Rule 3 (5b) of Cenvat Credit Rules ... Post Budget 2011

Notwithstanding the technicality of the law viz. the point of discussion “Provision for write of inventory”, we opine that in the subject matter the spirit of the law in principle might prevails over the technicality of the law and which is more inclined in the manner that if the value of any,

1. input, OR

2. capital goods before being put to use,

(on which CENVAT benefit is taken) is written off fully or partially or where any provision (either in full or part against those CENVATABLE inputs) has been made in books of account (which invariably reduces / hits / has an impact on the inventory value), 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.

 è That CENVAT credit on inputs / capital goods is predominantly on its “use concept” (i.e., used in the factory of the manufacturer). Keeping this in mind, we might just state that any provision (Tanta mounting to a write-off OR otherwise) made on inventory (before being put to use) is based upon the expected usefulness or marketability of the inventory. And that a provision so made against the inventory (w.r.t., its slow moving nature / technical obsolescence / otherwise) does raise a question / doubt on the said use concept based upon which CENVAT credit is in fact eligible / allowed.

And we therefore opine that one of the main object and purpose of the amendment made in CCR thru’ Rule 3(5B) is to arrest the CENVAT eligibility criteria based upon its use concept à 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 may however also like to technically view the FRG (Financial Reporting Guidelines) guidelines based upon which we make / create provision in our books of accounts. For this very purpose also attach herewith the FRG guidelines.

In the SFRG guidelines, we see that para 3.5 deals with “write downs” for inventory …as follows;

^{QUOTE ::}

The amount of write down is based on the expected inventory 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)

It can therefore be gain said that the write downs based on the expected inventory usefulness or marketability may just technically equate with the “any provision to write off fully or partially has been made in books of accounts” and thus such write downs (be it in the form of quantity risk / technical risk / price risk) principally goes in to reduce the value of inventory that might just qualify for the purpose of 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).