Dear All, Good morning...
I need suggestion on foolowing matters. Pls suggest
In one of my audit (Excise) of a manufacturing company of wheels and automobile components, I observed that during manufacturing process there are some rejections (those are being scrapped). Now my point is that either excise duty is to be paid or CENVAT credit is to be reversed for the inputs used on those rejections. But neither excise duty is paid or CENVAT credit is reversed by the client. My point is based on the following rules and circulars: -
Rule 3(5C) of CENVAT Credit rules, 2004 read with rule 21 of Central Excise Rules, 2002 and Circular No.907/29/2009 dated: 07/12/2009 requires for the same.
Rule 21 of Central Excise Rules, 2002 Reads as “Where it is shown to the satisfaction of the Commissioner that goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal, he may remit the duty payable on such goods, subject to such conditions as may be imposed by him by order in writing.”
Circular No.907/29/2009 dated: 07/12/2009; reads as follows:
“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.
Further 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 in the above Para 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.”
Auditee’s Reply: Duty is not paid because the products are rejected are due to defect which are not marketable and duty is not payable if the product is not marketable. Further duty is paid on the sale of scrap and hence no duty is payable on the defects manufactured.
My Contention: scrapping is a different and distinct process and for which duty is leviable, also at a lower rate. While CENVAT credit is taken at higher rate and duty paid on scrap at lower rate and govt. is loosing revenue.
CAclubindia
