Material issued on returnable basis

[Sudhakar Sinha]

Dear Sir,

I want to know, Taxes applicable on the material issued to Contractor on returnable basis for fixed period and charged a fixed amount to the contractor for the same.

Sudhakar Sinha

[Rajagopalan Ranganathan]

Sir,

Please clarify whether the contractor is providing service to you or he is engaged in the manufacture of excisable goods on behalf of you. Then only any advice/opinion can be given on your query.

[Sudhakar Sinha]

Dear Sir,

Contractor is providing service. Constructing Coal handling plant in Power Plant.

Sudhakar Sinha

[Rajagopalan Ranganathan]

Sir,

Since you have stated that the materials are supplied by you for a fixed period to the contractor to provide the service I presume that the materials supplied by you are capital goods.

According to rule 4 (5) (ii) of Cenvat Credit rules, 2004 "the CENVAT credit on capital goods shall be allowed even if any capital goods as such are sent to a job worker for further processing, testing, repair, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or the provider of output service taking the CENVAT credit that the capital goods are received back by the manufacturer or the provider of output service, as the case may be, within two years of their being so sent".

Similarly rule 4 (5) (iii) of Cenvat Credit rules, 2004 stipulates that "if the inputs or capital goods, as the case may be, are not received back within the time specified under sub-clause (i) or (ii), as the case may be, by the manufacturer or the provider of output service, the manufacturer or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods, as the case may be, by debiting the CENVAT credit or otherwise, but the manufacturer or the provider of output service may take the CENVAT credit again when the inputs or capital goods, as the case may be, are received back in the factory or in the premises of the provider of output service".

Therefore if the materials supplied by you are not returned within the period of 2 years you have to reverse the credit taken by you on such materials. Once the materials are returned you can again take the credit of reversed amount.

[Sudhakar Sinha]

Understood, Thank you sir,

[YAGAY and SUN]

In addition to above reply, this transaction comes under the purview of deemed sales under Chattisgarh VAT Act and you need to charge VAT if the effective control and possession are in the hand of your customer.

[Ganeshan Kalyani]

In my view both VAT is applicable when there is sale and consideration. Sale includes deemed sales under VAT.

[KASTURI SETHI]

I support the views of all experts. Comprehensive and very clear reply by Sh.Ranganathan, Sir.

AI Summary

Cenvat credit on capital goods supplied to contractors may require reversal if not returned within specified statutory period.
If materials supplied on a returnable basis to a contractor qualify as capital goods, CENVAT credit is allowable provided records show the goods are returned within the statutory return period; failure to return within that period requires reversal of the attributable CENVAT credit, with entitlement to reclaim upon return. Additionally, where effective control or possession lies with the customer the supply may constitute a deemed sale attracting VAT.