Our company is engaged in lamination on films and is registered under the Central Excise law. We are currently paying excise duty after claiming Cenvat credit for inputs utilised for lamination activity. However, recently the excise officers have issued a notice declaring our activity as a process not amounting to manufacture. Therefore, they have issued a show cause notice demanding the reversal of Cenvat credit we have taken for setting off against the excise duty paid on this activity. Kindly advise us in this regard.

Section 5B of the Central Excise Act, 1944 (the ?Excise Act?) empowers the Centre to regularise the Cenvat credit availed of by a manufacturer in cases where such manufacturer has paid excise duty on a process which is subsequently held by the courts as not amounting to manufacture.

In the light of the above section, the Central Board of Excise & Customs has clarified, vide Circular No. 911/ 01/ 2010 ? CX dated 14 January 2010 that where an assessee has paid duty on a particular activity which is subsequently held by the courts as not amounting to manufacture, the assessee can approach the central government for regularisation of the Cenvat credit already availed of by him in relation to that process. Given the above, it is recommended that you review your case and accordingly, approach the central government for issuing an order in this regard for non-reversal of Cenvat credit already availed of by you.

We manufacture and trade in consumer products in various Indian states. We sell the goods to our distributors who further resell the goods to the end consumers. We allow discounts to our distributors on a periodical basis. The quantum of such discounts is not known up-front and are not disclosed on the tax invoice issued to the distributors. They are subsequently allowed through issuance of a credit note. Based on our internal policy and IT system constraints, we do not adjust the differential tax on issuance of credit note. Further, our distributors are also not reversing the input tax credit. However, in some states, our distributors are facing difficulties with the VAT department raising objections to not reversing the input tax.

We understand that you are not claiming the deduction of VAT on account of discounts allowed to distributors on issuance of credit notes. Further, the distributors also do not reverse the Input Tax Credit (?ITC?) relating to the discount allowed by you.

In this regard, we would like to highlight the provisions for adjustment of tax and reversing of credit depends on the respective state VAT legislation. Some states like Andhra Pradesh, Kerala, Jharkhand specifically provide that where credit notes are issued by the selling VAT dealer, the quantum of input tax credit already claimed by the buying VAT dealer need not be reversed as well as the tax already paid by the selling VAT dealer need not be adjusted. However, other states such as Delhi provide that where credit notes are issued by the selling VAT dealer, the quantum of input tax credit already claimed by the buying VAT dealer needs to be reversed as well as the tax already paid by the selling VAT dealer needs to be adjusted.

We understand that this is actually more of a compliance issue since the quantum of tax deposited cumulatively by you and your distributor under both scenarios would be the same. However, given that a particular state legislation prescribes a specific method for making such adjustments, it is recommended that you should comply with the state specific requirements. To that extent, your practice for issuance of credit notes and VAT adjustments with regard to the same would need to be aligned towards the requirements of each state VAT legislation.

As regards the past period where such adjustment has not been made, it is advisable for your company to approach the senior level VAT officers to explain your case so that an order may be passed, if possible under the law, to the assessing officers not to raise any demand of tax for such period.

The replies do not constitute professional advice. Neither E&Y nor FE is liable for any action taken on the basis of these replies