Applicability of cenvat credit reversal on processed input goods exported

[Bhausaheb Gole]

Dear Experts,

We are manufacturing temprature measuring instruments & our unit is registered with Central Excise. our products are covered under First Schedule to the Central Excise Tariff, Act in chapter 90, we procured the excisable raw materials from our local suppliers as well as overses suppliers on fully paid excise duty, & We avail the Cenvat credit on all inputs procured in the factory, further we are doing various manufacturing process like Cutting, Super Polishing, Kordt Meter testing, Assembly, Calibration, Coating, Checking, thread measurements, job work and which will have involvement of high value machineries then goods are being Exported under BOND / REBATE with specified packing requirement & very rare & few parts which we procured from local market & doing testig,calbration, cutting, coating, measurement checking activity on that and EXPORT's these goods as a SFG.

Now, my issue is:

Excise department has raised the question on SFG, which includes only testing, caliration,cutting,coating checking activity & it does not amount to manufacture as per Section 2(f) in The Central Excises, & they called as it's a nothing but Trading Activity hence department demand us to reverse the cenvat credit on SFG & they applied Rule 6 also.

My View is:

If Goods are exported or cleared as such for exports under bond or under rebate (If our processes doen't cover under Section 2(f) in The Central Excises)

• it is relevant to examine the provisions under Cenvat Credit Rules, 2004 will be treated as deemed manufacturing. Reference to Circular No.283/117-CX.8 dated 31-12-1996.
• In the supplementary instructions of the cbec manual it is clearly written in para 3.4 of chapter 5 that inputs and capital goods can be removed for export under bond ie without payment of duty 'there is no bar a manufacturer to remove the inputs or capital goods as such for export under bond'.
• Provison of Rule (6) of Cenvat Credit Rule 2004.on reversal of cenvat credit @6/7% on value of goods (Difference between the value of Sales & cost of goods. 'It is not applicable if goods are exported please read provision Rule 6 sub rule 6 & clause V'.
• It's revenue neutral case, there is no loss of GOVT.

Please ADVICE :

On aforesaid all scenario i wanted to know relevant CASE LAWS, further Notifications & Circulars to prove that there is no need to reverse the CENVAT Credit or applicability of Rule 6, if goods are exported.

[Himansu Sekhar]

Sir

In my view these activities are not manufacturing activities. Under rule 3 of CCR , the credit availment is wrong. When the credit availment is wrong, the clarification under any instruction or circular will not be applicable and even if the goods are exported credit will have to reversed. Exempted service includes trading. Rule 6 prescribes reversal of credit. Department is correct

[Rajagopalan Ranganathan]

Sir,

In CCE vs. RFH Metal Castings-2005 (184) E.L.T. 194 (CESTAT) = 2005 (2) TMI 235 - CESTAT, NEW DELHI it has been held that inputs on inputs received (on which Cenvat was availed) can be cleared under bond without payment of duty, even if process carried out on input is not 'manufacture'. Cenvat credit availed on inputs is not required to be reversed-relying on Rico auto vs. CCE -2003 (157) E.L.T. 170 (Tri. - Del.). =  2003 (2) TMI 116 - CEGAT, NEW DELHI You can cite these two decisions and defend yourself.

[KASTURI SETHI]

Dear Querist,

The Department's stand is totally incorrect on the issue.

Whether any process amounts to manufacture or not ? It is to be determined Chapter-wise and commodity-wise. Now we accept the contention of the department that these processes do not conform to the definition provided under Section 2(f) of the Central Excise Act. It is not in dispute that you have paid CE duty/import duty on the inputs on which said processes were carried out. After carrying out the processes you exported the said inputs under bond without payment of duty. Since the processes were not in accordance with the Central Excise Act, the department treats such removal (as such) as trading activity which is exempted service. The department is not correct as there is a thin difference between removal as such and trading activity. Processes were carried out on the inputs though these were non-excisable processes.Whether the processes were in letter and spirit of Section 2(f) of Central Excise Act or NOT, it is irrelevant.

It is a fact that inputs (which have suffered duty) (Actually finished goods) have been exported. In this situation NO REVERSAL IS REQUIRED AT ALL. Rather you are entitled to refund of duty paid on exported inputs (Rather these are finished goods as processes were carried out. You may say these are exempted finished goods.) Thus it is not removal of inputs as such. Refund is admissible under Rule 5 of Cenvat Credit Rules, 2004. Here is judgement of Supreme Court which is relevant in this aspect.

"(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]"

Go through this judgement deeply.

[KASTURI SETHI]

I further clarify that if inputs are exported as such you can claim rebate of duty. Even if any one of the processes mentioned above amounts to manufacture, you can take credit of duty paid on inputs and claim refund under Rule 5 of Cenvat Credit Rules, 2004 because of exported inputs.

[Bhausaheb Gole]

Sir, I agree with you, but department stand is:

• Entire activity of SFG is not amounting to manufacturing (as per defi.) & hence it's trading,
• Trading is exempted service Please refer to Rule 6 of the CENVAT Credit Rules, 2004 and Notification No. 3/2011 CE (NT) dated 01.03.2011. As per the said provisions, Trading is exempted service & required to reverse credit in terms of Rule 6 on trading activity by submitting value in terms of said Rules and also pay Interest & Penalty.

Please go through the Notification No. 3/2011 CE (NT) dated 01.03.2011

[Bhausaheb Gole]

Please give the relevant case laws, especially Hon'ble Supreme Court decisions.

[KASTURI SETHI]

Dear Querist, When you are yourself admitting that you are engaged in trading activity, you should resort to claim rebate of duty paid on inputs exported. Forget about availment of credit. In my view, it is not trading. Have you not carried out processes on inputs ? Processes may not be as per Section 2 (f) of Central Excise Act. I have expressed my opinion.

[Bhausaheb Gole]

Sir,

I'm explaining the view of department only, there is no trading activity, hence please advice & share the relevant case laws to prove that.

AI Summary

Cenvat credit reversal: whether exported inputs require Rule 6 reversal or refund under Rule 5 for exported goods. The issue is whether processes performed on duty-paid inputs amount to manufacture; if not, whether clearing such goods for export under bond requires reversal of Cenvat credit under Rule 6 or whether refund/rebate under Rule 5 applies. The department treats non-manufacturing removals as trading/exempted service requiring Rule 6 reversal, while contributors cite administrative instructions and tribunal and higher court authority permitting clearance under bond without reversal and supporting refund under Rule 5, noting exceptions in Rule 6 for exported/exempted goods.