TIME LIMIT FOR AVAILING CENVAT CREDIT

An analysis of implications arising from the newly introduced time limit under CCR 2004 and related larger issues are discussed hereafter.

CENVAT (earlier MODVA T) is a substantive right

Some important observations by the Supreme Court, in the context of erstwhile MODVAT Scheme, are very much relevant for CCR 2004 as well, are as under:

Observations of Supreme Court in Eicher Motors Ltd. vs. UOI (1999) 106 ELT 3 (SC)

In the context of specific provisions that were introduced under the erstwhile MODVAT Rules for lapsing of unutilised credit in specific cases, the following observations were made by the Supreme Court

Para 5
…………
In 1995-96 Budget Modvat Scheme was liberalised/ simplified and the credit earned on any input was allowed to be utilised for payment of duty on any final product manufactured within the same factory irrespective of whether such inputs were used in its manufacture or not.…….. The stand of the assessee is that they have utilised the facility of paying excise duty on the inputs and carried the credit towards excise duty payable on the finished products. For the purpose of utilisation of the credit all vestitive facts or necessary incidents thereto have taken place prior to 16-03-1995 or utilisation of the finished products prior to 16-03-1995. Thus, the assessee became entitled to take the credit of the input instantaneously once the input is received in the factory on the basis of the existing scheme….. the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate, that the scheme is merely being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the rules available certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier scheme necessarily the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said rule would result in affecting the rights of the assessees.

Para 6

We may look at the matter from another angle. If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus, a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.

(emphasis supplied)

Observations of the Supreme Court in CCE vs. Dai Ichi Karkaria Ltd. (1999) 112 ELT 353 (SC)

Para 17
………..
It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtain an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co–relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.

Para 18

It is therefore, that in the case of Eicher Motors vs. Union of India (1999) 106 ELT 3 this Court said that a credit under the MODVAT Scheme was “as good as tax paid.”

(emphasis supplied)

Observations of judicial forums under erstwhile MODVAT Scheme when no time limit was prescribed

In CCE vs. Mysore Lac & Paint Works Ltd. (1991) 52 ELT 590 (CEGAT), it was held that six months is a reasonable time for taking CENVAT Credit.

In one case, it was held that in the absence of any time limit, CENVAT Credit can be taken any time – even after three or four years. – SAIL vs. CCE (2000) 41 RLT 706 (CEGAT) – followed in Steel Authority of India Ltd. vs. CCE (2001) 129 ELT 459 (CEGAT).

In Coromandal Fertilizer Ltd. vs. CCE (2009) 239 ELT 99 (Tri – Bang), it has been held that, when the law is settled on the issue, there is no justification to deny the credit on the ground that it is availed after three to seven years from the date of receipt of inputs. Further, since the CENVAT Credit Rules do not prescribe any outer limit, the Revenue’s contention that credit should be availed within reasonable period is not acceptable.

Useful reference can also be made to judicial rulings in J. V. Strips Ltd. vs. CCE (2007) 218 ELT 252 (Tri – Del) where credits taken after a considerable delay was denied to the assessee and Essar Steel vs. CCE (2008) 222 ELT 154 (Tri – Ahd).

It is evident from the above that in the absence of specific provisions in regard to time limit for availing credit, judicial authorities did consider time limit for claiming refund under Central Excise (viz., six months at the relevant time) as a reasonable time for taking credits. However, it needs to be noted that, the time limit for claiming refund under Central Excise/Service tax has since been increased from six months to one year.

Observations when time limit was prescribed under erstwhile MODVAT Scheme

Supreme Court Ruling in Osram Surya (P) Ltd. vs. CCE (2012) 142 ELT 5 (SC)

Prior to the introduction of the second proviso to Rule 57G i.e., prior to 29-06-1995, a manufacturer was en- titled to withdraw the said credit at any time without there being a limitation on such withdrawal. On 29-06- 1995, second proviso to Rule 57G was introduced by substituting the then existing proviso and the newly introduced proviso read thus : “Provided further that the manufacturer shall not take credit after six months of the date of issue of any of the documents specified in first proviso to this sub-rule:”

In the said case, the appellants who had received their inputs for the manufacture of their respective products, had taken credit under the Modvat Scheme, admittedly, six months after the date of issue of the documents specified in the said proviso to Rule 57G. Therefore, the said credit was disallowed by the authorities. This action of the authorities was questioned by the appellants before the Tribunal, contending that the benefit of the credit which had accrued to them prior to the introduction of the second proviso to the said Rule, cannot be taken away by introduction of a limitation because it was a vested right accrued to them prior to the coming into force of the said proviso to the Rule. They also contended that, the said proviso is not retrospective in its operation and is only applicable to the inputs received by a manufacturer after the introduction of the said proviso. Further, since the said proviso did not specifically state that it is taking away the vested right of a manufacturer, the proviso should be read to mean that the same is not applicable in regard to the credit accrued to a manufacturer prior to the introduction of the said Rule.

On behalf of the Revenue, it was contended that the language of the newly introduced proviso is very clear and admits no ambiguity, therefore, the question of interpretation of the Rule contrary to the said language does not arise at all and on a plain reading of the Rule, the Tribunal was justified in coming to the conclusion that after the in- troduction of the said proviso to the Rule, no manufacturer could avail of credit subsequent to a period of six months, as stipulated in the said proviso.

The observations and findings of the Supreme Court are as under:

Para 6

At the outset, we must note that none of the appellants have challenged the validity of the said proviso, therefore, we will have to proceed on the basis that the proviso in question is a valid one. In that background, the sole question that we will have to consider will be: whether the proviso to the Rule in question is applicable to the cases of manufacturers who had received their inputs prior to the introduction of the said proviso and are seeking to take credit in regard to the said inputs beyond the period of six months.

Para 7

……….by introducing the limitation in the said proviso to the Rule, the statute has not taken away any of the vested rights which had accrued to the manufacturers under the Scheme of Modvat. That vested right continues to be in existence and what is restricted is the time within which the manufacturer has to enforce that right. The appellants, however, contended that imposition of a limitation is as good as taking away the vested right. In support of their argument, they have placed reliance on a judgment of this Court in Eicher Motors Ltd. vs. Union of India [1999] 106 ELT 3 (SC)] wherein this Court had held that a right accrued to an assessee on the date when it paid the tax on the raw-materials or the inputs would continue until the facility available thereto gets worked out or until those goods existed ……. In the facts of Eicher case (supra) that was a case where- in by introduction of the Rule a credit which was in the account of the manufacturer was held not to be available on the coming into force of that Rule, by that the right to credit itself was taken away, whereas in the instant case by the introduction of the second proviso to Rule 57G, the credit in the account of a manufacturer was not taken away but only the manner and the time within which the said credit was to be taken or utilized alone was stipulated. It is to be noted at this juncture that the substantive right has not been taken away by the introduction of the proviso to the Rule in question but a procedural restriction was introduced which, in our opinion, is permissible in law. Therefore, in our opinion, the law laid down by this Court in Eicher’s case (supra) does not apply to the facts of these cases. This is also the position with regard to the judgment of this Court in Collector of Central Excise, Pune & Ors. vs. Dai Ichi Karkaria Ltd. & Ors. [1997 (7) SCC 448].

Para 8

It is vehemently argued on behalf of the appellants that in effect by introduction of this Rule, a manufac- turer in whose account certain credit existed, would be denied of the right to take such credit consequently, as in the case of Eicher (supra), a manufacturer’s vested right is taken away, therefore, the Rule in question should be interpreted in such a manner that it did not apply to cases where credit in question had accrued prior to the date of introduction of this proviso. In our opinion, this argument is not available to the appellants because none has questioned the legality or the validity of the Rule in question, therefore, any argument which in effect questions the validity of the Rule, cannot be permitted to be raised. The argument of the appellants that there was no time whatsoever given to some of the manufacturers to avail the credit after the introduction of the Rule also is based on arbitrariness of the Rule, and the same also will have to be rejected on the ground that there is no challenge to the validity of the Rule……………

Para 9

……..in our opinion the language of the proviso con- cerned is unambiguous. It specifically states that a manufacturer cannot take credit after six months from the date of issue of any of the documents specified in the first proviso to the said sub-rule. A plain reading of this sub-rule clearly shows that it applies to those cases where a manufacturer is seeking to take the credit after the introduction of the Rule and to cases where the manu- facturer is seeking to do so after a period of six months from the date when the manufacturer received the inputs. This subrule does not operate retrospectively in the sense it does not cancel the credits nor does it in any manner affect the rights of those persons who have already taken the credit before coming into force of the Rule in question. It operates prospectively in regard to those manufacturers who seek to take credit after the coming into force of this Rule………..

(emphasis supplied)

Gujarat high Court Ruling in Baroda Rayon Corporation Ltd. vs. UOI (2014) 306 ELT 551 (GUJ)

The main challenge in the petition was to the Notification No. 16/94-CE (NT), dated 30-03-1994. By virtue of the said notification, gate pass issued under Rule 52A of the MODVAT Rules as it stood prior to 01-04-1994, has been prescribed as a document for the purpose of Rule 57G of the Rules. However, the notification also provided that the documents should have been issued before 01- 04-1994 and the credit under the said Rule should have been taken on or before 30-06-1994. It is this part of the notification was challenged in the petition.

The Court observed and held as under:

Para 8
………. the right to avail of credit is conferred under Rule 57A of the Rules. Rule 57G only provides the procedure to be observed by the manufacturer. Thus, while exercis- ing powers under Rule 57G of the Rules, the Central Government is not empowered to curtail any right conferred under Rule 57A of the Rules. In the circumstances, the impugned notification issued in exercise of powers under Rule 57G of the Rules insofar as the same prescribes a time-limit for taking of credit, being in excess of the powers conferred under the said rule is ultra vires the same and as such cannot be sustained to that extent.

Para 9

Another aspect of the matter is that by curtailing the time- limit within which the credit taken is to be availed, in effect and substance the said notification provides for lapsing of the credit that has already accrued in favour of the pe- titioner. In this regard it may be noted that the petition pertains to credit taken in the year 1994.    Hence,
the present case would be squarely covered by the deci- sions of the Supreme Court in the case of Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd, (supra) and in the case of Eicher Motors Ltd. vs. Union of India, (supra) Court.

Para 11

In view of the above discussion, the petition suc- ceeds and is accordingly allowed. The impugned No- tification No. 16/94-C.E. (N.T), dated 30th March, 1994 to the extent it provides that the credit under Rule 57G of the rules has to be taken on or before 30th June, 1994 being in excess of the powers conferred under Rule 57g of the Rules is hereby quashed and set aside.

Illustrative cases where credit was allowed after six months from the date of issue of specified documents

•    Alembic Ltd. vs. CCE (2013) 293 ELT 119 (Tri – Ahd)

•    CCE vs. Ford India Ltd. (2012) 284 ELT 202 (Tri – Chennai)

•    Banner Pharma Caps Pvt. Ltd. vs. CCE (2009) 246 ELT 364 (Tri Ahd)

Illustrative cases where credit was denied when taken after 6 months from the date of issue of the specified documents

•    BHEL vs. CC & CE(A) (2007) 219 ELT 609 (Tri Bang)

•    NVK Mohammed Sultan Rawther & Sons Ltd. vs. CCE (2009) 237 ELT 741 (Tri – Chennai)

Validity of time limit introduced under CCR 04 with effect from 01/09/2014.

Vide Notification No. 21/2014 CE (NT) dated 11-07-2014, two new provisos have been inserted in Rule 4(1) & 4(7) of CCR 2004 respectively effective 01-09-2014, providing that a manufacturer/service provider shall not take CEN- VAT credit on inputs/input services after six months from the date of any of the documents specified in Rule 9(1) of CCR 2004. As such, no reasons have been provided by the Government for the sudden introduction of time limit, 10 years subsequent to the introduction of CCR 2004.

It would appear that the principles laid down by the Supreme Court in Eicher Motors & Dai Ichi discussed above, would be relevant in the context of CCR 2004 as well inasmuch as CENVAT Credit is a substantive right  of a manufacturer/service provider. The applicability of the aforesaid principles is strengthened in the scenario of substantial expansion of erstwhile MODVAT Scheme. The prevalent CCR 2004 covers the manufacturing sector substantially and more importantly services sector post introduction of Negative List based taxation of services with effect from 01-07-2012.

Hence, on the basis of principles laid down by the Supreme Court in Eicher Motors & Dai Ichi, provisos inserted in Rule 4(1) & 4(7) of CCR 2004 with effect from 01/09/2014 providing for time limit for taking CENVAT credit on inputs / input services can be challenged before a Court of law inasmuch as it curtails the substantive rights of manufacturers/service providers. Observations of the Supreme Court in Osram Surya’s case support availability of this option to a manufacturer/ service provider.

Without prejudice to the above, it would also appear that the time limit introduced with effect from 01-09-2014 could be regarded as retrospective to an extent it imposes re- strictions on CENVAT Credit entitlement in regard to duty/tax paid documents issued prior to 01-09-2014. Hence, it does curtail the substantive rights of manufacturers/service providers. Despite, the observations of the Supreme Court in Osram Surya Case, it would appear that, a strong case on this ground also can be made to advance an alternative proposition that time limit introduced with effect from 01-09-2014 should apply only to duty / tax paid documents issued on or after 01-09-2014.

Applicability of time limit to Re – Credits
Rule 4(7) of CCR 2004 allows CENVAT redit in respect of input service on or after the day on which the invoice is received by a manufacturer/service provider. However, third proviso to the said Rule 4 (7) reads as under:

“Provided also that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or as the case may be, challan referred to in Rule 9, except in respect of input service where the whole of the service tax is liable to be paid by the recipient of service , is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT Credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT Credit paid earlier subject to the other provisions of these rules:”

(emphasis supplied)

With effect from 01-09-2014, the sixth proviso has been inserted in Rule 4(7) of CCR 2004 which provides as under:

“….the manufacturer or the provider of output ser- vice shall not take CENVAT Credit after six months of the date of issue of any of the documents specified in sub-rule (1) of Rule 9.”

Hence, a very important practical issue arises for consid- eration is as to whether the time limit of six months would apply to cases where initial credit has been properly taken within six months but re-credit in terms of third proviso  to Rule 4(7) of CCR 2004 is taken after a period of six months from the date of issue of the tax paid document.

According to one view, in cases where re–credit taken  by the manufacturer/service provider is after the expiry of six months from the date of invoice upon payment, in light of the sixth proviso inserted with effect from 01-09- 2014 prescribing a six month time limit for availment of credit, the manufacturer/output service provider would not be entitled to take re-credit of the amount equivalent to the CENVAT Credit paid earlier. This view is supported by the terminology “subject to the other provisions of these rules” appearing in the third proviso to Rule 4(7) of CCR 2004. Hence, the sixth proviso inserted with effect from 01-09-2014, would apply in full force in such cases.

However, according to a second view, “re-credit” allowed as per the third proviso to Rule 4(7) of CCR 2004 is not taking CENVAT Credit, but it is re-credit of an “amount equivalent to the CENVAT Credit paid earlier” and hence, the sixth proviso to Rule 4(7) of CCR 2004 is not appli- cable to such cases. The time limit of six months applies to taking of CENVAT Credit for the first time and not to subsequent re-credit upon payment. Thus, once credit is validly taken within the permitted time limit of six months, subsequent re–credit upon payment pertains to reversal of amount equivalent to CENVAT Credit reversed and not taking of credit.

This view is supported by judicial rulings referred above in cases of Alembic Ltd. (supra)., Ford India Ltd. (supra) and Banner Pharma Caps Pvt. Ltd. (supra) earlier. Though in a different context, useful reference could also be made to ruling in CCE vs. Gujarat Bottling Co. Ltd. (2010) 259 ELT 13 (GUJ)

Rightly considering the above uncertainty, the Govern- ment has issued Circular No. 990/14/2014-CX-8 dated 19th November, 2014 whereby it is clarified at para 3 that if credit is taken for the first time within six months of the issue of the document under Rule 9(1) of CCR,2004, the condition of taking credit within six months is fulfilled. The limitation period of six months therefore would not apply for taking re-credit of amount reversed. The said clarification is also provided in respect of two more situations viz.
a)    when the value of input or capital goods on which CENVAT Credit taken is written off or such provision is made in the books of account, the manufac- turer or service provider has to reverse the credit taken (Rule 3(5B) of CCR, 2004)
b)    When inputs sent to job worker are not received back within 180 days, the manufacturer or service provider, in the first instance has to reverse the credit taken.

Thus in all the three situations, while taking re-credit, the limitation of six months would not apply if credit in the first instance is taken within the prescribed time limit of six months of the receipt of eligible document.

Conclusion
According to the Budget Estimates for the year 2014-15, collection from service tax (Rs. 2.16 lakh crore) is likely to exceed Central Excise (Rs. 2.05 lakh crore) for the first time. Further, as per the stated taxation policy of the Government, we are moving towards a GST Regime in due course of time. Hence, in that perspective, it is imperative that we have seamless flow of credits and a robust input tax credit regime in line with GST/VAT Systems prevalent worldwide. To advance this cause, the following is recommended:

a)    The time limit for availment of CENVAT credits should be done away with.

b)    Alternatively, if the time limit is to be continued, it should be increased to one year (so as to be consistent with time limit for claiming refund) and the same should be made applicable to duty/tax paid documents issued after 01-09-2014.

c)    Linkage of CENVAT Credit availment with payment to suppliers was relevant prior to the introduction of POT Rules when service tax was required to be paid to the Government after realisation from the customers. The said linkage is not required subsequent to the introduction of POT Rules. Hence, the same should be done away with.