We are a cement manufacturing entity and we require refractory materials for use in our manufacturing process. We avail of Cenvat credit on such refractory materials as per the provisions of the Cenvat Credit Rules, 2004. However, these materials have a short lifespan of only two-three months after which they are removed from our premises as scrap. Till now, we have been paying excise duty (on transaction value) on removal of these materials from our premises. We understand that there have been certain amendments in the Cenvat Credit Rules, 2004 vide the Finance Act, 2012. Request you to advise if we can continue to follow this procedure.
As per Rule 2 (a) of the Cenvat Credit Rules, 2004 refractory materials used in the factory of the manufacturer of final products qualify as capital goods. Rule 3(5A) of the credit rules which provides for reversal of Cenvat credit on removal of capital goods after being used has been amended to provide that where capital goods on which Cenvat credit has been taken are removed after being used (whether as capital goods or as scrap or waste), the manufacturer is required to pay an amount equal to the Cenvat credit taken on the said capital goods reduced by prescribed percentage for each quarter or excise duty payable on the transaction value, whichever is higher.
Prior to the amendment, Rule 3(5A) provided that if capital goods are removed as waste and scrap, the manufacturer would be liable to pay an amount equal to the duty payable on the transaction value.
In the instant case, you shall be required to either pay an amount equal to Cenvat credit availed reduced by prescribed percentage or applicable excise duty on the transaction value, whichever is higher. Typically, the transaction value would be significantly lower since the goods are being removed as scrap. However, as per the amended Rule 3(5A), you shall be required to pay an amount equivalent the Cenvat credit availed on such materials reduced by the prescribed percentage, which would typically be higher than the credit as computed based on the transaction value.
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