Manufacture  of  Intermediary  goods  and  using in Exempted Final Product.

Many  manufacturing  industries  manufacture  some intermediary goods  for use in their  final  products which they ultimately sell to the desirous customers  which  can be on payment of duty or export or may be an exempted product by a specific  notification.

As per the provisions of the Rule 6 of Cenvat Credit Rules, 2004  a manufacturer of both dutiable and exempted products either should maintain separate accounts of receipt/utilization of inputs required for manufacture of exempted products and dutiable product as no cenvat credit is allowed on the inputs used in the manufacture of exempted final product.  In case if it is not possible to maintain separate accounts of inputs utilized for manufacture of dutiable and exempted products/services  he has to pay an amount equal to 10% of the value of exempted final product or 8% of the value of exempted output service provided.

But the graceful Govt. of India has extended,under Rule 6(6) of Cenvat Credit Rules,2004, the benefit of allowing the cenvat credit availed on the input materials/services utilized  in manufacture/provision of  goods/services   which are removed without payment of duty are either:

1.       Cleared to a unit in a S.E.Z;  or

2.       Cleared to 100%  E.O.U; or

3.       Cleared to a unit in E.H.T.P or S.T.P; or

4.       Supplied to the UN or an international organization for their official use or supplied to a project funded by them, on which exemption of duty is available  under notification of the Govt. of India, Min. of Finance (Deptt. Of Revenue) No:108/95-C.E dated 28-08-1995, number G.S.R.602(E), dated the 28-08-1995; or

5.       Cleared for export under   bond in terms of provisions of the Central Excise Rules,2002;or

6.       Gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting; or

7.       All  goods  which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act,1975(51 of 1975) and the additional duty leviable under section 3 of the said Customs Tariff Act, when imported into India and supplied  against International Competitve Bidding  in terms of notification no:6/2002-C.E. dated:01-03-2002 or notification no:6/2006-C.E dated:01-03-2006 as the case may be.

  Now, the attention of the benevolent Govt . is drawn to the provisions of the Notification No:67/95-CE dated 16-03-1995 which exempts:

 (i)     capital goods as defined in CENVAT Credit Rules, 2002 manufactured in a factory and used within the factory of production;

(ii)     goods specified in column (1) of the Table hereto annexed (hereinafter referred to as 'inputs') manufactured in a factory and used within the factory of production in or in relation to the manufacture of final products specified in column (2) of the said Table;

from the whole of the duties of excise leviable thereon which is specified in the Schedules to the Central Excise Tariff Act, 1985 (5 of 1986) or additional duty of excise leviable thereon, which is specified in the Schedule to the said Special Importance Act: 

            Provided that nothing contained in this notification shall apply to inputs used in or in relation to the manufacture of final products  which are exempt from the whole of duty of duty of excise or addition duty of excise leviable thereon or are chargeable to Nil rate of duty, other than those goods which are cleared, -

i.                     to a unit in a Free Trade Zone, or  

ii.                    to a hundred per cent Export Oriented Undertaking, or

iii.                  to a unit in an Electronic Hardware Technology Park, or

iv.                  to a unit in a Software Technology Park, or

v.                   under notification No. 108/95-Central Excise, dated the 28th August, 1995, or

vi.                  by a manufacturer of dutiable and exempted final products, after discharging the obligation prescribed in rule 6 of the CENVAT Credit Rules, 2001.

Though the Govt.of India has extended the benefit of availment of cenvat on the inputs used in or in relation to the manufacture and clearance of final products which are exempted and cleared to various projects as enunciated in the Cenvat Rule 6 (6) are not in consonance with the provisions contained in the Notification No:67/95-CE   which  allows the use of intermediary goods produced in a factory and captively used for the production of exempted final products  which are cleared to the  projects noted at Sl.Nos:6 & 7 of Rule 6(6) of Cenvat Credit Rules, 2004. 

In fact this lacunae is causing the manufacturers a lot of harassment from the taxmen  who are insisting for payment of duty and its availment of cenvat credit, which is a Revenue neutral.  The jurisdictional authorities are at the insistence of the C.E.R.A (Central Excise Revenue Audit) parties, issuing the Showcause Notices demanding the payment of Central Excise duty on manufacture of intermediary products which are captively consumed  under proviso to Section 11A(i) of CEA’44 alongwith interest applicable  under Section 11AB, penalty imposed under Section 11AC (alleging suppression and willful misstatement with intent to evade payment and penalty under Rule 26 of CER’s, 2002.

The Notification No:67/95-CE dated 16-03-1995 needs an amendment incorporating clearance of final products by the manufacturers falling in the categories of 6 & 7 of Rule 6 (6) of Cenvat Credit Rules,2004, retrospectively, which will be a real boon to the manufacturers.

Failure to amend the interconnected notifications at the time when a benefit is extended to the Trade has resulted in the bulging of Revenue and harassment to assessees.


Will this article appeals  the dynamic Finance Minister  who can appreciate the problems of the Trade and cause the issuance of amendment to Notification No:67/95-CE dated 16-03-1995  incorporating the clearances made to the categories of 6 & 7 of Rule 6 (6) of Cenvat Credit Rules,2004, retrospectively.


(K.Prakash Babu)

Advocate/Indirect Tax Consultant


K.Prakash Babu 
on 26 November 2008
Published in Taxation
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