CENVAT Reversal on trading of goods

[deepak kalambate]

Dear Sir

We are manufacturer exporter and also trading of goods. We are exporting goods from manufacturer's premises i.e. merchant exports as trading activity. Now department is asking us to reverse CENVAT (Common Input Credit) though the goods are exported from manufacturer's premises.

Please advise and give me case laws referances regarding the subject matter.

Thanks & Regards

Deepak Kalambate

[Rajagopalan Ranganathan]

Sir,

Please clarify under whose bond/Letter of Undertaking the export is taking place. Since trading is an exempted service you, as trader, is not eligible to avail the credit of service tax paid on input services. Therefore the Department is right when it requires you to reverse the proportionate credit. Rule 6 (1) of Cenvat Credit Rules, 2004 states that " the CENVAT credit shall not be allowed on such quantity of input as is used in or in relation to the manufacture of exempted goods or for provision of exempted services or input service as is used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services." Therefore as a trader you are not eligible to avail credit of service tax paid on input service. Please refer to rule 6 of Cenvat Credit rules, 2004 for detailed procedure on how to calculate the proportionate credit.

[deepak kalambate]

Dear Sir,

Say "AMBIKA" is manufacturer of excisable goods whose factory is at chennai. We are placing order to M/s AMBIKA asking them to export goods to "M/s MONTI" at Italy. M/s AMBIKA is preparing invoice our Name and delivery to MONTI Italy and exporting goods under their bond. In this case we are merchant exporter and we are giving our export invoice in Foreign Currency and M/s AMBIKA is preparing ARE1. We are paying to M/s AMBIKA against their invoice in INR.

In this case We are not bringing material in our premises but exporting goods from manufacturer's premises directly. As this is pure export activity and there will be no tax on Exports. It department will ask to reverse Common Input Credit proportionately, it will be okay. But department is asking to reverse 6% of cost of goods sold.

Please advise.

[Rajagopalan Ranganathan]

Sir,

There are two options available under Cenvat Credit rules, 2004 for the trader to pay back the credit of service tax paid on common input services used. Since in your case the manufacturer of the excisable goods is exporting on behalf of you (merchant exporter) Where is the question of reversing the credit taken by you of service tax paid on input services used by you for manufacture of your own goods. Since you are only a merchant exporter (trader) you cannot avail any credit of service tax paid on input services utilized for export of excisable goods and only AMBIKA can avail the credit. Therefore you need not reverse the credit since the credit earned by you are utilized for payment of duty on excisable goods manufactured by you which has no connection with your trading activity.

[KASTURI SETHI]

I fully concur with the views of Sh. Ranganathan Sir. I further add as under :-

As per Rule 5 of Cenvat Credit Rules, if the final products are exported, the cenvat credit is not required to be reversed. As per Rule 6(6)(v), rule 6(1) to 6(4) are not applicable to goods exported under bond. Exported goods are not 'exempt goods'. Exported goods are treated as duty paid.

Exemption means under Section 5 A of Central Excise Act.

 

 

[KASTURI SETHI]

In support of views of Sh.Ranganathan, Sir, I further express as under :-

If Central Excise duty has been paid on inputs used in the manufacture of exempted finished goods exported, Refund of duty paid those inputs is admissible under Rule 5 of Cenvat Credit Rules. Finished goods may be exempted by virtue of notification or tariff rate Nil. So question of reversal does not arise. Go through the following case laws. These judgements are relevant now.

(1) Cenvat credit - Refund of unutilized credit, whether admissible on export of fully exempted goods? (2) Words and Phrases - Term ‘excisable goods’ used in Rule 6(6) of Cenvat Credit Rules, 2004, whether includes both dutiable and exempted goods when exported under Bond?

The Supreme Court Bench comprising Hon’ble Mr. Justice D.K. Jain and Hon’ble Mr. Justice Anil R. Dave on 12-3-2012 after condoning the delay granted leave in the Petition for Special Leave to Appeal (Civil) No. 9885 of 2011 filed by Commissioner of Central Excise, Chandigarh against the Judgment and Order dated 5-5-2010 of Himachal Pradesh High Court in C.E.A. No. 2 of 2009 as reported in 2010 (254) E.L.T. 417 (H.P.) = 2010 (5) TMI 334 - HIMACHAL PRADESH HIGH COURT (Commissioner v. Drish Shoes Ltd.). While granting leave, the Supreme Court passed the following order :

“Delay condoned.

Leave granted.

The appeal will be heard on the SLP Paper Book. Additional documents, if any, may be filed by the parties.”

The Himachal Pradesh High Court in its impugned order had held that refund of accumulated Cenvat credit under Rule 5 of Cenvat Credit Rules, 2004 was available when fully exempted goods are exported. Further bar under Rule 6 ibid is not applicable as such units are fully covered in exception clause contained in Rule 6(5) of Cenvat Credit Rules, 2002 and Rule 6(6) of Cenvat Credit Rules, 2004, there being real distinction between two Rules. While Rule 6(5) of Rules of 2002 mentioned ‘exempted goods’, Rule 6(6) of 2004 Rules mentions ‘excisable goods’ which includes exempted goods as well.

[Commissioner v. Drish Shoes Ltd. - 2015 (322) E.L.T. A112 (S.C.)= 2012 (3) TMI 457 - SUPREME COURT]

[Himansu Sekhar]

Export goods are not exempted goods. For services clarifications issued 868/6/2008_CX dated 09.05.2008.since readings are considered as exempted services, this will be helpful. But I doubt about the objections raised by the department. It is unique.

AI Summary

Cenvat credit restriction: merchant exporters must reverse input service credit when credits lack a manufacturing nexus for exports. Traders who perform merchant exports without bringing goods into their premises cannot claim Cenvat credit on input services used for those trading/export activities and must reverse the proportionate credit under the Cenvat Credit Rules; where the manufacturer exports under bond on the trader's behalf, the manufacturer-not the trader-may claim or utilise credit, and exports under bond are treated separately from exempted goods with refund provisions available for unutilised credit on exported final products.