CHAPTER - V
Grant of Modvat/Cenvat Credit

Under Modvat/Cenvat scheme, credit is allowed for duty paid on ‘specified inputs’ and ‘specified capital goods’ used in manufacture of finished goods. The credit can be utilised towards payment of duty on finished goods subject to the fulfilment of certain conditions. Some cases of incorrect availment of Modvat/Cenvat credit, noticed in test audit are elucidated in the following paragraphs :-

5.1    Incorrect availing of credit on inputs not involving purchase and sale

Rule 57AE(3) of the Central Excise Rules, 1944, prescribes that the manufacturer of final products shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods in which the relevant information regarding the value, duty paid, the person from whom the inputs or capital goods have been purchased is recorded. The burden of proof regarding the admissibility of the Cenvat credit shall lie upon the manufacturer taking such credit. Similar provision has also been made in rule 7(4) of the Cenvat Credit Rules, 2001 effective from 1 July 2001. The Ministry of Finance (the Ministry) circular dated 3 April 2000 also clarified that the basic responsibility lies upon the manufacturer to prove that inputs or capital goods were purchased and used by him for the intended purpose.

Eighteen assessees, in Bolpur, Kolkata I, II, III and IV Commissionerates of Central Excise, manufacturing excisable goods got inputs from their sister units on stock transfer basis. The invoices indicated that the goods sent were not a sale and the valuation of such inputs by the sender unit was made under rule 8 of the Valuation Rules, 2000. Sales tax was not paid on such goods as the transaction was not a sale. Since the assessee did not purchase the inputs, the availment of Cenvat credit of Rs.114.65 crore from 1 April 2000 to 27 December 2001 was not correct.

On this being pointed out (October 2000/February 2002), the Ministry stated (January 2003) that Cenvat credit was admissible as stock transfer of such inputs satisfied the definition of sale and purchase under section 2(h) of the Central Excise Act, 1944 and that rule 57AE (3) only clarifies maintenance of records and does not impose a condition regarding admissibility of credit on purchase of inputs by the manufacturer. The Ministry further stated (December 2003) that transaction between sister units are treated as separate entities.

Reply of the Ministry is not tenable since stock transfer does not satisfy the definition of ‘sale and purchase’ under section 2(h). Transfer of the possession of goods from one person to another was not involved as both parties belonged to the same company. The contention that rule 57AE(3) is only a clarification is also not correct as each rule is a separate entity and has to be followed mandatorily. The Supreme Court in case of A.N. Sehgal Vs. Raje Ram Sheoram (AIR 1991 SC 1406} held that effect should be given to both provisions of an enactment which cannot be reconciled with each other. The Ministry remained silent on its own circular dated 3 April 2000 where it was clarified that the basic responsibility is upon the manufacturer to prove that inputs or capital goods were purchased and used for the intended purpose. Moreover, rule 57AE(3) has been amended by a notification dated 1 March 2003 in which the word ‘purchased’ in rule 7 (4) (identical to rule 57AE (3)) of Cenvat Credit Rules, 2001 has been substituted by the word ‘procured’ prospectively. This lends credence to the stand taken by Audit. Hence, credit availed was recoverable for the period before 1 March 2003.

5.2    Simultaneous availing of Cenvat/Modvat credit on capital goods and depreciation under Income Tax Act.

5.2.1    Rule 4(4) of the Cenvat Credit Rules, 2002, prescribes that credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer claims as depreciation under section 32 of the Income Tax Act, 1961.

M/s. Numaligarh Refinery Limited, in Shillong Commissionerate of Central Excise, availed Cenvat credit of Rs.51.67 crore between June and August 2002, The balance sheets as on 31 March 2001 and 2002 and other records disclosed that fixed assets were exhibited at their cost inclusive of duty. The company was paying minimum alternative tax (i.e. income tax) on the basis of its book profit which was arrived at after charging depreciation on capital goods. As depreciation was charged on the capitalized value of capital goods which was inclusive of duty of excise, availment of credit was incorrect.

On this being pointed out (November 2002), the Ministry admitted the objection (December 2003).

5.2.2    Under rule 57R(8) of the Central Excise Rules, 1944, as effective before 1 April 2000, no credit of specified duty paid on capital goods was allowed if a manufacturer claims depreciation under section 32 of the Income Tax Act, 1961 or as revenue expenditure under any other provisions of the said Income Tax Act, in respect of that part of the value of capital goods which represents the amount of specified duty paid on such capital goods.

M/s. Honda Siel Cars India Limited, in Noida Commissionerate of Central Excise, availed of and utilized Modvat credit of Rs.14.79 crore on capital goods during 1998-99 and 1999-2000. The Annual Report of 1999-2000 revealed that the assessee claimed a revenue expenditure of Rs.354.33 crore during 1998-99 and 1999-2000 in the profit and loss account for the year ended March 2000 which included the amount of Modvat credit taken on capital goods. Availing Modvat credit of Rs.14.79 crore was, therefore, incorrect. Further, as the assessee had suppressed the facts, he was liable to pay penalty of Rs.14.79 crore and interest of Rs.10.72 crore upto January 2003 under rule 57U in addition to duty of Rs.14.79 crore.

On this being pointed out (July 2001 and August 2002), the Ministry while admitting the objection in principle stated (October 2003) that demand of Rs.14.79 crore had been confirmed and penalty of Rs.14.79 crore imposed in January 2003.

5.3    Short levy or non levy of duty on removal of inputs as such

Rule 57AB of the Central Excise Rules, 1944, and rule 3 of the Cenvat Credit Rules, 2001, prescribes that when inputs or capital goods, on which Cenvat credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under section 4 of the Act.

5.3.1    M/s. Ispat Industries Limited and M/s. Ispat Metallics India Limited, in Raigad Commissionerate of Central Excise, cleared inputs on which Cenvat credit was availed on payment of duty. Scrutiny of financial records revealed that the value shown in the excise invoices for payment of duty of excise was lesser than the value actually realised from the buyer. This resulted in short payment of duty of Rs.7.43 crore during the period 1 April 2000 to 30 September 2002.

On this being pointed out (November 2002), the Ministry while admitting the objection intimated (December 2003) that show cause notices demanding duty of Rs.13.67 crore along with interest and for imposition of penalty had been issued.

5.3.2    M/s. Ispat Metallics India Limited and M/s. Ispat Industries Limited, in Raigad Commissionerate of Central Excise, bought iron ore pellets (input) and availed Cenvat credit on them. Thereafter, in March and July 2001, the iron ore pellets were cleared without payment of duty. This resulted in non levy of duty of Rs.69.48 lakh.

On this being pointed out (October 2002), the Ministry admitted the objection (December 2003)

5.4.    Modvat/Cenvat credit availed but duty not paid on final goods

Under rule 57CC of the Central Excise Rules, 1944, where a manufacturer is engaged in the manufacture of any final product which is chargeable to duty as well as any other final product which is exempt or is chargeable to ‘nil’ rate of duty and the manufacturer takes credit of specified duty on any input for the manufacture of both categories of final products without maintaining separate account, the manufacturer shall pay an amount equal to 8 per cent of price of second category of final product charged by the manufacturer for the sale of such goods, at the time of clearance from the factory.

5.4.1    M/s Jayaswals Neco Limited and M/s. Chhattisgarh Electricity Company Limited, in Raipur Commissionerate of Central Excise, engaged in the manufacture of pig iron and ferro alloy also produced electricity which was partly used in the production of final products and partly sold outside the factory to Madhya Pradesh Electricity Board, M/s Monnet Ispat Limited and M/s. Raipur Alloys and Steel Limited, Raipur. The assessees had availed of credit on inputs such as furnace oil, caustic soda, hydrochloric acid, clean flo etc. for generation of electricity (non excisable). Modvat/Cenvat credit so availed was utilised for payment of duty on final products. No separate accounts of inputs used in the generation of electricity cleared for sale were maintained. Electricity valuing Rs.52.26 crore between January 1998 to April 2003 was sold on which an amount of Rs.4.18 crore being 8 per cent of the price of electricity was recoverable.

On this being pointed out (between December 2000 and July 2003), the Ministry stated (November 2003) that electricity being non-excisable, the provisions of rule 57CC/57AD(2) were not applicable for recovery of 8 per cent. However, reversal of credit of Rs.3.73 lakh on inputs used in manufacture of electricity sold was intimated. In case of M/s. Jaiswal Neco Limited, it stated that the assessee did not claim Cenvat credit on disputed inputs since January 2002.

Reply of the Ministry is not tenable as no separate records were maintained for use of inputs in manufacture of dutiable and non-dutiable goods, and hence 8 per cent of the value of non-dutiable final products was recoverable under the Cenvat Credit Rules. Further the rules do not provide for reversal of Cenvat credit on proportionate basis in such a situation. Verification of ER1 of December 2002 and March 2003 of the assessee also revealed that the Cenvat credit was availed on disputed inputs even after January 2002.

5.4.2    M/s. Crompton Greaves Limited, in Mumbai IV Commissionerate of Central Excise, manufactured electric motors and power driven pumps (exempted goods) using common inputs. No separate inventory was maintained for inputs used in their manufacture. The assessee cleared power driven pumps valuing Rs.19.35 crore without payment of duty during the period from April 2000 to March 2001. The assessee paid an amount of Rs.37.40 lakh only instead of Rs.1.55 crore (being 8 per cent of the price of power driven pumps) required to be paid. The amount of Rs.1.17 crore short paid was therefore recoverable.

On this being pointed out (June 2001), the Ministry accepted the objection (August 2003).

5.4.3    M/s. Indian Iron and Steel Company Limited, Burnpur, in Bolpur Commissionerate of Central Excise, manufactured raw coal gas by destructive distillation process and then sent the same to its purification unit within the premises for purification and manufacture of coal gas. A portion of pure coal gas (sub-heading 2705.00) was used within the factory as fuel for manufacture of final products and another portion was cleared outside the factory without payment of duty. The assessee used common inputs like sulphuric acid, wash oil etc. and did not maintain any separate accounts of inputs for such exempted category of excisable goods. The Modvat credit on inputs so availed was utilised towards the payment of other dutiable products. Therefore an amount equivalent to eight per cent of the value of such exempted final products was required to be paid. This resulted in non-payment of Rs.54.46 lakh for the period from August 1996 to March 2000.

On this being pointed out (January 2000), the Ministry admitted the objection (October 2003).

5.4.4    M/s. A.P. Paper Mills Limited, Rajahmundry, in Visakhapatnam II Commissionerate of Central Excise, engaged in the manufacture of both dutiable and exempted paper products, availed Cenvat credit on certain common inputs. No separate accounts were maintained for the inputs used in the exempted final products. The assessee cleared exempted goods valuing Rs.7.48 crore from July 2000 to January 2001, but did not pay an amount of Rs.59.81 lakh which was payable.

On this being pointed out (March 2001), the Ministry admitted the objection and intimated (October 2003) confirmation of demand of Rs.2.57 crore in July 2003.

5.4.5    M/s. Maize Products, in Ahmedabad II Commissionerate of Central Excise, manufactured and cleared maize starch, sorbitol and modified starches on payment of duty and byproducts (maize gluton, wet bran, corn S liquid etc.) at nil rate of duty. Separate inventory of common inputs, used in the above two streams of manufacture, was not maintained. Therefore the amount of Rs.2.30 crore was recoverable on products cleared at nil rate of duty during the period from April 2000 to June 2001 since byproduct was a final product as per rule 57AA(C) of Central Excise Rules, 1944.

On this being pointed out (February 2002), the Ministry admitted the objection and intimated (December 2003) that six show cause notices demanding duty of Rs.5.12 crore for the period from April 2000 to December 2002 had been issued.

5.5    Incorrect availing of Cenvat credit on inputs used in exempted final products

Rules 57C and 57AD(1) of the Central Excise Rules, 1944, prescribe that Modvat/Cenvat credit shall not be allowed on such quantity of inputs which are used in the manufacture of exempted goods.

5.5.1    M/s. Gujarat Narmada Valley Fertilisers Company Limited, in Vadodara II Commissionerate of Central Excise, availed Cenvat credit on Low Sulphur Heavy Stock (LSHS) used for generation of steam. Though a part quantity of steam so generated was sold outside the factory without payment of duty, the assessee did not reverse the credit attributable to the quantity of LSHS used as inputs in the manufacture of steam cleared outside the factory.

On this being pointed out (April 2002), the Department admitted the objection and stated (October 2002) that a show cause notice for Rs.3.45 crore from 27 September 1997 to 31 March 2002 had been issued (September 2002).

The Ministry admitted the objection (November 2003).

5.5.2    M/s. Ispat Industries Limited, in Raigad Commissionerate of Central Excise, availed Cenvat credit on iron ore pellets which was used in the manufacture of iron oxide fines. Since iron oxide fines (heading 26.01) were cleared without payment of duty during the period from April 2000 to March 2001, availment of credit of Rs.1.01 crore was not correct.

On this being pointed out (November 2002), the Ministry stated (December 2003) that the matter was being examined and steps taken to safeguard the interest of revenue.

5.5.3    M/s Chhattisgarh Electricity Company Limited, in Raipur Commissionerate of Central Excise, engaged in the manufacture of ferro alloy and electricity, availed Cenvat credit of Rs.75.10 lakh on inputs during the period June 2000 to May 2001. These inputs were used in the manufacture of electrostatic precipitators, raw material handling plant, copper tube and pipes which were consumed captively without payment of duty, availing exemption under notification dated 16 March 1995. As no duty was paid on the goods captively consumed, Cenvat credit availed thereon was not correct.

On this being pointed out (June 2003), the Ministry stated (November 2003) that the credit availed of was correct as inputs were used in the manufacture of capital goods which were further used in the factory of the manufacturer.

Reply of the Ministry is not tenable as the final goods manufactured from inputs did not suffer any duty and Cenvat credit availed on such inputs was not permissible under rule 57AD.

5.5.4    M/s. Aurobindo Pharma Limited, Unit IV, in Hyderabad I Commissionerate of Central Excise, engaged in the manufacture of bulk drugs, availed of Cenvat credit on selinium metal powder, ethylene diamine and propylene glycol which was exclusively used in the manufacture of pyrazynamide, an exempted product. Assessee paid eight per cent of the value of the said product under rule 57AD (2). This was not correct as the above rule is attracted only if the inputs are used in the manufacture of exempted and dutiable goods. The entire credit of Rs.67.03 lakh availed on these inputs during the period between June 2001 and April 2002 required recovery.

On this being pointed out (April 2002), the Ministry while admitting objection stated (October 2003) that a show cause notice demanding Rs.67.03 lakh had been issued besides demanding interest and proposing imposition of penalty.

5.6    Cenvat credit not reversed on raw materials written off

The Board clarified in February 1995 that where Modvat credit is availed on inputs, but later on inputs are not used in the manufacture and its value is written off from stock accounts for any reason, the Modvat credit should be reversed. The Board further clarified on 16 July 2002 that credit of duty availed on inputs is to be reversed only in cases where unused inputs are fully written off.

5.6.1    M/s. Electronics Corporation of India Limited, in Hyderabad III Commissionerate of Central Excise, availed Cenvat credit on different inputs received in their factory. Verification of their annual accounts revealed that during the year 2000-01, the assessee had written off full value of some of the raw materials and components declaring them as obsolete. The value of such materials written off amounted to Rs.10.55 crore. The corresponding credit of duty of Rs.1.69 crore on such inputs was however, not paid back.

On this being pointed out (May 2002), the Ministry stated (November 2003) that only the value of inputs was reduced and the quantity of inputs was not written off from the records for which provisions to restrict credit did not exist in the rules.

Reply of the Ministry is not tenable as the assessee had written off obsolete stores from materials stock account (Schedule N-2) for the year 2000-01 and hence those goods ceased to be inputs for availing credit under rule 57A.

5.6.2    M/s. Hindustan Petroleum Corporation Limited, in Mumbai II Commissionerate of Central Excise, engaged in the manufacture of petroleum products, had written off stores and spares, on which Cenvat credit was taken, valued at Rs.2.49 crore and Rs.5.12 crore during the years 2000-01 and 2001-02 respectively. Cenvat credit on these written off inputs was not reversed. Considering the credit amount as 8 per cent of value of inputs, the amount to be reversed worked out to Rs.60.88 lakh approximately.

On this being pointed out (June 2002), the Ministry stated (December 2003) that the spares were usable and write off in respect of these goods was done as an accounting entry to spread the cost of spares over a period.

Reply of the Ministry is not tenable as the value of inputs had been fully written off and hence credit was to be paid back as per Board’s circular cited above irrespective of whether or not such inputs were capable of being used.

5.7    Non-reversal of credit on inputs found short

Rules 57A and 57F of the Central Excise Rules, 1944, provided that credit of specified duty paid on inputs was available to a manufacturer to the extent it was used in or in relation to the manufacture of final products.

5.7.1    M/s. Mahindra and Mahindra Limited, in Mumbai V Commissionerate of Central Excise, engaged in the manufacture of motor vehicles, noticed shortage of inputs worth Rs.50.80 lakh at the time of stock taking for the year ended March 2000. As Modvat credit had been availed, credit was required to be reversed since the inputs were not used in the manufacture of final products.

On this being pointed out (March 2001), the Department stated (July 2003) that a show cause notice demanding duty of Rs.1.53 crore was issued on 31 March 2003 of which Rs.1.38 crore had been recovered. Department further stated that the point was under consideration and it could not have remained unnoticed.

Reply of the Department is not tenable as the stock taking for the year 1999-2000 was completed in March 2000 and show cause notice issued only in March 2003 which indicated that action was initiated after pointing out in audit.

The Ministry admitted the objection in principle (November 2003).

5.7.2    M/s. Philips Carbon Black Limited, Durgapur, in Bolpur Commissionerate of Central Excise, imported carbon black feed stock as the main input for manufacture of carbon black and availed of Modvat credit. Records of daily receipt and consumption of such inputs disclosed that the said materials were stored in the storage tank and at the end of every month actual quantity of stock in hand was ascertained physically by dip measurement of tanks. The shortage so found in stock was adjusted by reducing the book balance. Since the materials found short were not used in the final products, corresponding Modvat/Cenvat credit of Rs.98.59 lakh for the period from April 1999 to October 2001 ought to have been reversed.

On this being pointed out (January 2002), the Ministry admitted the objection and intimated (December 2003) that show cause notices demanding Cenvat credit of Rs.1.09 crore from April 1999 to January 2003 had been issued.

5.7.3    Physical verification of stores of M/s. Bharat Heavy Electrical Limited, in Hyderabad I Commissionerate of Central Excise, revealed shortage of stock of stores (inputs) of 324 spares and component items pertaining to the years 1991-92 to 2000-01 on which Modvat/Cenvat was availed of by them. The corresponding Modvat/Cenvat credit amounting to Rs.50.10 lakh relating to the said shortages was not, reversed by the assessee.

On this being pointed out (January 2003), the Department accepted the objection and stated (May 2003) that a show cause notice was being issued.

The Ministry stated (October 2003) that audit had taken into account only shortages and surplus had been ignored. It was further stated that there was shortage of filter assembly during the year 1990-91 and the same was in excess in the year 1997-98. During the process of reconciliation, the said shortages had been set off.

Reply of the Ministry is not tenable as such a set off is not allowed under the rules.

5.8    Incorrect availing of credit on the basis of improper duty paying document

Under notification issued in August 1997, deemed credit at the rate of 12 per cent of the invoice price of re-rolled products on which duty had been paid under section 3A was allowed to the manufacturer provided the said re-rolled products were received directly from their manufacturer.

M/s. K.E.C. International Limited, Butibori, in Nagpur Commissionerate of Central Excise, availed credit on M.S. angles received from M/s. Sunrise Structurals and Engineering Limited, Nagpur. These M.S. angles had been originally purchased from hot re-rollers who cleared the products under section 3A. M/s. Sunrise Structurals & Engineering Limited availed deemed credit and sold the M.S. angles to the assessee without mentioning clearance of ‘input as such’ on the invoice and paid excise duty at the rate of 16 per cent. This facilitated the assessee in availing Modvat credit of Rs.1.48 crore from May 1998 to January 2000, which was not admissible as the assessee had not purchased the inputs from the original manufacturer.

On this being pointed out (February 2000), the Ministry admitted the objection and intimated (October 2003) that demand of Rs.5.12 crore had been confirmed in July 2002 and penalties equal to duty were also imposed on both the parties. On appeal, the Tribunal had granted stay.

5.9    Utilisation of Cenvat credit more than the balance available

Under rule 57AB of the Central Excise Rules, 1944 read with notification dated 18 August 2000, while paying duty, the Cenvat credit shall be utilized only to the extent such credit is available on the fifteenth day of a month for payment of duty relating to the first fortnight of the month, and the last day of the month for payment of duty relating to the second fortnight of the month.

M/s.Kirpa Industries, Pithampur, M/s. Hotline Teletube and Components Limited and M/s.Hotline Glass Limited, Malanpur, in Indore Commissionerate of Central Excise, engaged in the manufacture of various excisable goods paid duty on finished goods from Cenvat credit account more than the balance available on the fifteenth and last day of the month during the period from August 2000 to February 2001. This resulted in excess utilisation of credit of Rs.63.37 lakh which tantamounts to clearance of goods without payment of duty.

On this being pointed out (May and June 2001), the Ministry while admitting the objection intimated (December 2003) recovery of Rs.11.23 lakh from M/s. Kripa Industries between September and December 2001 and confirmation of demand of Rs.54.25 lakh against M/s. Hotline Teletube and M/s. Hotline Glass Limited.

5.10    Availing of Cenvat credit of non specified duty

Cenvat credit is admissible on duties specified in rule 3 of the Cenvat Credit Rules, 2001.

M/s. Mandovi Pellets Limited, in Goa Commissionerate of Central Excise, availed Cenvat credit of Rs.54.45 lakh on iron oxide fines received from M/s. Ispat Industries Limited during the period from October 2001 to June 2002. Availing of credit was not correct because iron oxide fines were exempt from duty and M/s. Ispat Industries Limited had paid the amount of eight per cent under rule 6 of the Cenvat Credit Rules since common inputs were used for manufacture of dutiable as well as non-dutiable final goods. Payment of eight per cent did not represent duty, and hence availing of credit was not correct.

On this being pointed out (January 2003), the Ministry stated (November 2003) that M/s. Ispat Industries Limited had cleared the broken iron ore pellets on payment of appropriate duty.

Reply of the Ministry is not tenable as the relevant invoices clearly indicated that M/s. Ispat Industries had cleared iron oxide fines.

5.11    Incorrect availing of Cenvat credit on capital goods before use

Rules 57AC and 4(2)(a) and (b) of the Cenvat Credit Rules provide that Cenvat credit on capital goods received in a factory during a financial year shall be taken only for an amount not exceeding fifty per cent of the duty paid on such capital goods in the same financial year. The balance fifty per cent credit may be taken in subsequent financial years provided the capital goods are still in possession and use of the manufacturer of final products in such subsequent years. The Ministry clarified on 5 May 2000 that balance credit may be taken in a subsequent financial year subject to the capital goods still being in the use and possession of the assessee.

5.11.1    In M/s. National Aluminium Company Limited, (refinery division and smelter plant) in Bhubaneswar I Commissionerate of Central Excise, it was revealed that the assessee availed balance fifty per cent Cenvat credit of Rs.36.56 crore in April 2002 on capital goods received during 2001-02 for expansion programme out of which Rs.21.02 crore was utilized by them (by June 2002 and August 2002) before installation and actual use of the said capital goods which were either lying in the central store, or with the co-ordinator of expansion programmes. Expansion programme was yet to be completed and production thereof not started. The availing of balance Cenvat credit and utilisation thereof was incorrect.

On this being pointed out (June 2002), the Ministry admitted the objection (December 2003).

5.11.2    M/s. Kalyani Brakes Limited and M/s. Ispat Industries Limited, in Aurangabad and Raigad Commissionerates of Central Excise, availed balance 50 per cent of Cenvat credit amounting to Rs.15.87 crore during April 2001 and utilized the same even though the said capital goods were not put to use. This resulted in incorrect availment of Cenvat credit amounting to Rs.15.87 crore.

On this being pointed out (November 2002), the Ministry stated (October 2003) that installation or use of the capital goods was not a precondition for taking Cenvat credit.

Reply of the Ministry is not tenable in view of specific inclusion of the phrase, ‘possession and use of’ capital goods in rule 57AC ibid and Ministry’s own clarification of 5 May 2000.

5.11.3    M/s. Indian Oil Corporation Limited, Haldia, in Kolkata II Commissionerate of Central Excise, availed of fifty per cent Cenvat credit of Rs.5.87 crore during 2001-02 and balance Rs.5.87 crore in April 2002 and thereupon utilized the same. Audit scrutiny revealed that the new plant was still under construction and was not commissioned/installed to make it operational till May 2002. Availment/utilisation of credit of Rs.5.87 crore was incorrect.

On this being pointed out (July 2002), the Ministry stated (October 2003) that installation or use of the capital goods was not a precondition for taking Cenvat credit.

Reply of the Ministry is not tenable in view of specific inclusion of the phrase ‘possession and use of’ capital goods in rule 57AC ibid and Ministry’s own clarification of 5 May 2000.

5.12    Excess availing of Modvat credit on capital goods

5.12.1    Rule 57Q(3) of the Central Excise Rules, 1944, as it stood before 1 April 2000, allowed credit of additional duty leviable under section 3 of the Customs Tariff Act, 1975, on goods falling under heading 98.01 of the Customs Tariff, to the extent of 75 per cent of the said additional duty paid on such goods.

M/s. Tata Iron and Steel Company Limited, in Jamshedpur Commissionerate of Central Excise, received capital goods in 1999 falling under heading 98.01 of the Customs Tariff. The assessee availed full Modvat credit of Rs.6.56 crore on such capital goods in two spells i.e. 50 per cent in April 2000 and balance in April 2001 instead of 75 per cent of duty paid. This resulted in excess availment of credit of Rs.1.64 crore.

On this being pointed out (August 2001), the Ministry admitted the objection and intimated (October 2003) recovery of Rs.5.02 crore including interest.

5.12.2    M/s. Tamil Nadu Petro Products Limited, Manali, in Chennai I Commissionerate of Central Excise, availed (May 2002) Cenvat credit of Rs.3.13 crore being 50 per cent balance credit pertaining to capital goods received during the period 2001-02. While reckoning the credit of Rs.3.13 crore, the assessee incorrectly included an amount of Rs.75.03 lakh being the 50 per cent balance credit already availed (January 2002) pertaining to the period 2000-01. This resulted in excess availment of credit of Rs.75.03 lakh.

On this being pointed out (November 2002), the Ministry admitted the objection and intimated (July 2003) recovery of duty of Rs.75.03 lakh and interest of Rs.5.09 lakh in November 2002.

5.13    Other cases

In 593 other cases of grant of Modvat/Cenvat credit, the Ministry/the Department had accepted objections involving duty of Rs.17.84 crore and reported recovery of Rs.8.33 crore in 536 cases till February 2004.