Rule 3(5) Cenvat Credit rules 2004

[Srivatsan Krishnamachari]

Dear Learned Friends,

As per Rule 3 of Cenvat Credit Rules 2004, if used Capital Goods are removed after they are used for a number of years, then the manufacturer or  provider of output service shall pay an amount equal to the credit taken on the said Capital Goods,reduced by the percentage points under straight-line method at the rate of 2.5 percent per quarter.

I have come across a Tribunal Decision in respect of Pooja Forge Ltd vs. CCE = 2006 (1) TMI 290 - CESTAT, NEW DELHI in which it was held that in case of movement of the Capital Goods in between two units of the same Assessee and for use in the manufacture of same final products, it does not involve any disposal or alienation of Modvated Capital Goods which would warrant return/denial of modvat credit. .......'

We are closing the activities in the existing Premises and moving out to our another Premises(Registered under Central Excise) which necessitates shifting of Machines to our second Unit and the Machines which are to be shifted are going t o be used in the manufacture of final products.

My query is whether can we remove the machines to our second unit without reversing the credit taken on those machines by applying the ratio as held in the case of the above referred case law ' Pooja Forge Ltd vs. CCE = 2006 (1) TMI 290 - CESTAT, NEW DELHI

I solicit your valued replies.

Thanks & With Regards,

K.Srivatsan

[Rajesh Nathoo]

Dear  Mr. Srivatsan,

Above said verdict in Pooja Forge Ltd vs. CCE  2006 (1) TMI 290 - CESTAT, NEW DELHI was on the grounds that there was no revenue loss to the exchequer as Supplier Unit could reverse the credit and Receipient unit was eligible for the  whole credit amount . It cannot be generalised for each and every situation. facts and Circumstances vary from case to case .

Rule 3 is very well logically inbuilt . Suppose a factory A purchases the capital goods and takes cenvat credit of Rs 2 lacs . If after 5 years , it removes it  to another factory B , factory A is liable to reverse the credit of 1 lacs (on depreciated value )and factory B is eligible to take the credit . In nutshell credit has been distributed between 2 factories depending on the period both factories used the same capital goods . Though Cenvat Credit on capital goods can be utilised within ist 2 financial years , but rule assumes the  life of capital goods to be 10 years as its depreciated value reduces to 0 after 10 years . It expects the capital good to used in the manufacture of  dutiable goods for 10 years even though credit has been utilised much before .

Please refer to the judgement  cited by you , capital goods were used in the manufacture of same dutiable product which was dutiable at the time when capital goods were purchased and when capital goods were removed to another factory .

In ur case , u can reverse the proportionate credit and receipient unit with different C.Ex. No. would be eligible for taking said credit  if the product u are manufacturing is dutiable on the day when capital goods are received in receipient factory .

  Though as per above judgement , there was no revenue loss to the exchequer , the verdict of above judgement can be challenged . As Factory itself  has the status of an entity . Registration under Central Excise is factory based . Point of taxation in Central Excise is removal irrespective of whether there is transfer of ownership or sale . Same logic has been extended to capital goods when these are removed from the factory .

The benefits of duty free  inter movement transfer of inputs/finished goods/capital goods has been provided to only LUTs and not to all Central Excise Assessees.

AI Summary

Cenvat credit reversal: transferor must proportionately reverse capital goods credit; recipient may claim credit if goods remain dutiable. Rule 3 requires that when used capital goods are removed between factories, the transferor must reverse cenvat credit proportionately using straight-line depreciation, while the recipient may claim the credit if the goods are used for manufacture of dutiable products on receipt. The Pooja Forge decision permitted reallocation where supplier reversed credit and recipient claimed it, but that ruling is fact-specific and not universally applicable.