CENVAT Credit is ‘as good as tax paid’ and its utilization indefeasible

August 23,2017
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Poonam Harjani, Partner, Nitya Tax Associates
Neha Jain, Associate

Over the years, CENVAT Credit (‘Credit’) provisions had been flooded with numerous litigations. Yet another area is the restrictions on its utilization posed in varied manner by the Government from time to time. This write-up is a critique on the recent judgement of Gujarat High Court in the case of Advance Surfactants India Ltd vs. Union of India, 2017 (8) TMI 594- Gujarat HC TS-212-HC-2017(GUJ)-EXC, regarding validity of the proviso to sub-rule (4) of the rule 3 of CENVAT Credit Rules, 2004 (‘Credit Rules’).

Powers to make rules by the Central Government was conferred under clauses (xviaa) and (xvia) of Section 37(2) of the erstwhile Central Excise Act, 1944 (‘the Act’) inter alia to provide for the credit of the duties or tax paid on inputs, capital goods and input services used in or in relation to the manufacture of excisable goods or for the provision of taxable output services.

Pursuant to the aforementioned enabling provision under the Act, CENVAT scheme was introduced with the main objective of allowing Credit to prevent cascading effect of central duties and taxes paid on procurements used in or in relation to manufacture of the final products or for the provision of taxable output services. Credit Rules were introduced in supersession of CENVAT Credit Rules, 2002 and the Service Tax Credit Rules, 2002 and were made effective from September 10, 2004.

Basically, Rule 3 of the Credit Rules provides for availing the Credit by the manufacturer of final products or by the provider of output services. However, restriction was imposed by the Government on the utilization of the Credit under proviso to rule 3(4) of Credit Rules.

Recently, the validity of this proviso has been challenged because it disentitles the utilization of Credit available in the subsequent month against the previous month’s liability.

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