Budget 2009: Advice to amend Cenvat Rule

To allow Cenvat credit for welding electrode

The benefits of the highly liberal Cenvat Rules, 2004, has not percolated to manufacturers using welding electrode. This article analyses the eligibility of welding electrode to Cenvat credit and how the change of rules during this Budget can solve the problem.

One of the most unfortunate events is that the benefits of the highly-liberal Cenvat Rules, 2004, has not percolated to manufacturers using welding electrode. This is just because the CBEC did not have the alacrity to amend the most-outdated circular of 1992 in relation to welding electrode (which reiterates the circular of 1988). These circulars are based on the definition of inputs as in the Rule 57A of the Central Excise Rules, 1944. Unless something is completely used up in the final product, the old rule would not treat it as input. The Modvat system itself started in 1986.

The new rules of 2004 very specifically define input as all goods except some specified items and capital goods." In the case of capital goods they have to be “used in the factory of the manufacturer of the final products”. In the case of other inputs they have to be “used in or in relation to the manufacture of final product or for any other purpose within the factory of production”. So this highly liberal Rule (which it should be) s just going waste and manufacturers are getting a raw deal.

Even more unfortunate thing is that in July 2008, the Rajasthan High Court gave a beneficial judgement (I respectfully agree with it) holding that Cenvat credit for welding electrode is definitely admissible. The High Court relied on the judgement of the Supreme Court which has held that “they (inputs) need not be ingredients or commodities used in the processes, nor must they be directly or actually needed for turning out or the creation of goods”. Relying on the Supreme Court judgement, the Rajasthan High Court held that the expression “in the manufacture of goods” should normally encompass entire process carried on by the dealer or converting raw material into finished goods. I may further point out that the present 2004 rules are even more liberal than that because the Rules permit even “use in the factory” and “used in relation to manufacture”.

So it is clear beyond all doubts that 1992 circular based on 1944 Rules should have immediately been rescinded. Therefore, the Department has been routinely following that circular and even the Tribunal has been confirming those decisions of the Department. I refrain from quoting tribunal judgements which, I must say, have turned a blind eye to the liberal Cenvat Rules of 2004.

In 2008 one tribunal case went to the Supreme Court but the Supreme Court rejected it in limini without going into the merits. This is not really a law laid down by the Supreme Court as per Article 141 of the Constitution. Unfortunately, this judgement has been taken as a law in a very recent decision of the Cestat, Kolkata. At the same time I am happy that the Cestat in a very recent decision in the case of Aditya Cement vs. CCE, Jaipur has correctly held that the Rajasthan High Court judgement is to be relied upon because it is the only High Court judgement available and because the Supreme Court judgement is just a summary dismissal of a case and therefore does not lay down the law.

The conclusion is that the board should immediately revise the 1992 circular. At the same time during this Budget the Cenvat Rules should be revised to include eligibility to the items used in repair and maintenance of machines. 

E-mail: smukher2000@yahoo.com