The Central Board of Excise & Customs (CBEC) has clarified the treatment of Central Value Added Tax (Cenvat) Credit in respect of stocks of goods whose value is written off in the books of accounts.
It is not unusual that manufacturers are stuck with non-moving stocks of inputs such as raw materials and components, or semi-finished goods or finished goods due to change of models or change of processes or poor feedback from customers or obsolescence, etc. In such cases, the best accounting practices suggest writing off the value of such stocks in the books of accounts, instead of carrying their value in the books as assets. The stocks are not physically destroyed but retained in the hope that they can be put to better use at a suitable time.
CBEC has always taken a view that utilisation of Credit taken on inputs that have been written off for stock account purposes will amount to abuse of the scheme and that the Credit taken on inputs of such stocks must be reversed. But there was no legal back-up for such insistence.
This July, the government inserted Rule 3(5B) in the Cenvat Credit Rules, 2004, to provide that writing off the value of inputs and capital goods before putting them to use would entail reversal of the full Credit taken on them and that subsequent use of the inputs or capital goods would enable taking the Credit again. The latest Circular (number 907/27/2009-CX dated December 7, 2009) reiterates this position.
On the question of finished goods that are written off in the books of accounts, the CBEC says once the goods are manufactured, they become liable to excise duty payment unless the duty is remitted under Rule 21 of Central Excise Rules, 2002.
In case the duty is remitted, the Cenvat Credit on the inputs used in the manufacture of such finished goods must be reversed in accordance with Rule 3(5C) of Cenvat Credit Rules, says the Circular.
Otherwise, duty must be paid on these even if they are not cleared from the factory, says CBEC. This view needs better legal back-up.
Regarding stocks in process that are written off, the CBEC says that if the stocks have reached a stage, where they can be considered as manufactured goods, then they must get the same treatment as finished goods that are written off. Otherwise, they should be treated as inputs and reversal of Credit on the inputs must follow, says the Circular. A lot of unnecessary litigation can be avoided, if such views have better legal back-up.
In another somewhat suspect instruction (file number 267141/2009-CX.8 dated December 7, 2009), CBEC says that capital goods more than 10 years old, if cleared as waste and scrap, must suffer duty on the transaction value. This instruction is apparently in accordance with Rule 3 (5A) of the Cenvat Credit Rule, 2004. But, it confuses the real issue.
The question is whether any duty at all is payable if capital goods more than 10 years are cleared, not as waste and scrap but as usable capital goods. The answer is No, as the second proviso to Rule 3 (5) of Cenvat Credit Rules, 2004, allows on clearance of used capital goods a deduction of 2.5 per cent per quarter in the amount of Credit to be reversed.