Explanation to Notification No. 39/2007-CE

Notification No. 39/2007- Central Excise dated 13-11-2007 has amended Rule 3 sub-rule (5) of the Cenvat Credit Rules, 2004

According to the new proviso inserted, the manufacturer or provider of output service shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat Credit, in case the capital goods on which cenvat credit has been taken are removed after being used.

A detailed history of this relevant provision has been explained hereunder for the benefit of the readers.

The readers will be amazed and shocked to realize that the Government has rectified this erroneous mistake after a gap of 13 years.

Position prior to the notification

• On 1-3-1994- Notification 4/94 dated 1-3-1994 introduced Rule 57S stated that the capital goods on which cenvat is allowed is either:–

1. To be used in the factory of the manufacturer of the final products; or

2. To be removed, after intimating the Assistant Collector of Central Excise, having jurisdiction over the factory and after obtaining dated acknowledgment of the same, from the factory for home consumption or for export on payment of appropriate duty of excise leviable thereon or for export under bond, as if such capital goods have been manufac-tured in the said factory.

• On 20-5-1994 - Notification 4/94 was amended vide notification 23/94 dated 20-5-1994. A new proviso was introduced which stated that: "Provided further that where the capital goods are removed after being used in or in relation to manufacture of final products from the factory for home consumption on payment of duty of excise or for export under rebate on payment of duty of excise, such duty of excise shall be calculated by allowing deduction of 2.5 per cent of credit taken for each quarter of a year of use or fraction thereof, from the date of availing credit, except where such capital goods are sold as waste and scrap, the duty leviable shall be at the rate applicable on such waste and scrap";

Explanation:

This notification introduced the concept of depreciation of 2.5%. In case the capital goods were sold as scrap, duty applicable to scrap was to be paid.

• On 31-3-2000 – Notification No. 27/2000, dated 31-3-2000 had an explanation to Rule 57AB stating as to when "inputs or capital goods are removed from the factory, the manufacturer of the final products shall pay the appropriate duty of excise leviable thereon as if such inputs or capital goods have been manufactured in the said factory, and such removal shall be made under the cover of an invoice prescribed under rule 52A."

Explanation:

Cenvat credit taken on the capital goods shall be reversed once the goods are sold or removed from factory/service premises. An invoice has to be raised under the format prescribed.

• On 21-6-2001-Notification No. 31/2001-C.E. (N.T.), dated 21-6-2001 added a provision stating that when inputs or capital goods, on which cenvat credit has been taken are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 or section 4A of the Act, as the case may be, and such removal shall be made under the cover of an invoice referred to in rule 7.

Explanation:

When capital goods are purchased or received in a factory/service premises cenvat credit on the excise duty paid on those goods is availed. However when the machinery is sold or removed from the factory/service premises the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 or section 4A of the Act.

• On 1-3-2003 – Notification No. 13/2003 dated 1-3-2003 amended the provision as to: When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in
  rule 7

Explanation:

When capital goods are purchased or received in a factory/service premises cenvat credit on the excise duty paid on those goods is availed. However when the machinery is sold or removed from the factory /service premises the Cenvat Credit availed previously has to be reversed. Hence according to the Cenvat credit Rules, 2004, the amount to be paid is equivalent to the cenvat credit availed.

This provision has remained the same even through the Cenvat Credit Rules, 2004.

Example

Mr. A, a manufacturer, has purchased a machinery for 3 crore in 1994. Cenvat credit taken was Rs 48 lakhs. He sells the machine in 2007 for Rs. 35 lakhs. However Mr. A has to reverse the cenvat credit of Rs. 48 lakhs when he sells the machine irrespective of the amount at which the machine is sold.

• On 13-11-2007- The Government finally rectified this erroneous mistake and an amendment vide Notification 39/2007 dated 13 November 2007. A new proviso was introduced vide this notification stating that "if the capital goods, on which Cenvat Credit has been taken, are removed after being used, the manufacturer or provider of output service shall pay an amount equal to the Cenvat credit taken on the said capital goods reduced by 2.5 per cent for each quarter of a year or part thereof from the date of taking the Cenvat credit."

Explanation:

The Government finally realized its folly and hence the cenvat credit reversed at the time of removal of the capital goods has to be reduced by 2.5 % for each quarter from the date of taking the cenvat credit.