Under Central Excise, the facility to avail Cenvat credit is available only to manufacturers and service providers. For traders who cannot avail cenvat credit, a mechanism exists whereby a dealer in excisable goods (who is not a manufacturer / service provider) can pass on the Cenvat credit of Excise Duty / Countervailing Duty (CVD) and Special Additional Customs Duty (SAD) to a subsequent dealer, manufacturer or a service provider so that cenvat credit does not become a cost in the supply chain. This facility is also available to an importer of goods with a warehouse registered under Central Excise. In order to avail the said facility, the dealer/ importer is required to obtain registration and file returns under Central Excise.
An oft repeated phrase in government circles is ‘ease of doing business’ which implies cutting down on unnecessary procedures and compliances for businesses. Every action of the government was being scrutinised through the lense of ‘ease of doing business’. In this context, it was astonishing that another concept of ‘Importer’ was introduced by the Central Board of Excise and Customs (CBEC) through Notifications No. 08/2014-CE (NT) to 10/2014-CE (NT) dated 28 February 2014 whereby an importer intending to pass on cenvat credit was required to obtain registration separately as an importer despite being already registered as a dealer. This measure resulted in increase in compliances rather than easing out procedural compliances for businesses. Further, confusion was created among the existing importers on account of lack of clarification on whether a new category of importer was introduced or even existing importers were required to register afresh. Several importers did not take separate registration which exposed them to penal consequences over the period of past two years. Taking note of the problems faced by the assessees, the CBEC has issued letter F.No. 201/04/2016-CX.6 dated 23 May 2016 (though at draft stage), whereby an option of obtaining single registration and filing one return has been proposed for assessees operating as a dealer as well as an importer.
While the Notification and Circular to bring into effect the above facility is at draft stage, it would be worthwhile to understand the objective behind introducing the concept of separate ‘Importer’ registration, the problems faced by the trade on its implementation and the proposed solution by the CBEC.
Separate category of ‘importer’ registration- Why was it required?
Prior to the year 2005, there was a practice prevalent in the Industry, whereby an importer could pass on Cenvat credit of eligible duties paid on import of goods by endorsing the Bill of Entry in the name of the subsequent manufacturer/ dealer. In such a scenario, the imported goods would move directly from the port of import to the destination, without routing the transaction through the registered warehouse of the importer.
However, questions emerged on validity of the above practice on account of decision of the Larger Bench of the Tribunal in the case of Balmer Lawrie & Co. Ltd. 2000 (116) E.L.T. 364 (Tribunal- Del) wherein it was held that:
‘The argument of the counsel that issuance of the invoice for clearing the goods by the manufacturer from the factory or by the dealer while transferring the goods is only a procedural condition of a technical nature and as such its breach must be held to be condonable, under the law, cannot be attached any legal value.’
Similar view was adopted by the Mumbai Tribunal in the case of Khandelwal Laboratories Ltd 2006 (205) E.L.T. 541.
As a result of the above judgements, the Central Excise authorities started to disallow claim of Cenvat credit on the basis of endorsed bill of entries, despite contrary decision in the case of Marmagoa Steel Ltd 2005 (192) E.L.T. 82 (Bom HC) which was subsequently ratified by the Supreme Court.
Accordingly, though it is well known tenet that ‘procedure is the handmaid of justice and not its mistress’, time and again the tax authorities have adopted contrary positions. In the present case, the procedural aspect of delivery of goods to warehouse of importer was made a substantive one by disallowing claim of Cenvat credit on the basis of an endorsed bill of entry. This resulted in a lot of hardships to the trade fraternity, since the importers without registered warehouse or depot in India were denied the facility of passing on of Cenvat credit.
On representations by the industry in this regard, a committee was formed to suggest suitable course of action to reinstate the facility and it was decided that a process should be brought to enable the importers to pass on Cenvat credit without physical receipt of the goods in the registered warehouse of the importer. Accordingly, it was believed that the amendments through notifications dated 28 February 2014 were introduced for importers without registered warehouse/ depot to enable them to pass on Cenvat credit to the subsequent manufacturers/ dealers by obtaining registration under Central Excise.
Here, it should be noted that under Cenvat provisions, “importer” and “importer with depot registered under Central Excise Rules, 2002” have been accorded separate status. To substantiate the above, reference should be made to Rule 9(1) of the Cenvat Credit Rules, 2004, whereby a manufacturer is allowed to take credit on the basis of an invoice issued by –
- By an importer or
- By an importer from his depot registered under CE Rules
Further, we would like to refer Rule 2(ij) of the Cenvat Credit Rules, 2004, whereby the term “first stage dealer” has been defined to include first stage dealer who procures goods, inter-alia, from -
- an importer under cover of an invoice or
- the depot of an importer, under cover of an invoice
Accordingly, there is a clear distinction established between ‘importer’ and ‘importer who issues an invoice from a depot’ and therefore it can be observed that the intention of the amendments brought in by the Notifications was to enhance the ease of doing business for the importers who do not have a registered warehouse/ depot in India and not to increase the compliance burden for existing importers.
Impact of the amendment- Tumultuous weather for the importers’ ship
Taking cue from the notifications 08/2014 to 10/2014 issued by the CBEC, the office of the Chief Commissioner of Central Excise, Mumbai issued a clarification through their letter F.No.IV/16-24/CCO-II/MCX/2014 dated 07 April 2014 directing all importers to obtain fresh registration under the category of ‘Importer’ in addition to their existing registration as a ‘Dealer’. As a result of the above, assessees who were already registered as a dealer were required to obtain separate registration as an importer. Further, the assessees were required to file returns and maintain records separately as an importer as well as a dealer.
Accordingly, the amendments which were brought in with a view to enable the importers to have an additional mechanism for pass on of Cenvat credit were interpreted to the contrary, making compliance process cumbersome for the importers and leading to confusion on whether it was mandatory to obtain registration irrespective of existing registration as a dealer. The objective of ‘ease of business’, through a bewildering combination of ambiguities, was turned on its head to achieve the exact opposite.
This situation resulted in many dealers failing to obtain registration in time leading to potential penalties for non compliance. To complicate matters, the excise authorities started issuing show cause notices to the subsequent manufacturer/ dealer denying claim of Cenvat credit basis the invoice of a dealer who failed to obtain separate registration as an importer. This additional burden on the manufacturers/ dealers may be ultimately recovered from the ‘non-compliant’ importers depending on the commercial relationship between them.
Hence, apparent procedural lapse on the part of importers resulted in disproportionate consequences in the form of demand for reversal/ payment of Cenvat credit availed from the manufacturers/ dealers along with penal consequences for non compliance. However, the demand can be countered by the dealers on the grounds that since the goods have been received and used in the factory and the same have been appropriately accounted for in the books, mere non compliance of non-registration as an importer should be considered as procedural in nature and should not be considered as a ground for denial of substantive benefit of Cenvat credit. Even so, the emerging scenario had potential to create an additional burden on the importers, leading to an atmosphere of distrust and chaos between the importer and customers till the time of finalisation of assessments / audit.
Amendment proposed by CBEC - Ray of hope for the importers
In the midst of the perils awaiting the dealers, a pleasant surprise is received through the letter issued by the CBEC on 23 May 2016. It appears that the government is aiming for course correction by cleaning up the mess created by the earlier notifications.
Under the draft notification and circular issued as part of the letter dated 23 May 2016, it is proposed to provide an option of obtaining single registration and filing single quarterly return to an assessee operating as a dealer as well as an importer in India. The said amendment as and when issued would in effect restore the situation prevailing prior to the amendment and would reduce the compliance burden and litigations on the matter. Accordingly, the aforesaid change is a welcome move by the CBEC and would ultimately be in line with the ‘Ease of doing business in India’.
However, before one jumps the gun and starts celebrating, it should be kept in mind that ‘For every medication there is a side effect’. In case the draft Notification and Circular are issued in the same form as mentioned in the letter, it would open a pandora’s box.
Before the change is introduced, clarification is required on the fate of manufacturers/ dealers who have been issued show cause notices by the Excise authorities, denying cenvat credit on invoices issued by assessees registered as a dealer (instead as an importer). Further, in case the proposed amendment is introduced prospectively, clarification is required on whether the existing dealers were required to obtain importer registration for the interim period ie for the period April 2014 to June 2016 and whether proceedings can be initiated against them for such period. Additionally, since the benefit is proposed to be provided to an assessee operating as a dealer and an importer at the same time, clarification is required on whether the option would also be applicable to pure importers ie to businesses engaged solely in import and sale of goods in India.
Considering the intention of the amendment introduced was not to prescribe dual registration, in our view, it is likely that the field formations would be instructed to drop pending litigations denying Cenvat credit and levy of interest and penalty thereon. Further, we expect that pure importers would be given the option to continue with the dealer registration in the notification to be issued in this regard.
Introduction of option of single registration and returns is a positive move in the right spirit by the CBEC in line with the objective of reducing compliance burden for businesses. Now, the importers have to await issue of the notification and circular by the CBEC. One can only hope that the concerns of the industry are given due regard by the CBEC before issue of the notification, to provide significant relief to the importers currently enmeshed in the maze of predicaments.
(Authored by Sunny Kachalia, Senior Manager, Shivendra Dwivedi, Asst Manager and Saurabh Punmia, Sr Executive of SKP Business Consulting LLP)