By Puloma D. Dalal, Bakul Mody, Chartered Accountants
Transfer of CENVAT Credit – Existing Provisions under Rule 10
of CENVAT Credit Rules, 2004 (‘CCR’)
If a manufacturer of the final products shifts his factory to
another site or the factory is transferred on account of change in ownership or
on account of sale, merger, amalgamation, lease or transfer of the factory to a
joint venture with the specific provision for transfer of liabilities of such
factory then, the manufacturer shall be allowed to transfer the CENVAT credit
lying unutilised in his account to such transferred, sold, merged, leased or
amalgamated factory.
If a provider of output service shifts or transfers his
business on account of change in ownership or on account of sale, merger,
amalgamation, lease or transfer of the business to a joint venture with the
specific provision for transfer of liabilities of such business then, the
provider of output service shall be allowed to transfer the CENVAT credit lying
unutilised in his account to such transferred, sold, merged, leased or
amalgamated business.
The transfer of the CENVAT credit under sub–rules (1) and (2)
shall be allowed only if the stock of inputs as such or in process, or the
capital goods is also transferred along with the factory or business premises
to the new site or ownership and the inputs, or capital goods, on which credit
has been availed of are duly accounted for to the satisfaction of the Deputy
Commissioner of Central Excise or as the case may be, the Assistant
Commissioner of Central Excise
Amendment in Rule 10 of CCR vide Notification No. 4/2017 –
CE(NT) dated 02/02/2017
In Rule 10 of the said rules, after sub-rule (3), the
following sub-rule shall be inserted, namely :-
(4) “Subject to the provisions contained in sub-rule
(3), the transfer of the CENVAT credit shall be allowed within a period of
three months from the date of receipt of application by the Deputy Commissioner
of Central Excise or Assistant Commissioner of Central Excise, as the case may
be:
Provided that the period specified in this sub-rule may, on
sufficient cause being shown and reasons to be recorded in writing, be extended
by the Principal Commissioner of Central Excise or Commissioner of Central
Excise, as the case may be, for a further period not exceeding six months.”
Brief Analysis of the amendment
Rule 10 of CCR contains specific provisions for transfer of
unutilised CENVAT credit, in cases where, a manufacturer or a service provider
shifts his factory/premises to another site or transfers his business, on
account of sale, merger, amalgamation, lease etc. The transfer of credit
in such cases is allowed on the condition that the stocks of inputs and capital
goods are transferred as well. Further, the said inputs or capital goods, on
which credit has been availed, need to be duly accounted for to the
satisfaction of the concerned authorities.
Based on practical experience of central excise and service
tax administration, it is noticed that invariably attempts are made by Central
Excise department to raise frivolous objections and deny transfer of unutilized
CENVAT credit in case of business restructuring generally resulting in hardship
and avoidable litigation.
In particular, provisions under Rule 10 of CCR have led to
several disputes. The departmental authorities insist that prior permission is
required for transfer of unutilised CENVAT credit, while the tax payers take a
position that mere intimation was sufficient to transfer the unutilised credit.
Some relevant judicial considerations are given hereafter for
reference:
In Hewlett Packard (I) Sales vs. CC (2008) 6 STR 155; 211
ELT 263 (CESTAT), it has been held that prior permission of AC / DC is not
required for transfer of credit relying on Solaris Biochemicals vs. CCE
(2005) 179 ELT 216 (CESTAT) – followed in Kiran Pondy Chems vs. CCE
(2009) 239 ELT 192 (CESTAT SMB); Flex Art Foil P Ltd. vs. CCE (2010) 260 ELT
261 (CESTAT) [view upheld in CC vs. Hewlett Packard India Sales Ltd.
(2012) 279 ELT 203 (Karn HC DB).]
In CCE vs. Amar Traders (2008) 222 ELT 400 (CESTAT SMB),
assessee had taken CENVAT credit after intimating about merger and stock
(without seeking any permission). It was held that assessee is eligible for
CENVAT credit of duty paid on stock.
Rulings which have held that permission is not required to
transfer the balance credit – [CCE vs. Tata Auto Components Systems (2011)
33 STT 294; 277 ELT 318 (Karn HC DB); Om Glass Works vs. CCE (2012) 279 ELT 313
(CESTAT SMB).]
In CCE vs. Nagarjuna Agrichem (2008) 222 ELT 232 (CESTAT
SMB), it was observed that Rule 10 does not lay down any condition for
seeking permission from authorities.
In most of the judicial cases, relating to transfer of
unutilized CENVAT credit in case of business structuring, the matter has been
decided in favour of tax payers.
Under this backdrop, a new sub-rule 4 has been inserted with
effect from 02/02/2017 in Rule 10 of CCR, to provide that transfer of
unutilised CENVAT credit shall be allowed by the jurisdictional authorities
within 3 months (to be further extended by 6 months on sufficient cause being
shown) from the date of receipt of application by the manufacturer or service
provider.
The wordings of this newly introduced clause, indicates that
the unutilised CENVAT credit cannot be utilised by the new entity/unit unless
express written approval is received from the concerned authorities.
Some Practical Issues from the amendment
a) It is likely to increase the compliance
procedures for tax payers who have multiple premises/factories and consequently
multiple registrations under central excise and service tax. This could also
lead to an overall delay in the entire process, with the various jurisdictional
authorities disposing off applications at different times.
b) Pending
approval from the concerned authorities or in a case where the application is
rejected by the authorities, there could be situations where the new
entity/unit has to discharge the output tax liability of both the current
operations as well as new operations which may have to be paid in cash without
being able to utilise CENVAT credit of the transferor entity/ factory. This
could pose severe working capital constraints.
c) There could be a scenario where the authorities
do not issue the formal approval within the prescribed time. In such a case,
the amendment is silent as to whether or not, transfer of unutilised CENVAT
credit would automatically stand permitted after the expiry of the prescribed
time period.
Conclusion
Mergers and amalgamations are a very common phenomenon in the
fast changing business environment globally as well as in India. Hence, it is
essential that in order to promote the cause of “ease of doing business”, the
relevant tax laws are business friendly so as to encourage smooth & easy
business restructuring. The amendment made in Rule 10 of CCR with effect from
02/02/2017, could result in long drawn litigations and create uncertainty as
regards entitlement to the benefit of unutilised CENVAT credit at the end of
transferor company or entity, by the transferee company or entity.
In light of the foregoing, the following is recommended:
Appropriate clarifications need to be issued by
CBEC to address practical issues arising from the amendment so as to avoid
hardships to tax payers, in case of business restructuring. In order to encourage
mergers and amalgamations and business restructuring generally and also to
promote the cause of “ease of doing business”, transfer of unutilised CENVAT
credit may be permitted provisionally, pending disposal of application for
transfer of credit based on an undertaking that can be given by the transferor
company or entity to safeguard interest of revenue. While finalising GST
legislation, it should be ensured that these concerns are appropriately addressed.
