversed and / or (b) that if cenvatable inputs are used in manufacture of exempted goods then the CENVAT credit so taken had also to be reversed in principle. Thus, the ‘use’ concept as discussed, is the moot criteria for eligibility or otherwise of the CENVAT credit on inputs / capital goods.
Keeping this in mind, we do state that any provision (
That the main object and purpose of the recent amendment made in CCR thru’ Rule 3(5B) is to arrest the CENVAT eligibility criteria based upon its use concept è i.e., if a provision / write-off for inventory is made either in part or full, the CEVNAT benefit (if any) availed in respect of those inventory need to be reversed and the same can be taken when the said input or capital goods is subsequently used.
We thus conclude that write downs to inventory are based on the expected usefulness or marketability of the inventory. Technically the phrase “any provision to write off fully or partially has been made in books of accounts” means write downs to inventory which in principle reduces the value of inventory and qualifies for CENVAT reversal as per Rule 3 (5B) of the CCR (which have come into force in this last budget 2011 vides the notification no. 3/2001-C.E. (N.T.), dated 1-3-2011 à w.e.f., 1-3-2011).