Confederation of Indian Industry - Procedural and Other Issues: Indirect Taxes

Procedural and Other Issues: Indirect Taxes

1. Customs

1. Customs Duties and Tariff Notifications Related Issues

1.1.1 Enlarging scope of temporary import for contract execution

Customs notification 27/2002 dated 1^st March 2002 permits temporary import of machinery, equipment or tools falling under chapters 84, 85, 90 or any other chapter of Customs Tariff on payment of 15% of the aggregate of the duties of customs provided the goods have been taken on lease by the importer for execution of a contract.

In addition to machinery, equipment and tools, there are other goods such as derrick barrages, hook-up barrages, pipe lay barrages, diving support vessels, DP vessels, work boats, anchor handling tugs, supply vessels, towing tugs falling under Chapter 89 which are temporarily imported on lease for execution of offshore projects. These may also be allowed for import at concessional rate of customs duty.

Include barges, vessels, tugs and boats in the scope of customs notification 27/2002. Also specific mention of Chapter 89 may be made in the notification.

1.1.2 Customs duty exemption on base value of goods exported from India for undergoing specified processes and re-imported

There are instances, where the domestic manufacturer exports certain indigenous or imported goods to a place outside India for carrying out further operations and then imports these back into India. This is generally done when certain sophisticated machining operations cannot be carried out indigenously due to various reasons such as economy of scales and high costs involved in import of machinery. Currently while re-importing, customs duty is levied on such jobbing charges including the cost of the material exported from India. This amounts to payment of customs duty even on the cost of indigenous materials.

Customs notification 43/1996 dated 23rd July 1996 provides a special valuation method for goods on which a manufacturing process was undertaken in India and subsequently sent abroad for carrying out certain further operations. Under this valuation provision, customs duty is to be paid on the processing charges, insurance and both ways freight. Currently, this mechanism is applicable for carrying out further manufacturing processes of coating, electroplating or polishing or a combination of one or more of these processes.

The scope of customs notification 43/1996 needs to be enlarged to cover other manufacturing processes such as cutting and slitting, precision drilling, roller pressing of turbine blades wherein identity of the goods does not change.

Increase the scope of customs notification 43/1996 to include more processes, so that the customs duty is charged only on the value addition by way of processing charges, insurance and both ways freight.

1.1.3 Goods sent abroad for international trade fairs and re-imported

Whenever the products are sent abroad for exhibiting the same in exhibitions, these are cleared under bond without paying excise duty. But at the time of re-import, additional duty (CVD) has to be paid at the port of re-import.

Levy of CVD at the time of import needs to be relaxed. When such goods are cleared for home consumption, excise duty will naturally be paid on such items brought back from abroad and sold. Receipt of goods in the factory can be watched by local Excise authority.

Additional duty (CVD) should be exempted on goods re-imported after exhibiting in trade fairs/ exhibitions abroad.

1.1.4 Tools & equipment for repairs of machinery by foreign technicians

When imported machinery are required to be repaired by foreign technicians, they either bring the tools & equipment along with them or the same are sent by air separately. Such tools and equipment could be new or old / used and are brought on returnable basis. In such cases customs authorities insist for payment of duty, which is to be refunded under section 74 under Drawback scheme.

It is impossible for foreign technicians to pay the customs duty and then obtain refund under Section 74 under Drawback scheme. It seriously affects the repair work and at times the foreign national is compelled to stay back at a heavy cost.

When tools & equipment are brought by foreign nationals either along with them or separately, the same may be allowed to be cleared through customs without payment of duty on an undertaking by the Indian client / company.

1.2 Project Imports

1.2.1 Project import registration based on LOI

As per Project Import Registration 1986 issued vide customs notification 230/1986 dated 3^rd April 1986, one of the requirements for registration of contract mentioned in para 5(4) is production of contract agreement with the customer.

In case of large value contracts, the customer issues Letter of Intent (LOI) to the supplier indicating broad description of goods to be supplied, delivery schedule and it has the force of a contract. The supplier starts importing inputs to meet the delivery schedule pending signing of contract agreement.

Some of the customs houses refuse registration of contract under Project Import Regulations in the absence of contract agreement. This creates difficulties for the manufacturer in timely import of inputs.

Necessary amendment of customs notification 230/1986 may be issued allowing registration of contract on the basis of LOI with an undertaking by the importer that contract Agreement will be submitted within a period of six months.

1.2.2 Project import registration – cash deposit / bank guarantee and reconciliation

Presently while registering a project, an importer is required to give a bond for CIF value of imports. In addition the importer has to deposit 2 per cent of CIF value of imports in cash to the extent of Rs.50 lakhs and furnish bank guarantee for the balance amount.

For the completion of reconciliation and refund of the deposit, plant site verification by the Central Excise authorities of the range where the project is situated is required. However, the requirement of site verification has been replaced by a certification from the head of the PSU/ Government department vide CBEC circular no. 14/2006-Cus dated 17^th April 2006. In other cases the procedure for verification at site continues.

It takes years for completion of a large project and the reconciliation process. Consequently, the cash deposit remains locked up with the customs for a long time and also the bank charges of the bank guarantee continues.

The requirement of 2 per cent cash deposit and bank guarantee be dispensed with and in lieu thereof, undertaking of the importer should be accepted.

1.3 Exports

1.3.1 Self-sealing and self-certification of export goods by manufacturer-exporter - simplification of procedures

Simplification of exports procedures helps in reduction of transaction costs and a number of steps have been taken by the Government in that direction. However, the process needs to be continued, so that Indian exporters do not face any procedural disadvantages as compared to their competitors abroad.

In line with the recommendations of the Task Force on Indirect Taxes headed by Dr. Vijay Kelkar in para 5.1 of Chapter 4 of the Report, CBEC vide circular no. 736/52/2003-CX dated 11th August, 2003 has extended the facility of self-sealing and self-certification of export goods (excluding exports to Nepal & Bhutan) to all categories of manufacturer – exporters. However there is no change in the existing provision of handing over the triplicate and quadruplicate copies of ARE-1 to Superintendent or Inspector of Central Excise within 24 hours of removal of goods as stipulated in para 10.1 of Part I of Chapter 7 and para 6.2 of Part I of Chapter 8 of Central Excise Manual issued on 1st September 2001.

Handing over of triplicate and quadruplicate copies of ARE-1 within 24 hours involves extra cost for the exporter as well as personal interaction of excise staff with the exporter. Therefore, this needs relaxation. Also a procedure needs to be devised for export cargo similar to home clearance, wherein there is no role of Central Excise staff in export of goods.

Free documentation procedure should be permitted for "Free Shipping Bills" to begin with and over a period of time extended to other categories.

1.3.2 Liberalise excise bond procedure for port of exports

Presently Merchant Exporters executing Bond with their jurisdictional Maritime Commissioners are required to export the goods only through the port within the jurisdiction of such Commissioner as stipulated in CBEC Circular No. 770/3/2004-CX dated 9^th January 2004. This poses logistics problems for the Merchant Exporters since the goods procured by them for export have to be necessarily of the Maritime Commissioner with whom the Bond is executed even when another port is available within close vicinity of the place of procurement of the goods.

To illustrate if the Merchant Exporter has executed Bond with the Maritime Commissioner in Mumbai and if the goods to be exported are procured from Kolkata then the Merchant Exporter has to necessarily transport the goods to Mumbai for export from Mumbai port even when the nearby Kolkata port is available for export. This increases transaction costs of the Merchant Exporters and may make them non-competitive in the international market.

Restriction of requiring the merchant exporters to export their goods only from the port within the jurisdiction of their Bond accepting authority should be dispensed with and the principle of issuing Telegraph Release Advice (TRA) for shifting the port of import under the Scheme of Advance Licences may be followed and exporters be allowed to declare the port of export of their choice.

1.3.3 Diversion of export goods after clearance from factory

Some times the export goods cleared from the factory for export to a particular consignee have to be diverted to some other customers due to cancellation of earlier order. In such cases where the exporter wants to divert the export goods to some other buyer or some other destination, customs authorities take considerable time to decide even where the diversion results in increase in the value of the shipment which means higher foreign currency earning.

This results in delays in shipments of the export cargo and blockage of funds for longer period. Customs should be more receptive to such changes as such occurrences are part of today’s business.

The procedure for amendment to the shipping bill may be simplified.

1.3.4 Online debit of licences instead of TRA

Exporters who avail export schemes like DEEC, DFRC, DEPB and EPCG have to register at a specific port for importation of items. When the goods are imported through other port than the registered ports, Telegraphic Release Advice (TRAs) are issued by the customs at the port of registration for using in the other ports for clearance of imported goods. This process of obtaining TRAs is time consuming and leads to delay in clearing the shipments affecting production schedules and paving way for high demurrage cost.

Since the EDI system is operational in all major ports, separate TRAs can be eliminated by debiting the import licence through EDI.

Introduce system of debit of import licence at different ports through EDI to avoid issuance of TRA.

1.4 Other Issues

1.4.1 Customs (Import of goods at concessional rate of duty for manufacture of excisable goods) Rules, 1996

Customs notification no.36/96 (NT) dated 23rd July 1996 contain Rules for import of goods at concessional rate of customs duty for manufacture of excisable goods. As per the procedure laid down in this notification, an application is to be made by the manufacturer / importer to Assistant Commissioner / Deputy Commissioner of Central Excise who countersigns the same and then forwards it to the Assistant Commissioner of Customs for giving the benefit of concessional rate of duty.

There is no mention in this notification about the method of forwarding the application by the AC/DC to the Assistant Commissioner of Customs at the port of import. Sometimes the excise offices insist that it will be sent through post, which takes time, and in many cases, it is not traceable at customs thus leading to delay in clearance.

In case of exports, the customs officer after examining the goods puts his "Let Export" report on the reverse of all copies of A.R.E-1 and then hands over the duplicate copy to the exporter in a sealed cover to be passed on to the concerned Assistant Commissioner, (Excise). This is clearly mentioned in the procedure for exports.

Similar procedure for handing over the customs copy of application in a sealed cover to the assessee for import of goods at concessional rate of customs duty would help the importer manufacturers.

The copy meant for customs authorities may be handed over to the importer in a sealed cover.

1.4.2 Automatic vacation of CESTAT stay order due to non-disposal of appeal within 180 days

Sub-section (2A) in Section 129B was inserted in the Customs Act, 1962 by Finance Act 2002. It provides that where the Appellate Tribunal has granted a stay in a particular matter, the appeal is to be disposed of within 180 days from the date of the stay order. In case the Tribunal does not dispose of the appeal within the stipulated period of 180 days, the stay order would get vacated automatically. This defies logic. The stay itself is granted either on merits or on the basis of financial hardship pleaded by the appellant petitioners. That being the case, the appellant petitioner should not be asked to pay the amount after 180 days.

This insertion of the Section 129B (2A) of the Customs Act has adverse implications for the appellants. As soon as the stay gets automatically vacated in terms of the amended law, the revenue authorities could initiate coercive action for recovery of pre-deposit/duty and penalty, though such recovery would not be warranted in law.

The disposal of the appeal, within the time limit set out by the amendment, is a matter that is beyond the control of the appellant. As such, the onus of getting the appeal disposed of within 180 days by the Tribunal should not be put on the appellant, and he should not be put in a disadvantageous position on this count.

The Task Force on Indirect Taxes headed by Dr. Kelkar while dealing with this instant issue, has also recommended in para 4.32 of Chapter 7 of its report that the provision of automatic vacation of stay should be revoked.

The earlier provision in the Customs Act 1962 providing for dispensing with the pre deposit and stay of recovery of the disputed duty / penalty amount till final disposal of the appeal should be restored.

2. Excise

1. Excise Tariff & Tariff Notifications Related Issues
1. Excise duty exemption on supplies against international competitive bidding

When supplies are made against International Competitive Bidding (ICB), exemption from payment of excise duty was available based on excise notification 6/2002 – sl. no. 301. In CENVAT Credit Rules 2004, a specific provision was made on 28^th January 2005 by inserting Rule 6 (6) (vii) to allow CENVAT credit on inputs and it contained reference to central excise notification 6/2002.

In the budget 2006, central excise notification 6/2002 was replaced by new set of excise notifications and the earlier provision of excise duty exemption on supplies against ICB was incorporated in central excise notification 6/2006 – sl. no. 91. However, no corresponding amendment was made in Rule 6 (6) (vii) of CENVAT Credit Rules. Subsequently, this omission was corrected by amending rule 6 (6) (vii) vide excise notification 9/2006 (NT) dated 21^st April 2006.

Consequently, the excise authorities are insisting on payment of 10% excise duty for supplies made during the period 1^st March 2006 to 20^th April 2006. As this is not the intention of the Government to exclude the exemption only for a period of 50 days, clarification may be issued to the effect that the amendment made on 21.04.2006 shall have retrospective effect from 01.03.2006.

Suggestion

Clarification needs to be issued that amendment to CENVAT Credit Rule 6 (6) (vii) issued on 21^st April 2006 shall have effect from 1^st March 2006

2. Excise duty exemption to certain goods supplied to specified research institutions

The excise notification no. 10/1997 provides exemption to following specified goods supplied to specified research institutions:

1. Scientific and technical instruments, apparatus, equipment (including computers).
2. Accessories and spare parts of goods specified in (a) above consumables.
3. Computer software, compact disc read only memory (CD-ROM) recorded magnetic tapes, micro-films microfiches.
4. Prototypes

Various manufacturers especially in engineering industries are facing problems in interpretation of scope of above notification. The research institutes are invariably claiming that engineering goods such as switchboards, switchgears, electrical motors, automation products etc. are covered within the scope of above description given in the notification. On the other hand the excise department is taking a view that the said goods are basically engineering goods and therefore cannot be considered as scientific and technical instruments, apparatus etc.

There have been cases where the manufacturers have ventured to claim the exemption for such goods, but, subsequently got Show Cause Notices. Such situations mainly arise due to the reason that notification in question does not specify particular tariff heading to which the exemption is applicable.

The specific chapter or tariff heading needs to be specified in the notification 10/1997 for sake of clarity.

2.1.3 Excise duty exemption on non-conventional energy devices / systems

Central Excise notification 6/2006 – sl. no. 84 exempts excise duty on 21 specified non-conventional energy devices / systems given in list 5 of this notification. Sl. no. 16 of this list covers agricultural, forestry, agro industrial, municipal and urban waste conversion device producing energy. Excise duty exemption on such waste conversion energy-producing device is there for two decades under different excise notifications.

When the applicable central excise notification was 205/88, CBEC issued a clarification under Section 37B as per Order No. 4/92 that "(a) Benefit of the Notification No. 205/88 will be available to such goods, even when these are cleared in CKD, SKD conditions, provided that evidence is produced that goods cleared, form part of a complete device, and the evidence is also produced for supply of such device to the buyer. (b) The said goods are designed for converting agricultural and municipal wastes for producing energy though conventional fuel can be used."

When an order for waste energy conversion device is placed on Engineering, Procurement and Construction (EPC) company, it procures number of items from different manufacturers. Items like pumps, motors, valves, etc. procured from other manufacturers cannot be termed as goods designed for converting agricultural and municipal waste for producing energy though these form part of main equipment. Consequently, the EPC contractor cannot buy equipment from sub-suppliers with the excise duty exemption under the notification and has to pay excise duty at the rate of 16 per cent which defeats the basic purpose of the notification and results in increase in cost.

Necessary clarification / instructions may be issued to enable the EPC contractors to procure equipment from their sub-suppliers with excise duty exemption based on the prescribed documents such as Project Authority Certificate and / or Chartered Engineer’s Certificate indicating that the sub-suppliers equipment is to be used in the non-conventional energy producing device / systems.

1. Central Excise Rules

1. Interest on payment of excise duty for diversion of goods meant for export

As per Rule 19 of Central Excise Rules 2002, any excisable goods can be exported without payment of excise duty from a factory of the producer or the manufacturers or the ware-house or any other premises, as may be approved by the Commissioner.

Condition (v) of the Excise notification no. 42/2001-C.E. (N.T) dated 26 June 2001 stipulates that in case of cancellation of export application the exporter shall pay the excise duty along with the interest at the rate of 24% per annum from the date of removal for export till the date of payment of duty.

The rate of interest of 24% in case of cancellation of export application is very high. It should not be more than the rate as prescribed under section 11 AA & 11 AB of Central Excise which is 13% effective from 12^th September 2003.

Suggestion

Reduce the rate of interest from 24% to 13% in case of diversion of goods meant for export.

2. Pre-authentication of invoices

There was a specific provision under erstwhile Central Excise Rule 52A (7) that the Commissioner may by general or special order exempt an assessee or class of assesses from pre-authentication of each foil of invoice book and from intimating the serial numbers of the invoices. The Central Board of Excise and Customs had given a relaxation vide letter No. F. No. 354/62/97-TRU dated 5^th June 1998 from pre-authentication of the invoices to assesses having units which pay excise duty of Rs. 5 crore and above from PLA in a financial year. Simultaneously, Commissionerates had issued Trade Notices exempting such assesses from the requirement of intimation of serial number of invoices.

The Government, by insertion of Rule 11 (5) and 11 (6) in the Central Excise Rules, 2002 has withdrawn the relaxation of pre-authentication of invoices and intimation of invoice serial numbers. In cases of assessees having numerous invoices generated daily for clearance of goods, pre-authentication of each blank invoice is a voluminous and time consuming exercise which adds no value, particularly, since most of these assessees have computerized invoicing systems that have been put in place after obtaining due permission from jurisdictional excise authorities. Likewise, intimation of invoice serial numbers also does not provide any real control over the movement of the goods. For purposes of crosschecking, the invoices can always be linked back to the RGI where details of clearances are recorded.

The erstwhile provisions, whereby the requirement of pre-authentication by authorized signatory and prior intimation of serial numbers of the invoices by the assessees paying duty is excess of Rs. 5 crore per annum was relaxed, be reinstated.

2.2.3 Adjustment of duty paid in excess and short paid on goods cleared under provisional assessment

In circumstances where the assessee is unable to determine the assessable value of the goods at the time of clearance, he has the option to clear the goods under Provisional Assessment in terms of Rule 7 of the Central Excise Rules, 2002. The goods after clearance may be sold at a price higher or lower than at which it was removed. It is only after sale of the goods that the actual price of the goods is ascertainable. Again, in circumstances where the goods are being cleared for captive consumption to a different unit of the same assessee, the value at the time of the clearance i.e. the actual cost of production is also not ascertainable accurately since all the costs going into the manufacture of the said product may not be readily available from the books of accounts. Such actual costs are only available at the end of an accounting period, when audited results are available.

In case the goods are sold / re-valued at a price higher than the one at which these were cleared, there will be a liability to pay the net differential duty. It may also so happen that the net duty after adjustment becomes refundable when the goods sold / re-valued at a price lower than the one at which it was cleared. The assessee would then be required to pay the differential duty with interest or claim refund along with interest as per sub rule (4) and (5) of Rule 7.

In some Commissionerates, the revenue officers are taking a view that under the new Central Excise Rules the assessee has to pay the differential duty and separately file refund claim, as the case may be, on the basis of each transaction. This would increase the paper work for the assessee as well as the department.

An amendment may be brought in Rule 7 of Central Excise Rules 2002, so as to explicitly clarify that it is the net differential duty, which would have to be paid or refunded on a monthly basis.

2.2.4 Provisional assessment to excise duty – liability to pay interest

Where it is not possible to quote for the firm prices by the supplier to the customer, because of longer duration of the contract or otherwise, there are mutually agreed formulae to compensate both ways — for arriving at the contract price by way of price variation or exchange rate variation clauses. In such circumstances, the supplier on availability of indices raises the supplementary invoices. It is in the interest of the supplier to raise such invoices as early as feasible, wherever there is increase in the price due to these agreed clauses.

The excise authorities have started demanding the interest on the excise duty paid on such positive variation on the ground that these supplementary invoices pertain to the goods invoiced earlier. This logic does not seem to be correct as the final price is not ascertained at the time of the clearance of the goods and is only known subsequently.

Prior to the introduction of Central Excise Rules 2001, the Provisional Assessment to excise duty under Rule 9B of Central Excise Rule 1944 was allowed in case where the valuation cannot be ascertained at the time of clearance of material / payment of duty. When the duty leviable on goods was finally assessed, the short fall, if any, was paid by the assessee and no interest was charged on the differential amount.

In the Budget 2002-03, the Central Excise Rules 2001 were replaced by Central Excise Rules 2002. As per Rule 7(4) of the said new Rules, in the case of Provisional Assessment, the assessee shall be liable to pay interest on any amount payable to the Government consequent to order for final assessment from the first day of the month succeeding the month for which such amount is determined, till the date of payment thereof

This has been interpreted by the field formations that if the order for final assessment is issued on first day of the month, the assessee will get one full month to pay the differential amount but if final assessment is made on last day of the month, the assessee will get only one day to make payment. This issue has been dealt by CESTAT, Mumbai in case of MSEB Pole Factory Vs C.C.E, Aurangabad [2005 (187) E.L.T.209 (Tri-Mumbai)] and CESTAT has ruled that one month period is from the date when amount of duty is determined. It would be preferable if necessary clarification is issued to avoid such disputes.

Rule 7(4) of Central Excise Rules 2002 should be modified to allow payment of differential excise duty within one month without interest in case of final assessment order.

2.2.5 Remission of duty and time limit of disposing the application for destruction of goods after RGI stage

Occasionally, some damage or detection of manufacturing defect takes place after the RGI stage, in the process of storing. Application for remission of Central Excise duty on such goods has to be made as per the provisions of the Central Excise Rules. However, these applications are not disposed off by the concerned officials of Excise department for a long period and sometimes remain pending for a considerable period.

Till the time the destruction is allowed by the Central Excise authorities the stock of damaged / defective goods have to be kept which is not economical and sometimes hazardous. Under Rule 21 of the Central Excise Rules, 2002, the powers delegated to various officers have been stipulated for remission of excise duty when the goods have been destroyed before removal. The superintendent has powers to remit the duty upto Rs.1000 and the Assistant / Deputy Commissioner upto Rs.2500. These powers need to be enhanced as these were fixed many years ago and thereafter the prices of products have gone up many times.

Time limit may be provided in the Central Excise Rules for disposal of such applications. Powers of the Superintendent and Assistant / Deputy Commissioner may be revised to Rs.10,000 and Rs.50,000 respectively.

2.2.6 Excise audit by Controller and Auditor General of India (CAG)

Rule 22(3) of the Central Excise Rules, 2002 empowers CAG to conduct Excise audit at the premises of the manufacturer. This audit by CAG, is in addition to audit done by the central excise officers. The repeat visit by CAG for the same job is not necessary. This issue has been highlighted by the Kelkar Task Force on Indirect Taxes in para 5 of Chapter 7 of its report and has recommended doing away with the audit by CAG.

It will be worthwhile to mention that CAG does not visit the income tax and customs tax payers and earlier the provision now found in the said Rule 22(3) was not there in the Central Excise Law.

Rule 22(3) of the Central Excise Rules, 2002 may be amended to exclude reference to audit party deputed by the CAG so that they need not visit the taxpayer’s premises.

2.2.7 Difficulty in availing CENVAT on sale in transit transaction

Difficulties are being faced by the trade and industry in availing the CENVAT facility on sale in transit consignment due to contradictory provision in Central Sales Tax Act and Central Excise Rules.

Section 3(b) of the Central Sales Tax Act provides for the circumstances under which a sale or purchase of goods is said to take place in the course of interstate trade or commerce. According to this Section, a sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase is affected by transfer of documents of title to the goods during their movement from one state to another. Where the property in the goods has passed / the movement has commenced, the sale will not evidently fall within Section 3(b) or when the property in the goods passes after the movement from one State to another, such sale will not also fall within the section. Accordingly, the section provides for endorsement in the documents during the journey or movement of goods and not earlier to that.

Under Central Excise, where a Registered person places an order on a manufacturer for supply and delivery of goods directly to customer/assessee and the goods are also accordingly transported/despatched from the manufacturers’ premises to the users’ premises without being brought to the Registered persons’ premises, the manufacturer has to issue an invoice under Central Excise Rules, 2002. The prescribed invoice under Central Excise should also contain (in addition to specified details), the consignee’s name and address for the purpose of availing CENVAT credit. Thus, before the goods move from one state to another or one place to another, the consignee’s name (second buyer) also should be incorporated in the documents of title of goods to make him eligible to avail CENVAT Credit. If this condition is satisfied in order to avail the CENVAT credit, then the transaction will not qualify as an E1 sale under the Central Sales Tax Act.

A close comparison of mandatory requirement under the Central Sales Tax Act, 1956 and Central Excise Act, 1944/Rules, 2002 will lead to contradiction between these two Acts as far as sale in transit is concerned. Both the Acts are Central legislations and as such there should not be any anomaly or contradiction on the same issues. When sale in transit is recognised or accepted under Central Excise Act, 1944/Rules, 2002, the same should have been allowed under Central Sales Tax Act also as per Central Excise requirement. At present, the industry faces hardship in cases of sale in transit under Central Sales Tax Act as documents of title to goods are to be endorsed during the course of transit whereas the Central Excise Act requires such endorsement for such sale in transit to be done before commencement of such movement.

Provisions for sale in transit should be aligned in Sales Tax Act and Central Excise Rules.

3. CENVAT Credit
1. CENVAT credit on capital goods

Rule 4(2)(b) of CENVAT Credit Rules, 2004 states that credit of balance 50 per cent CENVAT on capital goods in the subsequent year shall be allowed, if the capital goods are still in possession and use of manufacturer of final goods or provider of output service. This gives rise to the difficulties and disputes between the department and the assessees on the ground of possession and use.

In the on going process of simplification of statutes, there should not be any condition to avail the CENVAT credit only to the extent of 50 per cent of duty paid in the same financial year. Rather, the credit of whole of the duty paid on capital goods should be allowed on receipt of the capital goods in the factory.

The Task Force on Indirect Taxes headed by Dr. Vijay Kelkar has also recommended abolition of distinction between capital goods and inputs and allowing full CENVAT credit on the capital goods with effect from 1^st April 2004 immediately on receipt.

CENVAT Credit Rules may be suitably amended to do away with the distinction between inputs and capital goods so that 100 per cent credit of duty on capital goods can be availed on the date of receipt.

2.3.2 Reversal of full credit on removal of capital goods

Sub-rule (5) of Rule 3 of CENVAT Credit Rules, 2004 provides that 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 service, the assessee have to pay an amount equal to the credit availed in respect of such inputs or capital goods. Similar provision was made in CENVAT Credit Rules 2002 by an amendment by C. E. notification 13/2003 (N.T.) dated 1^st March 2003. Prior to this amendment, the assessee was only under obligation to discharge excise duty on the value determined for such goods under Section 4 or Section 4A of the Act. The reversal of full credit on removal of capital goods is adversely affecting the industry.

iThe term "removed as such" is causing confusion as worn out used machinery removed or sold should not be treated as removal of goods "as such" as in the case of raw materials. Sub-rule (5A) in Rule 3 has been inserted vide Central Excise Notification 27/2005 (N.T.) dated 16^th May, 2005 stipulating that if the capital goods are cleared as waste and scrap, the excise duty is payable on transaction value. This has partially addressed the issue.

Any capital goods will be subjected to wear and tear and will therefore depreciate in value merely by efflux of time. Also, technological obsolescence can render capital goods unviable for use by the manufacturer. In that case, even if the assessee clears the capital goods, after, say, a period of 5 years, at a much lower value compared to the value at which the capital goods were originally purchased, the assessee would be required to pay an amount equal to the CENVAT credit originally availed by the assessee.

Capital goods, which are cleared after being used, should not be treated as "removed as such". In case of removal of such used capital goods by way of sale, the excise duty liability should be either on the transaction value or on the depreciated value.

Payment of CENVAT on used capital goods should be either on the transaction value or on the depreciated value at the time of removal.

2.3.3 Inclusion of LDO and HSD in input category

Under the provision of Rule 3 of CENVAT Credit Rules 2004, inputs used in the manufacture of final products are eligible for taking credit of excise duty paid. However, as per Rule 2 (k), light diesel oil (LDO), high-speed diesel oil (HSD) and motor spirit (petrol) have been disallowed for taking CENVAT credit.

LDO and HSD are used by the manufacturers, either for generation of power or as consumables in the manufacture of final products. Denial of CENVAT credit results in higher cost.

Allow CENVAT Credit for LDO and HSD when used for generation of power or in the process of manufacture.

2.3.4 CENVAT credit on negligible shortage of inputs

As per Rule 3 (1) of CENVAT Credit Rules, 2004, CENVAT credit is allowed on the quantity of duty paid inputs received in the premises of the manufacturer. In some cases the reading shown by the weighing scale at the factory shows a shortage (by weight) of inputs received. It is also true that some times excess quantity (by weight of input) is recorded by different weighing scales. However, in case of bulk cargo, there could be actual shortage due to loss in transit.

If the weight difference is within the normally accepted tolerance of + 0.5 percent, the normal commercial practice is not to deduct any amount from supplier’s invoice.

In CENVAT Credit Rules, there is no specific provision for such minor variation in weight and some times a portion of CENVAT credit is disallowed.

The Department and officials of Excise Audit should ignore marginal difference in weight. In order to avoid unnecessary litigation and harassment to the trade and industry, suitable changes should be made in the CENVAT Credit Rules to allow such minor variation of + 0.5 per cent in weight.

2.3.5 CENVAT credit on inputs used in R & Development activities and trial run

A small quantity of the inputs received is subjected to tests and trials to ensure quality standards and specifications. Again some of the inputs are used in the research and development activities, which is an ongoing endeavour by the manufacturer to improve and upgrade the final products to meet the related statutory requirements as well as market expectations. In these circumstances the inputs used in tests, trials and research and development activities merit recognition as inputs used in relation to manufacture, though indirectly. This substantially fits into the definition of ‘input’ under Rule 2(k)(i) of the CENVAT Credit Rules 2004, which reads as under:

"Input" means all goods, except light diesel oil, high speed diesel oil and motor spirit commonly known as petrol, used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils".

In spite of the clear and exhaustive definition, excise authorities have taken a view that credit on the inputs used in tests, trials and research and development activities of the manufacturer are not eligible for CENVAT credit contending that the inputs are not used directly in the manufacturing stream.

The CENVAT credit scheme is a beneficial piece of legislation. The R&D activity is an inextricable part of the manufacturing process resulting in the emergence of the final product. Therefore, inputs when used in research and development activity should be eligible for CENVAT credit.

The definition of "input" may be suitably amended to extend the CENVAT credit on the inputs used in the factory for tests / trials and research and development activity.

2.3.6 Issue of Cenvatable invoice by registered dealers

As per sub-rule (7) of Rule 11 of Central Excise Rules, 2002, the first and second stage dealers and importers dealing in excisable / imported goods are allowed to issue Cenvatable invoices, thereby passing on the excise on the indigenous goods or the CVD incidence on imported goods to the manufacturer using these goods.

Sub-rule (4) of Rule 9 of CENVAT Credit Rules, 2004 stipulates that CENVAT credit in respect of inputs or capital goods purchased from a first or second stage dealer is allowed if such a dealer has maintained records indicating the facts that –

1. the goods were duty paid
2. only an amount of duty on pro-rata basis has been indicated in the invoice issued by him.

Due to the proviso (ii) mentioned above, the dealer is required to show the actual CENVAT / CVD paid on indigenous / imported goods and the buyer of these goods is able to calculate the dealer’s purchase price and the margin of the seller is known. This creates fear among the registered dealers that they are totally exposed before the buyers and may lose the business.

With a view to resolve this problem, option may be given to dealers to issue invoices similar to the invoices being issued by the manufacturer in terms of the provisions of the rule 11 of Central Excise Rules, 2002 and pay CENVAT at the applicable rate on the date of removal on the value as determined under sub-section (2) of section 3 or section 4 of the Act as the case may be. The difference between CENVAT in sale invoice and credit availed on the purchase of traded goods will be payable by the dealer through Personal Ledger Account (PLA). Such option was earlier given to dealers of textiles and textile articles of chapter 50 to 63 vide Central Excise Notification 34/2003 - NT of 10^th April 2003 by inserting a new sub-rule (4A) in Rule 3 of erstwhile Cenvat Credit Rules, 2002.

Option may be given to first and second stage dealers of excisable goods to avail CENVAT credit and issue CENVATABLE invoice of the value as determined under sub section (2) of section 3 or section 4 of the Excise Act, 1944.

2.3.7 Facility for direct dispatch of inputs to job workers

Under the provisions of Rule 4(5a) of Cenvat Credit Rules 2004, inputs and capital goods as such or after being partially processed are allowed to be sent to a job worker for further processing for which movement is required to be covered under challans / memos to be prepared by the parent manufacturers. The time limit within which processed goods are required to be returned to the parent factory is 180 days.

The above procedure is generally helpful to the industry and is being availed by various manufacturers in today’s competitive times when outsourcing is order of the day. However, in order to avail this procedure, the inputs should first come to the parent factory and thereafter only can be cleared to the job workers for further processing. This unnecessarily requires movement of goods from the input supplier to the factory and thereafter to the job worker. If facility of direct supply from premises of input supplier to the job worker is allowed, then there will be considerable saving in time and freight charges. Earlier such facility was available under erstwhile Rule 57J and needs to be introduced again.

Suitable amendments may be made in the CENVAT Credit Rules 2004 to allow sending of inputs directly to the job worker from the premises of input supplier.

2.3.8 Moulds & dies supplied to a manufacturer who produces and supplies intermediate goods on payment of duty

Under Rule 4(5)(b) of CENVAT Credit Rules 2004, CENVAT credit is allowed on capital goods like Moulds, Dies, Jigs and Fixtures sent to a job worker to carry out production as per the specification of the primary manufacturer. Dies and Moulds are also supplied to the manufacturers using their own raw material but supplying goods as per the specification of the primary manufacturer. The provision of CENVAT Credit Rule 4(5)(b) should also be extended to such manufacturers known as ancillaries / supporting manufacturers.

CENVAT Credit Rule 4(5)(b) may be suitably amended to enable the primary manufacturer to clear the moulds and dies even to the manufacturers who produce and supply intermediate goods as per the specification of the primary manufacturer on payment of excise duty.

2.3.9 CENVAT credit for Service tax paid on supplementary invoices

As per Rule 9 (1) (b) of the Cenvat Credit Rules, 2004, credit of excise duty paid can be taken on the supplementary invoice issued by the supplier. However, similar provision is not there for availing service tax credit. Service tax is a new subject and many assessees are not aware of the provisions of the Service Tax Rules and hence fail to charge the service tax at the time of invoicing to the customer particularly when additional services are brought under the tax net. Subsequently, on being aware of the relevant provisions, they pay the service tax and recover the same by way of raising supplementary bill on customers.

Since, there is no provision of availment of cenvat credit on service tax based on the supplementary invoice the customers are not in a position to avail the same.

Rule 9 (1) (b) of the Cenvat Credit Rules 2004 be amended to include "a supplementary invoice issued by an output service provider" to enable the assessee to avail of the credit on the strength of a supplementary invoice.

2.3.10 Adding more services in CENVAT Credit Rule 6 (5)

The CENVAT Credit Rule 6(5) specifies 17 services for which full credit is allowed except when these are used exclusively in or in relation to the manufacture of exempted goods or services. A few examples of specified services are consulting engineer, architect, interior decorator, management consultants, real estate agents, security agency, etc.

It is very difficult to appropriate services provided by the advertising agencies, chartered accountants, cost accountants, courier, manpower recruitment and maintenance or repair to dutiable and exempted products/services and therefore these should be treated at par with the services specified in Rule 6(5).

Services provided by Advertising Agency, Chartered Accountants, Cost Accountants, Courier, Manpower Recruitment and Maintenance or Repair should be added in the specified list of services in Rule 6(5) of the CENVAT Credit Rules, 2004.

2.3.11 Utilisation of service tax credit by provider of taxable and exempted services

As per rule 6 (3) (c) of the CENVAT Credit Rules, 2004, the provider of taxable services and non-taxable services is required to utilise the service tax credit to the extent of 20% of output tax when the accounts are not maintained separately.

This provision restricts CENVAT credit to 20% even if there is a mix of 50% taxable services and 50% non-taxable services provided by a service provider, which is apparently not justified. This rule needs to be modified.

Allow utilisation of CENVAT credit under CENVAT Credit Rule 6 (3) (c) in the ratio of taxable output service to total input service.

2.3.12 Clarification on availment of CENVAT credit for certain input services

As per Rule 2(l) (ii) of CENVAT Credit Rules, 2004, "input service" means any service used by the manufacturers, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal.

It is difficult to draw a line between the service used or not used in or in relation to the manufacture in case of service tax paid or mobile phones, residential telephones, vehicles, cars etc. commonly used for official as well as personal work. This would entail litigation. This can be avoided either by enhancing the scope of input service or issue of necessary clarification.

Make a clear cut provision for availment of credit of service tax in doubtful cases cited above.

2.4 Other Issues

2.4.1 Disparity between interest chargeable from the assessee and interest payable on refunds by the Central Excise department

There is a great disparity between the interest payable by the assessee under section 11AB on the duty short levied or short paid or not levied or not paid and the interest payable by the department under section 11BB on the delayed refunds.

The assessee has to pay interest @13 per cent as per notification no. 66/2003 CE (NT) dated 12th September 2003 on the amount of excise duty involved. On the other hand, the department is liable to pay interest @ 6 per cent as per notification no. 67/2003-CE (NT) dated 12th September 2003. In addition, the assessees have to pay interest from the first day of the month succeeding the month in which the duty ought to have been paid and the department has to pay interest after expiry of three months from the date of application for refund.

Similarly as per Rule 8(3) of the Central Excise Rules 2002, if an assessee fails to pay the excise duty by the due date, he is liable to pay an interest at the rate of 13 per cent per annum.

In case of exports under bond without payment of excise duty, notification no. 42/2001-C.E. (N.T.) dated 26^th June, 2001 stipulates that in case of cancellation of export application the exporter shall pay the duty specified in the application (ARE-1) along with the interest at the rate of 24% per annum along with such duty from the date of removal of material for export from the factory or warehouse or any other approved premises till the date of payment of duty.

Looking at the current interest rate scenario, the wide disparity between the rates of interest and the period needs to be removed.

2.4.2 Automatic vacation of CESTAT stay order due to non-disposal of appeal within 180 days

The amendments to the related provisions of Central Excise law by Finance Act 2002 provide that where the Appellate Tribunal has granted a stay in a particular matter, the appeal is to be disposed of within 180 days from the date of the stay order. In case the Tribunal does not dispose of the appeal within the stipulated period of 180 days, the stay order would get vacated automatically. This defies logic. The stay itself is granted either on merits or on the basis of financial hardship pleaded by the appellant petitioners.

This amendment to the Section 35C(2A) of the Central Excise Act has adverse implications for the appellants. It is apprehended that as soon as the stay gets automatically vacated in terms of the amended law, the revenue authorities would initiate coercive action for recovery of pre-deposit/duty and penalty, though such recovery will not be warranted in law.

The disposal of the appeal, within the time limit set out by the amendment, is a matter that is beyond the control of the appellant. As such, the onus of getting the appeal disposed of within 180 days by the Tribunal should not be put on the appellant, and he should not be put in a disadvantageous position on this count.

The Task Force on Indirect Taxes headed by Dr. Kelkar while dealing with this instant issue, has also recommended in para 4.32 of chapter 7 of its report that the provision of automatic vacation of stay should be revoked.

The earlier provision in the Central Excise Act 1944 providing for dispensing with the pre deposit and stay of recovery of the disputed duty / penalty amount till final disposal of the appeal should be restored.

3. Service Tax

3.1 Service tax rate

The extract from para 155 of the Finance Minister’s budget speech on 28^th February 2006 is reproduced below:

"World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent".

This was not the first instance of increase in service tax rate. Earlier also, service tax rate was increased from 5% to 8% in the year 2003 and from 8% to 10% in September 2004.

The Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 in its Report, while proposing introduction of GST in India, has suggested standard rate of 12% Central GST in place of existing standard CENVAT rate of 16%.

Keeping this in view the convergence of CENVAT and service tax rates to 12% would be more appropriate. This can be achieved by gradually reducing CENVAT rate from 16% to 12% and freezing the service tax rate at the existing level of 12%.

For increase in revenue from service tax, tax base should be widened by bringing more services under tax net.

Bring more services under tax net to increase revenue.

3.2 Service tax on maintenance or repair services

Service Tax on maintenance or repair services was levied with effect from 1^st July 2003 vide Service tax notification No.11/2003 dated 20^th June 2003. The contract for providing services can be either for labour only or comprehensive contract, which covers labour as well as replacement of parts.

In case of consumer durables such as air conditioner, refrigerator, computer, water purifier, vacuum cleaner etc., the comprehensive Annual Maintenance Contracts (AMC) are very common. In view of the service tax notification 12/2003 dated 20^th June 2003, service tax is exempted on the value of goods and materials supplied by the service provider subject to documentary proof.

There is practical difficulty in keeping separate records for materials utilised in case of comprehensive Annual Maintenance Contracts and therefore there is need to simply the procedure.

In case of service tax on erection, commissioning or installation, service tax notification 1/2006 dated 1^st March 2006 exempts the amount in excess of 33% of the gross amount charged from the customer. In this notification, 10 more services have been covered with exemption percentage varying from 10% to 70%. A similar provision for maintenance or repair services will go a long way towards simplification.

Necessary provision may be made to charge service tax on 25% or any other specified value of the contract in case of comprehensive Annual Maintenance Contracts covering labour and replacement of parts.

3. Problems connected with simplified valuation under service tax notification no. 1/2006

The Government, while charging service tax on taxable services, felt the need to charge service tax only on the service portion of the total value charged from the customers/clients. Accordingly, few services were identified wherein it would be very difficult to ascertain the exact value of materials etc. used in the course of providing such services which include industrial civil construction; erection, commissioning and installation; transport of goods by road etc. and allowed abatement at a specified rate.

The abatements were made available to service providers through various notifications, which were subject to the condition that no input credit on inputs and capital goods should be availed by the service provider in the course of providing the service. The denial of input credit on inputs as well as capital goods was acceptable to service providers, as the service providers were not required to pay service tax / excise duty on the amount of abatement. This situation was prevalent up to 28^th February 2006.

The earlier notifications for abatement were rescinded and a new notification no. 01/2006 ST dated 1^st March 2006 was issued allowing the different abatements under a single notification. The new notification also stipulated a new condition to the effect that these abatements specified in notification no. 01/2006 are not available to a service provider who has availed input credit on service tax paid on input services.

Consequent to the above, trade is facing the following difficulties:

- While the rationale behind denial of input credits on inputs and capital goods on adoption of abatement route is understandable, there is no logic behind denial of input credit on input services. This is because the purpose of abatement itself is to charge service tax only on the services portion and accordingly, abatement portion is acceptable.

- The basic purpose of Cenvat Credit is to avoid the cascading effect of taxes. However, under the situation prevailing from 1^st March 2006, input credit is denied on service tax paid on many services such as erection, installation and commissioning, commercial and industrial construction etc. whenever, abatement route is preferred by the service provider. As the ultimate customer would always insist on abatement route, input credit on service tax paid, which is otherwise, available is denied because of notification no. 01/2006 ST.

• In case of large contracts, the contracts are further sub contracted normally to 3 to 4 sub contractors in order to complete the job in time. The cascading effect is such that some times the service tax paid even exceeds the tax on 100% of the contractual price.

- Supposing a large contract for Rs. 100 crores is awarded by a concern to A, which is sub-contracted to B for 90 crores and B further sub-contracts this work to C for Rs. 80 crores. Finally C sub-contracts the further work to D for Rs. 75 crores. The total service tax that Government collects under the above situation is on a value of 33% of Rs. 345 crores (that is on 113.85 crores), which is more than 100% on the actual contract amount of Rs. 100 crores.

The exact wording as provided in the notification 01/2006 ST are reproduced below:

In proviso (i) of service tax notification 01/2006 the words " or the CENVAT Credit of service tax on input services" should be deleted so that the input credit on service tax is available to service providers.

3. Clarification on service tax on outward freight

Sometimes, Service Tax is paid on outward freight by the manufacturer of finished goods as a deemed service provider. This is because the liability to pay service tax is on the person who is liable to pay the freight – either as a consignor or as consignee. The question as to whether the manufacturer of the final product who pays the Service tax on the freight wherever excisable goods are cleared on sale on ‘paid’ basis is entitled to avail the CENVAT credit is in dispute.

There is one view that Service tax paid on tra