Thursday, 12 March 2015

Rule 6 of CCR, 2004 - New explanation to create new complications

ONE of the major changes made by the Finance Minister in the recent budget is equating the non-excisable goods to exempted goods for the purpose of Rule 6 of the Cenvat Credit Rules ('Credit Rules'). This is made by inserting a new explanation 1 under rule 6(1) which is as follows:
"For the purpose of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory."
Further, the value for the non-excisable goods is specified under Explanation 2 as follows,
"Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the rules made thereunder."
It is clear from the above explanation that exempted goods and final products now include non-excisable goods also for the purpose of Rule 6 of the Credit Rules. As we are aware that Rule 6 of Credit Rules interalia is applicable to a manufacturer of final products who is engaged in the manufacture of both dutiable and exempted goods. The first point to be noted here is that the explanation is applicable only for the purpose of Rule 6 and there is no amendment in the definition of 'exempted goods' or in the definition of 'final product' under the Credit Rules. Therefore, Rule 6 is now applicable for the manufacturer of dutiable goods and non-excisable goods also. The definition of excisable goods has been provided under section 2(d) of the Central Excise Act, 1944 (Excise Act) to mean goods specified in the Central Excise Tariff Act, 1985 ("CETA") as being subject to a duty of excise. Therefore goods which do not have any rate specified in the CETA are treated as non-excisable goods.
Non-excisable goods v. Non-manufactured goods:
It is pertinent to note that Rule 6, with insertion of new explanation, is applicable only to non-excisable goods and not to non-manufactured goods. The point of difference is that the goods which are manufactured and not having any rate in the Schedule are treated as non-excisable goods and accordingly Rule 6 has to be applied by the manufacturer of these goods. Whereas the goods which are not at all manufactured by the manufacturer e.g., worn out parts of the machinery, scrap of used furniture etc., cleared along with dutiable goods does not necessitate the manufacturer to comply with Rule 6 even after the new explanation. Therefore, a manufacturer who is having turnover of both manufactured dutiable goods and non-manufactured goods is still not required to comply with Rule 6 of Credit Rules. However, Department may create hassles by applying Rule 6 in these situations as well.
Non-excisable goods v. By-products/ waste:
The next point to be debated is that in the case of Union of India Vs. Hindustan Zinc Ltd ., reported in = 2014–TIOL-55-SC-CX, the Hon'ble Supreme Court held that by-products and wastes arising in the manufacture due to the technological necessity are not treated as finished goods for the purpose of erstwhile Rule 57CC (same as Rule 6 of CCR) and accordingly, manufacturer need not comply with Rule 57CC/ Rule 6 for those by-products or waste. Therefore,the question that may arise in this regard is whether those by-products and waste arising out of the technological necessity shall be treated as non-excisable goods for the purpose of Rule 6 of Credit Rules.
Past periods:
The other point which raises debate is that as the amendment to Rule 6 is made by way of Explanation, whether it can be said that the amendment is clarificatory in nature and applicable to past period also. In such a case, whether Rule 6 should be applicable for the non-excisable goods manufactured for the past periods also.
Valuation:
The next point which needs to be answered is the Valuation relating to non-excisable goods. Explanation-2 to Rule 6(1) provides that invoice value should be the value for the purpose of Rule 6 and where such invoice value is not available such value shall be determined by using reasonable means consistent with principles of valuation contained in Excise Act and Rules. In this regard, the question which arises is whether department has the power to dispute invoice value on any reasons like invoice value is less than market price, sale to related parties, similar goods are sold for higher price by the same assessee to other buyers etc.,
Conclusion:
In a nutshell, though the Explanation has been inserted in Rule 6(1) of CCR, the following points are still needs explanations.
++ Applicability of the explanation to non-manufactured goods like worn out goods or used furniture etc., removed from factory.
++ Applicability of the explanation to goods like by-products and wastes arising out of manufacture as technical necessity.
++ Whether the department can say that the new explanation is applicable for past periods also?
++ Whether the department can dispute the invoice value?
Thus, the new explanation inserted in Rule 6(1) of Credit Rules is like a landmine that has the potential to explode anytime in the near future.

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