Removal of Capital Goods – All is not yet clear

Removal of capital goods has always been an arena of litigation. The various issues cropped up during litigation includes whether capital goods removed as such or after use? Whether Excise Duty is payable or not? If Excise Duty is payable, whether on depreciated value or on transaction value.

Removal of Capital Goods is governed by Sub rule 5 of Rule 3 of Cenvat Credit Rules, 2004. This rule itself amended various times to set at rest the various issues raised during litigation. After so many amendments, right now relevant para at present Sub Rule 5 of Rule 3 is as follows:-

(5)        When inputs or capital goods on which Cenvat Credit has been taken are removed as such from the factory, or premises of the provider of output services, the manufacturer of final products or provider of output service, as the case may shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9:

Provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service:

Provided further that such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty of final products:

(5A) (a) if the capital goods, on which CEVAT Credit has been taken, are removed after   being used the manufacturer or provider of output services shall pay an amount   equal to the Cenvat Credit taken on the said capital goods reduced by the  percentage points calculated by straight line method, as specified below for each    quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:-

(i) For computers and computer peripherals:

For each quarter in the first year @ 10%

For each quarter in the second year @ 8%

For each quarter in the third year @ 5%

For each quarter in the fourth & fifth year @ 1%

 (ii) For capital goods other than computers and computers peripherals @ 2.5% for each quarter;

Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

(b) If the capital goods are cleared as waste and scrap, the manufacturer  shall pay an amount equal to the duty leviable on transaction value.

5(B)     deals with written off.

5(C)     deals with remission under rule 21 of Central Excise Rules, 2002.

At the first instance, it seems that Sub rule 5 and 5A has been worded so nicely that every situation is covered as follows:-

[1] Sub Rule 5A says that when capital goods are removed as such, assessee is required to reverse Cenvat credit availed;

[2] Sub Rule 5A (a) says when capital goods are cleared after use, assessee is required to reverse Cenvat credit on depreciated value or pay duty on transaction value whichever is higher;

[3] Sub Rule 5A (b) says when capital goods are cleared as waster or scrap; assessee is required to pay duty on transaction value.

Here, we are concerned only with sub rule 5A (b) which covers the situations when capital goods are cleared as waste or scrap. Now the department is raising demand of central excise duty on clearance of waste or scrap of Iron & Steel, Plastic items, Rubber items, Electrical items generated during the repair and maintenance of plant & machinery by taking recourse to sub rule 5A (b) of Cenvat credit rules, 2004 on the ground that capital goods cleared as waste or scrap.

But the question is “whether clearance of waste or scrap generated out of repair & maintenance of capital goods” is equal to “clearance of capital goods as scrap”. One view that seems to be more appropriate is that sub rule 5A (b) covers only those situations when capital goods are cleared as waste or scrap without losing their identity as capital goods means only in those situations where capital goods life is over, it cannot be used further and sold as waste or scrap. Clearance of waste or scrap generated out of repair & maintenance of capital goods cannot be equated with clearance of capital goods as scrap.

Further, if duty is payable on transaction value then waste or scrap need to be categorized in a particular chapter heading and there is no specific chapter heading under which waste or scrap of Iron & Steel, Plastic and Rubber generated out of repair or maintenance of plant and machinery can fall. Department is trying to cover these waste or scrap under Chapter 72, 40 & 39. Even if department’s view is accepted and scrap is cleared under these chapters it cannot be called clearance of capital goods as scrap because these chapters are not covered under the definition of capital goods. Hence, it cannot be said that capital goods is being cleared as waste or scrap.

Further, Central Excise Duty on waste or scrap of Iron & steel, Plastic or Rubber generated out of repair and maintenance of plant & machinery cannot be demanded under Cenvat Credit Rules, 2004 as these rules have been framed by the board using the power delegated under section 37 of Central Excise Act, 1944 and section 37 does not authorize the board to change the criteria of demanding duty.

If the department’s view is accepted then Hon’ble Supreme Court judgement in the case of “Grasim Industries Ltd. vs. Union of India” and so many judgements of Hon’ble High Courts and Tribunals will lost their significance because in all these judgements it has been specifically held that excise duty cannot be levied without fulfilling the conditions of manufacturing.