Reversal of Cenvat

Cenvat credit is taken as soon as inputs are received in factory or input services are paid for. In some cases, Cenvat credit may have to be reversed.

Reversal under rule 6 – If a manufacturer manufactures exempted as well as taxable goods and/or a service provider provides taxable as well as exempt services, he (manufacturer/service provider) is required to either pay ‘amount’ or reverse proportionate Cenvat credit. The issue is discussed in a later chapter.

Reversal if finished goods cleared at concessional rate of duty – Finished products can be sent under bond under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 without payment of duty. If such goods are sent, Cenvat credit will have to be reversed. If common inputs and input services were used on which Cenvat was availed, payment of ‘amount’ as per rule 6(3)(b) will
be required. Case law discussed in another chapter.

Reversal if remission obtained on duty payable on final product – If final product is destroyed or becomes unfit for consumption, when the goods were in store room, duty on such final product can be remitted under rule 21 of Central Excise Rules. Rule 3(5C) of Cenvat Credit Rules (as inserted w.e.f. 7-9-2007) provides that if duty on final products is remitted under rule 21 of Central Excise, Cenvat credit of duty paid on inputs used in
manufacture or such goods shall be reversed.
Cenvat = 770 × {[1 + 10/400] × 14.42/100} = 770 × {1.025 × 0.1442}
= 770 × 0.147805 = Rs. 113.81 per unit

Reversal of Cenvat credit in respect of obsolete goods written off – As per rule 3(5B) of Cenvat Credit Rules (inserted w.e.f. 11-5-2007), if (i) inputs or (ii) capital goods before being put to use, are written of fully or provision is made in books of account to write off fully, the manufacturer is equired to pay an ‘amount’ equal to Cenvat credit taken in respect of such inputs or capital goods. If these are subsequently used in manufacture of final
products, manufacturer can take Cenvat credit of amount which was paid earlier.

Reversal if final product subsequently exempt – Cenvat Credit is taken as soon as goods enter factory premises. Final product may be cleared later. It may happen that the final product may be subsequently exempt (conditionally or unconditionally). At that time, some inputs (on which Cenvat has been availed) will be in stock. These inputs will be used for manufacture of exempted final product, if he decides to avail the exemption
(in case of conditional exemption. In case of unconditional exemption, it is mandatory for him to avail exemption. In such case, basic principle is that Cenvat is available only if duty is paid on final product. According to this principle, the Cenvat credit availed on stock is required to be reversed.

Reversal if remission obtained on duty payable on final product ? – If final product is destroyed by fire accident, when the goods were in store room, duty on such final product is remitted. There is dispute whether Cenvat is to be reversed in such cases. See under ‘remission of duty’ in another chapter.

No Cenvat reversal in certain cases
In following cases,

Cenvat credit is not required to be reversed.No reversal in case of export/deemed export of final product – Cenvat credit is not required to be reversed, if final product is exported or supplied to UN Agencies, or to EOU/STP/EHTP. Supplies to SEZ are ‘exports’. This aspect has been discussed at other place in the book.

No reversal if intermediate product supplied and final product exported – If intermediate product is cleared without payment of duty under bond for manufacture of final product which is to be exported, Cenvat on inputs used in manufacture of intermediate product is not required to be reversed. This aspect has been discussed at other place in the book.

No reversal if input subsequently become ineligible for Cenvat – It may happen that an input may be eligible for availing Cenvat when it was received in the factory and Cenvat may be availed on it. However, later, the input may be removed from list of inputs eligible for Cenvat. In such cases, even if some inputs were lying in stock on the date of such withdrawal, Cenvat credit already availed need not be reversed – Dhar Cement Ltd. v. CCE
1996(86) ELT 515 (CEGAT) following Amrit Banaspati v. UOI1990(50) ELT 64 (P & HHC) and Dipak Vegetables v. UOI 1991(52) ELT 222 (Guj HC).

No reversal if supplier gives reduction in price after clearance – Excise duty is payable on the basis of price at the time of clearance. Thus, assessable value does not change if supplier gives credit of duty after removal of goods. In view of this, credit is not to be reversed only because the supplier of inputs has given some reduction in prices after removal of goods. In CCE v. Kinetic Engg1997(95) ELT 396 (CEGAT), it was held that classification
of goods made at the supplier’s end cannot be altered at the manufacturer’s end. Same principle will apply to valuation also.

Full Credit Available Even If Price Subsequently Reducted –
Full credit is available even if supplier subsequently gives price reduction. In CCE v. Trinetra Texturisers 2004 (166) ELT 384 (CESTAT), supplier of inputs gave reduction in price subsequent to clearance of goods. It was held that the buyer is eligible to avail full Cevat credit of duty paid, unless the duty liability of supplier was reduced.
[Thus, even if supplier of input gives rice reduction, Cenvat Credit is available of full duty paid]. In MRF Ltd. v. CCE 1997(92) ELT 309 (SC), it was held that any fluctuation in price subsequent to removal of goods has no relevance whatsoever to the liability of excise duty.
2.10.9 No reversal on mere instructions of excise officers –
Cenvat credit should not be reversed on instructions or insistence of excise authorities, if assessee is not agreeable to legal validity of such instructions, unless an appealable order is issued. In Punjab Concast Steels v. CCE 2001(127) ELT 559 (CEGAT SMB), it was held that if Cenvat credit is reversed as per directions of excise authorities, the amount cannot be claimed as refund. The order asking reversal should be appealed against.

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