* Chapter 10 MODVAT CREDIT ON CAPITAL GOODS * Modvat scheme was extended to capital goods with effect from 1 March 1994. Under the scheme, credit is allowed for specified capital goods to be used for producing or processing of goods. This credit can be utilised towards payment of duty on excisable goods, subject to the fulfilment of certain conditions. Some of the cases of incorrect availment of credit noticed in test audit are mentioned below:- 10.1 Modvat credit on capital goods before being installed or put to use The Central Board of Excise and Customs, in its circular dated 26 December 1994, clarified that credits of duty paid on capital goods should be taken only when such capital goods are actually deployed in the production process and not merely when the goods are received. Sub rule (2) (ii) had also been inserted under rule 57Q on 1 January 1996, to make it statutorily clear that no credit on capital goods should be taken before their installation or use. (a) An assessee, in Meerut Commissionerate of Central Excise, engaged in manufacture of plastic articles, availed credit of duty paid on capital goods amounting to Rs 1.98 crore between June 1994 and November 1994 even before the capital goods being put to use for manufacture in March 1995. Availment of credit was in clear contravention to the aforesaid clarification. The matter was reported in March 1997; reply of the Ministry of Finance/department had not been received (November 1998). (b) Four assessees in Aurangabad, Pune I and Surat II Commissionerates of Central Excise, engaged in the manufacture of various excisable goods had availed Modvat credit of Rs 1.17 crore between April 1996 and March 1997 on capital goods prior to their installation in the factory. On being pointed out in May and June 1997, the Ministry of Finance/department admitted objection and intimated recovery of Rs 1.17 crore. * 10.2 Incorrect availment of Modvat credit on project imports * Goods falling under heading 98.01 of the Customs Tariff were outside the definition of ?capital goods? under rule 57Q prior to 1 March 1997, as the heading 98.01 was not included in the Central Excise Tariff, Act. Subsequently, through a notification dated 1 March 1997 issued under rule 57Q, manufacturers of specified final products were allowed Modvat credit of additional duty leviable under section 3 of the Customs Tariff Act, on Project imports falling under heading 98.01 of the Customs Tariff, only to the extent of 75 /per cent/ of the additional duty paid. (a) Four assessees in Calcutta I, Calcutta II and Patna Commissionerates of Central Excise were allowed to take and utilise Modvat credit of countervailing duty paid on ?Project imports?, items falling under heading 98.01 of the Customs Tariff between March 1995 to February 1997. Since project items falling under heading 98.01 were not covered under rule 57Q till 1 March 1997, the Modvat credit of Rs 1.56 crore so availed was not in order. On being pointed out (between April 1997 and November 1997), the Ministry of Finance admitted the objection in one case and intimated (October 1998) issue of demand notice for Rs 2.43 crore. Reply in the remaining three cases involving duty of Rs 1.33 crore had not been received (November 1998). (b) Three assessees, one each in Calcutta II, Chennai III and Vadodara Commissionerates of Central Excise, were allowed to avail Modvat credit in March, June and August 1997 of the entire countervailing duty paid on ?Project imports? between December 1995 and June 1997. Since Modvat credit was permissible only to the extent of 75 /per cent/ of additional duty (countervailing duty), this resulted in excess grant of credit of Rs 30.72 lakh. On being pointed out (October 1997), the department admitted (December 1997 and May 1998) the objection in two cases. Reply in the third case had not been received (June 1998). Reply of the Ministry of Finance had not been received (November 1998). * 10.3 Removal of capital goods without payment of duty * According to rule 57S (6), a manufacturer may, with the permission of the Commissioner of Central Excise and subject to such terms and conditions as he may impose, remove ?Mould and dies? to a job worker, without payment of duty, for the purpose of production of goods on his behalf provided that the ?Moulds and dies? are returned to the manufacturer within a period of three months or within the extended period as may be permitted by the Commissioner of Central Excise. An assessee, manufacturing ?Washing machines?, in Nagpur Commissionerate of Central Excise, availed Modvat credit of Rs 87.89 lakh on ?Moulds and dies? between April 1995 and June 1996. He was allowed till 3 May 1998 to remove these without payment of duty, to another manufacturer who manufactured parts of ?Washing machine? and supplied them to the assessee after charging proportionate duty on cost of ?Moulds and dies? required for production of the goods. This manufacturer did not recover any job charges from the assessee. This indicated that the removal of the ?Moulds and dies? was infact not to a ?Job worker? but to another manufacturer. Removal of goods without payment of duty was not in order and duty was required to be paid by the assessee under rule 57S(1)(ii). Adoption of incorrect procedure, thus, resulted in non payment of duty of Rs 87.89 lakh. On being pointed out (December 1997 and March 1998), the department contended (May 1998) that since there was no clear definition of job worker in the Central Excise Rules, 1944, the assessee had been permitted to bring back the capital goods by 3 May 1998 and the procedure followed by the assessee was appropriate. Reply of the department was not tenable as the word ?Job work? and ?Job worker? had been defined in notification dated 17 June 1992 and 11 April 1994 as to mean ?Processing or working upon of raw material or semi finished goods, supplied to the job worker so as to complete a part or whole of the process resulting in the manufacture or finishing of an article?. Under job work system, job worker only recovers his job charges. In the instant case, the producer was not the ?Job worker? as he had declared himself as manufacturer of spare parts in the classification list filed with the department and had recovered cost of the goods and duty by issuing his own invoices. Reply of the Ministry of Finance had not been received (November 1998). * 10.4 Availment of credit on capital goods used in the manufacture of exempted goods * According to the provisions of rule 57R(1), credit of specified duty paid on capital goods was not allowable if such capital goods were used exclusively for the manufacture of exempted final products. An assessee, in Bangalore II Commissionerate of Central Excise, imported in May 1997, a cell manufacturing line equipment and took credit of countervailing duty of Rs 69.36 lakh paid on such capital goods in July 1997. As the equipment was used exclusively for the manufacture of ?Solar photo voltaic cells? which were exempt from duty, the credit of Rs 69.36 lakh taken was incorrect. On being pointed out (November 1997), the department accepted the objection and intimated (March 1998) recovery of Rs 69.36 lakh. * 10.5 Simultaneous availment of credit under Modvat scheme and depreciation under Income Tax Act * As per sub-rule (5) of rule 57R of the Central Excise Rules, 1944, credit of duty paid on capital goods would not be allowed if the manufacturer claimed depreciation under section 32 of the Income Tax Act, 1961, on that part of the value of the goods which represented duty of excise. Provisions of rule 57T(1) also require that a manufacturer availing credit of specified duty shall file a declaration with the department to the effect that he would not claim depreciation under section 32 of the Income Tax Act, 1961. Eight assessees, {Bangalore III (1), Mumbai III (4), Mumbai IV (2) and Surat II (1) Commissionerates of Central Excise}, had availed Modvat credit on capital goods amounting to Rs 53.80 lakh between 1994-95 and 1996-97 and claimed simultaneously depreciation on the same capital goods under section 32 of the Income Tax Act, 1961. Availment of Modvat credit was therefore incorrect. On being pointed out (between February 1996 and October 1997), the department accepted the objection in seven cases (September 1997 and February 1998) and reported recovery of Rs 17.51 lakh. In one case it stated (April 1997) that while claiming depreciation, Modvat credit had been deducted. Reply of the department was not tenable as a subsequent verification (June 1998) of the income tax assessments revealed that the amount of credit was not deducted from the value of asset claimed for depreciation. Reply of the Ministry of Finance had not been received (November 1998). * 10.6 Availment of Modvat credit without duty paying documents * As per rule 57R(3) of the Central Excise Rules, 1944, as amended on 17 June 1994, a manufacturer availing credit of duty paid on capital goods and who has entered into the agreement with a financial institution to finance the cost of capital goods including the specified duty, shall produce a certificate from the financing company to the effect that the duty on capital goods had been paid prior to the first lease rental installment alongwith copy of the agreement. An assessee, in Surat II Commissionerate of Central Excise, manufacturing ?Organic chemicals? falling under chapter 29 entered into lease agreements with various financial institutions failed to produce the certificate of payment of duty as per the rule, ibid and availed credit of Rs 23.60 lakh incorrectly during July 1995 to September 1996. On being pointed out (February 1997), the department admitted the objection (September 1997). Report on recovery of duty had not been received (October 1998). * 10.7 Other cases * In four other cases, the Ministry of Finance/department while accepting incorrect availment of credit of Rs 55 lakh, reported recovery of Rs 55 lakh in all the cases.