CENVAT CREDIT REVERSAL ON REMOVAL OF CAPITAL GOODS AS SCRAP/WASTE

Rule 3 of the CENVAT credit allows the manufacturer of final products and the provider of output service to avail the excise duty paid for inputs and capital goods and service tax paid input services used for the provision of output service.   Rule 3(5) provides that when inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, 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 9.  Such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service.  Such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products.

In this article the circumstances on which reversal of CENVAT credit on removal of capital goods as scrap/waste is discussed and its applicability to the manufacturer of  goods and provider of output service is discussed.

Before 17.03.2012 Rule 5(A) provides that if the capital goods are cleared as waste and scrap , the manufacturer shall pay an amount equal to the duty leviable on transaction value.    By this provision it can be inferred that the reversal of excise duty on sale of scrap was applicable to the manufacturer and not applicable to the service provider.

Rule 5A was substituted with effect from 17.03.2012 vide Notification No. 18/2012-CE (NT), dated 17.03.2012.  The substituted Rule 5A provides that if the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT credit taken on the said capital goods  reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT credit, namely:-

1. For computers and computer peripherals-

• For each quarter in the first year @ 10%;
• For each quarter in the second year @ 8%;
• For each quarter in the third year @ 5%;
• For each quarter in the fourth and fifth year @ 1%.

2. For capital goods, other than computers and computer

The proviso to this rule provides that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid  shall be equal to the duty leviable on transaction value.

It can be inferred from the substituted Rule 3(5A) that the reversal of excise duty on sale of scrap/waste was applicable for both the manufacturer and service provider with effect from 17.03.2012.

The said Rule 3(5A) was again substituted vide Notification No. 12/2013-CE (NT), dated 27.09.2013.   The newly substituted Rule 3(5A) (a) provides that if the capital goods, on which CENVAT credit has been taken, are removed after being used, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:-

1. for computers and computer peripherals:

• for each quarter in the first year @ 10% ;
• for each quarter in the second year @ 8%
• for each quarter in the third year @ 5%;
• for each quarter in the fourth and fifth year @ 1%;

2.  for capital goods, other than computers and computer peripherals @ 2.5% for each quarter.

The proviso to this rule provides that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

Rule 3(5A)(b) provides that If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value.

From the newly substituted rule it can be inferred that reversal of excise duty is applicable only to the manufacturer.  The service provider is not required to reverse the excise duty on sale of scrap/waste with effect from 27.03.2013.