Trading of goods by manufacturer after availing cenvat credit and issuance of cenvatable invoices

[Bal Krishan]

We are manufacturing of packing machine and registered with the central excise department. We cleared the machines under central excise after payment of duty. We also purchase spare parts on payment of duty as well as without payment of duty and after availing the cenvat credit of spare parts in case of duty paid spare parts we clear the same to different buyer on payment of appropriate Central Excise duty in all cases. We are not having any manufcturing facility for manufacture of spare parts. We can manufacture/assemble only packing machine. Now our Audit is going on and auditor objected that we can not avail the cenvat credit in respect of spare parts as these are not our inputs( for manufacture of machine) and credit is allowed in respect of inputs used for manufacturing of machine only. They further objected that we can not issue cenvatable invoice as a manufcturer because the spare parts have not been manufactured by us and moreover there is no facility for manufacturing of these spare parts. We have not taken any permission for trading of goods from the department. The Auditors disallowed the cenvat credit availed on spare parts which was traded by us without doing any work on it. They are also going to disallow the cenvat credit to our buyers also stating that we had issued invoices without having manufacturing facility. please guide whether the contention of auditor is correct

[KASTURI SETHI]

Sh.Bal Krishan Ji,

The audit objections are correct. On the basis of your query it appears that you have committed so many mistakes unknowingly i.e. you have acted in a bona fide manner.In this scenario, your firm is very weak on merits.

In Central Excise, there are three fundamental conditions for availment of Cenvat Credit. These are as follows :-

(i) Duty must be paid on inputs, capital goods & input services in prescribed invoice. Invoice must be proper as per Rule 11 of Central Excise Rules, 2002

(ii) These inputs, capital goods & input services must be used in or in relation to manufacture of dutiable final product. Manufacturing activity was requirement of Cenvat Credit Rules. If no manufacturing activity has taken place, no credit is permissible.

(iii) Duty must be paid on final product.

Thus you cannot take credit on spare parts which were not used in the manufacture of final products. These were meant for trading and hence not eligible for Cenvat Credit. Cenvat Credit can be taken on bought out goods only if the same are used in or in relation to manufacture of the dutiable final product. In the case of trading, manufacturing has not taken place. Hence not eligible.

You can issue cenvatable invoice as a manufacturer for the packing machine only which you manufacture. For issuance of Cenvatable invoice in respect of sale of spare parts, you were required to get yourself registered as dealer in excisable goods under Rule 9 (1) of Central Excise Rules, 2002. You neither got permission for trading in the manufacturing premises nor got yourself registered as dealer. You cannot do trading in the manufacturing premises without permission from the Commissioner How can you pass on Cenvat Credit by raising Cenvatable invoice in respect of spare parts ? No central Excise law permits such action. Cenvatable invoices for sale of spare parts issued to the buyers are invalid invoices on the ground of being not registered as a dealer. You are advised to reverse the credit along with interest without issuance of show cause notice and save penalty. You may or may not agree, I have given correct advice as per Central Excise law.

Go through the following Board's circular and case laws :

Cenvat credit when process does not amount to manufacture

Circular No. 911/1/2010-CX., dated 14-1-2010

2013 (295) E.L.T. 353 (S.C.) =  2013 (9) TMI 98 - SUPREME COURT KCP LTD. Versus COMMISSIONER OF CENTRAL EXCISE, CHENNAI

[Bal Krishan]

Sethi ji thanks very much. Sir one thing more whether we can not say that this clearance of input as much.

Sir one more objection is pointed out.

We were earlier partnership firm and PAN was issued to the Firm name. This partnership firm dissolved and all the business was taken over by one partner on individual capacity i.e. Proprietorship. But the central excise registration {supposed A} was not changed and the manufacturing activities were being undertaken on the old pan till GST. The pan no of partnership firm { A}

and proprietor {B}is different. We took service tax registration{B} on the PAN of proprietor however excise registration is in the partnership firm for the same premise but the income tax return for this business is being filed on the capacity of indvidial i.e. proprietor ship. We paid the service tax on foreign commission for the goods exported from the service tax registration No {B}. The goods were belong to having Excise registration No {A} We also took credit in respect of service tax paid by B on reverse charge in respect of goods exported by A . Th e auditor objected as under.

1. We can claim cenvat credit of revers charge only if we paid the service tax from the same entity i.e. both having registration on same PAN.

2. INSTEAD They asked us to pay the service tax on reverse charge on foreign commission and GTA from the PAN no of manufacturer as the service tax paid from the another PAN can not be treated as payment of manufacturet. Please also guide.

[KASTURI SETHI]

Both A and B have separate and independent legal entities as per Central Excise Act as well as Income Tax Act. You have created a mess. It appears to me you have not appointed any person who is well conversant with Central Excise & Service Tax.

[KASTURI SETHI]

Pl.note that if there is actually no revenue loss in this scenario, all these lapses on account of different PAN and registration, will be treated as procedural lapse. Procedural lapse means absence of mala fide intention.

[KASTURI SETHI]

With reference to your queries at serial no.2 above, replies are as follows : - 1. Yes. 2. Yes but procedural lapse.

AI Summary

Packing Machine Firm Advised to Reverse Cenvat Credit on Traded Parts; Issues with Unregistered Invoices and PAN Transition. A manufacturer of packing machines, registered with the Central Excise Department, faced audit objections for availing Cenvat credit on spare parts not used in manufacturing but traded. The auditor argued that Cenvat credit is only permissible for inputs used in manufacturing the final product, and trading does not qualify. Additionally, the firm issued cenvatable invoices without being registered as a dealer, which is against Central Excise rules. The firm also faced issues with using different PANs for excise and service tax registrations after transitioning from a partnership to a proprietorship, complicating tax credit claims. The advice given was to reverse the credit with interest to avoid penalties.