Queries on tax issues, addressed by Sarika Goel and Neha Kishore of EY
We are a manufacturing company registered with the central excise department. We have multiple factories, and remove certain goods manufactured at Unit 1 to for captive consumption to our Unit 2 on payment of excise duty, and Unit 2 avails of credit of such duty. Based on an excise audit done by the authorities, it now appears that we may not have been following the correct methodology for valuation of the said clearances from Unit 1 to Unit 2 over the last three years, and thus, the authorities are now invoking the larger period of limitation under excise regulations, alleging suppression and mis-declaration against the company, and demanding differential excise duty for the past three years. Given that the short payment of duty was purely on account of an inadvertent error and in any event, any duty paid by Unit 1 on the clearances is available as credit to Unit 2, kindly confirm whether the department is correct in invoking the larger period of limitation in this case?
As per provisions of the central excise regulations, the larger period of limitation can be invoked in cases of non-payment or short-payment of duty on excisable goods by reasons of fraud, collusion, mis-representation, suppression or mis-declaration. The onus to prove the mala fide intent by the assessee is on the revenue. However, the issue of whether such mala fide intent can be alleged/said to exist in cases where the situation is revenue-neutral, i.e. the duty payable by the assessee unit would be available as credit to another assessee unit, has always been contentious.
In your case, considering the facts, even if it is assumed that that the goods cleared by Unit 1 for captive consumption by Unit 2 attracted a higher amount of duty, Unit 2 would be entitled to take credit of the same and the whole exercise would be revenue neutral, leading to no loss to the revenue. Thus, in our view, it should be possible to argue that the allegation of deliberate short-payment of duty cannot be held against the company, and hence, invocation of the extended period of limitation for purported evasion of duty should not hold ground, since there is no undue gain accrued to the company.
Our above view gains strength from a recent judgment of the Supreme Court, dated 23 April 2015, in the case of Nirlon Ltd vs Commissioner of Central Excise, Mumbai in Civil Appeal no. 7642 of 2014. However, the normal period of limitation of one year can still be applied and the authorities would be within their rights to demand the differential duty, if any, on the clearances made within the past one year from the date of show cause notice.
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