Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
CHAPTER I central excise Duty">excise duty ON IRON AND STEEL AND ARTICLES OF IRON AND STEEL
Executive summary
A review of 457 units manufacturing Iron and Steel and articles of Iron and Steel was conducted in audit to evaluate at the macro level the adequacy of provisions of the Act, Rules and instructions issued by the Ministry of Finance/Central Board of Excise and Customs (CBEC) in ensuring proper assessment, collection and allocation of revenue from these commodities and further whether the applicable Valuation Rules, Cenvat Credit Rules, existing instructions and orders of the department relating to the manufacture, classification and service tax on services provided/received by these manufacturers, were complied with. Audit review has revealed a few system as well as compliance weaknesses relating to the assessment and collection of duty from Iron and Steel sector. The payment of duty through cenvat rather than by cash is excessive indicating possible misuse of cenvat credit facility. This is an area of concern, which the Ministry needs to address after investigating the reasons for such excessive cenvat credit use by these sectors and include this criterion (cenvat to PLA ratio) as a risk factor for investigation/internal audit of the assessees. Furthermore, while many products are cleared from stockyards (and not factory gates where duty is paid) after undergoing value addition through customisation, this value addition escapes duty as ‘cutting and bending’ has not been declared as ‘manufacture’.
The Term Paper on Andrew Carnegie Iron Steel Business
Andrew Carnegie and the Rise of Big Business Andrew Carnegie was the pioneering tycoon of the 19 th century. From his companies emerged the steel to build the infrastructures such as railroads, bridges, automobiles, and ships that would build a nation in need of direction. He was a major player in the transformation into the Industrial Revolution producing the steel to make machinery and ...
Accordingly, there is a need to amend the chapter notes appropriately. Absence of a restrictive clause on the quantity of inputs cleared ‘as such’ vis-à-vis procured and used in the manufacture of final products could lead to misuse of the cenvat scheme as some manufacturers could buy/procure huge quantities of inputs after availing quantity discounts, much in excess of their own requirement for manufacturing finished goods, and clear the inputs ‘as such’ at a premium. The Government should consider amending the Act and applicable rules to restrict the percentage clearance of inputs cleared as such which have been procured by the manufacturers. Alternatively, the duty reversal/payment should be at the enhanced sale value of the inputs cleared ‘as such’. Audit further observed that in a few cases the production declared on which duty was paid was substantially lower than the declared capacities. The Government should institute an internal control which should trigger audit/investigation of units which declare their production and pay duty on the declared production below a pre-defined percentage of installed capacity. The Government has since amended the rules to require the assessees to declare its production capacity which would enable the department to scrutinise the declared production vis-à-vis the production capacity to trigger investigation in deserving cases. Additionally, in the absence of standard input-output norms (SION) for the domestic industry, the risk of suppression of production has not been adequately mitigated. The Government should prescribe some indicative
1
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
input-output norms for domestic industries which can act as a benchmark against which the actual production could be measured and cases of significant variations should act as a trigger for detailed investigation/internal audit for detecting suppression of production and revenue loss. There is a need for the Government to amend the Act suitably to make ‘Zinc dross’ excisable and the process of obtaining ‘Zinc dross’ as manufacture in view of the value and marketability of the commodity. A few compliance issues like suppression of production by showing reduced sales, undervaluation on account of incorrect determination of cost of production, incorrect availing of and use of cenvat credit and non-payment of service tax, etc. were also noticed. The irregularities discussed in this report can easily go undetected due to ineffective internal control mechanism relating to valuation, classification, verification of end use based exemptions, procedures of payment of duty, cenvat procedures, exports/imports and ineffective internal audit. The Government, therefore, needs to strengthen the existing internal control mechanism to ensure that the Government dues are realised efficiently and revenue evasion, frauds, etc. are dealt with effectively. While the total financial implication of this audit intervention is Rs. 1,373.94 crore, the direct additional revenue which could come to the Government is Rs. 904.67 crore. Of these, observations with money value of Rs. 25.32 crore had been accepted (till November 2008) by the department and Rs. 6.12 crore recovered. Seven specific recommendations designed to address the system deficiencies and mitigate the risk of similar irregularities in future, have been included in the report. Five of these recommendations have been agreed to, by the Ministry.
The Essay on Production Function
Question No. 1P: 219 Explain the difference between short run and long run production function; cite one example of this difference in a business situation. The short run production function shows the maximum quantity of a good or service that can be produced by a set of inputs, assuming the amount of at least one of the inputs used remains unchanged. While a long run production function shows the ...
2
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.1
Highlights
The percentage of cenvat to duty paid in cash was high in iron and steel industry indicating possible misuse of cenvat credit facility. The Government needs to investigate the reasons and plug loopholes to address this risk. (Paragraph 1.6.1.1) As the process of cutting and bending undertaken at stockyards did not amount to manufacture, the additional amounts charged at stockyards for cutting and bending were not includible in assessable value. Consequently, the Government is losing revenue as these charges realised by the iron and steel units are outside the indirect tax net. (Paragraph 1.6.1.2) No restriction on the quantity of inputs cleared ‘as such’ vis-à-vis procured for use in the manufacture of final products led to misuse of the cenvat credit scheme by a few manufacturers. (Paragraph 1.6.1.3) Under-utilisation of installed capacity creates a risk of suppression of production and corresponding loss of revenue. The Government has since amended the rules to require the assessees to declare its production capacity which would enable the department to scrutinise the declared production vis-à-vis the production capacity to trigger investigation in deserving cases. (Paragraph 1.6.1.4) Standard input-output norms (SION) are not prescribed for domestic production, in the absence of which the risk of suppression of production and consequent revenue loss has not been fully mitigated. The Government may consider fixing standard input-output norms for domestic production on the lines of SION for exports. Any significant fluctuation in actual production from these norms should act as a trigger for further detailed investigation/internal audit. (Paragraph 1.6.1.5)
The Essay on Iron Steel And Metal Finishing Operations Summary
Iron, Steel and Metal Finishing Operations Summary By: Kevin Worley Southwestern Oklahoma State University Production, forming, and cleaning of steel products creates several waste-outputs. These outputs range from the benign to RCRA regulated hazardous waste. Listed below are the steps associated with a metal product from ore to finished product, detailing the various wastes. Production of Coke ...
System issues:-
Compliance issues: Suppression of production by manufacturers of iron and steel resulted in evasion of duty totalling Rs. 331.86 crore. (Paragraphs 1.7.1.1 to 1.7.1.5) Undervaluation of goods, due to non-inclusion of additional considerations, resulted in revenue loss of Rs. 17.80 crore. (Paragraph 1.7.2.1) Duty of Rs. 1.72 crore was levied short due to undervaluation of inputs by reducing the price and ignoring the increased value of inputs. (Paragraph 1.7.2.5)
3
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Duty of Rs. 1.99 crore was levied short due to undervaluation of goods sold at depots in two cases. (Paragraph 1.7.2.7) In 307 cases, the assessees had availed of cenvat credit totalling Rs. 407.16 crore incorrectly. (Paragraph 1.7.3) Incorrect grant of exemption benefit in 30 cases resulted in revenue loss of Rs. 18.40 crore. (Paragraph 1.7.4) Non-levy of interest and penalty in a few cases resulted in revenue loss of Rs. 6.88 crore. (Paragraph 1.7.9) A few manufacturers of iron and steel did not pay applicable service tax totalling Rs. 83.88 crore. (Paragraph 1.7.10)
1.2
Introduction
Iron and Steel and its articles is one of the twenty commodities yielding major revenue (Rs. 15,117.71 crore, Iron and Steel=Rs. 12,685.20 crore and articles of Iron and Steel=Rs. 2,432.51 crore, during the year 2006-07) to the Government. While ‘Iron and Steel’ is classified under Chapter 72, the articles of ‘Iron and Steel’ are classified under Chapter 73 of Central Excise Tariff Act (CETA), 1985. The percentage share in the total collection of central excise receipts under both the chapters was 12.96 per cent during 2006-07. From the budget 1999-2000, duty at the rate of 16 per cent was levied on ‘Iron and Steel and its articles’. There has been no change in the rate of duty since then. From 10 September 2004, education cess at the rate of two per cent of the duty and from 1 March 2007 secondary and higher education cess at the rate of one per cent of the duty is also leviable.
The Term Paper on Audit Notes-Risk And Materiality
1. Kenny recently joined the public accounting firm of Hamid, Krishnan & Co. as an audit assistant after obtaining an accounting degree. He quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures to the letter. On his third audit for the firm, Kenny examined the supporting documentation for 200 disbursements as a test of ...
1.3
Audit objectives
Records of selective units manufacturing Iron and Steel and/or articles of Iron and Steel and concerned departmental offices were scrutinised in audit to examine: At the macro level, adequacy of provisions of the Act, Rules and instructions issued by the Ministry of Finance/Central Board of Excise and Customs (CBEC) in ensuring proper assessment, collection and allocation of revenue from these commodities and At the micro level, to seek assurance that: (i) (ii) Records of the goods manufactured and cleared were properly maintained; Valuation of goods was done in accordance with provisions of section 4 of the Act and Central Excise Valuation Rules as amended from time to time and correctly classified;
4
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(iii) (iv) (v)
Credit of duty paid on inputs/capital goods under Cenvat was taken correctly; Service tax on services provided/received by manufacturers were paid correctly; and Internal controls were effective to safeguard the interest of revenue.
1.4
Scope of audit
During 2007-08, duty paying units of Iron and Steel and/or articles of Iron and Steel in 80 out of 93 commissionerates were 10,384. Records of 457 manufacturing units as well as selected range offices for the period 2004-05 to 2007-08 (up to September 2007) were test checked in audit. The audit sample size was 4.40 per cent of the population.
1.5
Acknowledgement
The Indian Audit and Accounts Department acknowledges the cooperation extended by the Ministry of Finance and its field formations in providing the necessary information and records for audit. The draft review was forwarded to the Ministry in October 2008 and the exit conference was held with the Ministry officials in November 2008. The responses of the Ministry to the recommendations received in November 2008 and responses of the department, wherever received, have been incorporated appropriately.
The Research paper on Case Study Audit
Furthermore, many competitors of Fast Go’s are larger and have greater financial resources, less average, and their coverage are more extensive. Furthermore, Fast Go also suffer high turnover of staff of the company. It is resulted from the high competition in the industry. Many staff left Fast Go and join bigger companies that offer better pay for them. Besides that, Fast Go also predicts that ...
AUDIT FINDINGS AND RECOMMENDATIONS 1.6 System Issues
1.6.1 Valuation
1.6.1.1 Excessive Cenvat to PLA ratio in Iron and Steel sector The amount of duty discharged by the assessees through cash payment by debiting the ‘Personal Ledger Account (PLA)’ and by debiting the cenvat credit account constitutes the gross revenue of the Government. Under the cenvat scheme, subject to certain conditions, a manufacturer of final products while discharging the central excise duty on final products can take credit for the excise duty/service tax paid on any inputs used in the manufacture of the final products. Thus, on the final products, the manufacturer needs to pay the duty in cash after adjusting any cenvat credits, which the assessee may have in its account. In other words, only the value addition at each stage is taxed. Accordingly, in an ideal tax structure, the duty payment through cash would be more than the payment made through cenvat credit, given positive value additions at stages of manufacturing cycle and duty rates on the final products not being lower than that on the inputs. The trend of central excise duty relating to Iron and Steel and articles thereof (Chapter 72 & Chapter 73) under 80 commissionerates is summarised in the following table: –
5
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Table no. 1 Central Excise revenue data relating to iron and steel (Amount in crore of rupees) Commodity and Chapter Year No. of units Duty paid through PLA Duty paid through cenvat Total duty paid Percentage of cenvat to PLA All commodities percentage of cenvat to PLA 77.34 86.36 109.42
Iron & Steel (Chapter 72)
2004-05 2005-06 2006-07 2007-08
4,940 5,794 6,298 5,892 3,765 4,213 4,698
7,048.65 10,426.09 11,992.52 5,193.95 2,276.57 1,924.56 2,381.82
9,685.06 13,840.03 17,702.37 8,770.99 2,479.89 3,942.37 5,306.70
The Term Paper on Abc Steel Company
Robert Cruz, newly appointed Shop Manager of ABC Steel Company, was making his way through the plant back to his office. He had just reviewed the company’s most recent operating statistics with his boss, Rudyard de los Santos, Operations Manager. The statistics were shocking: ABC Company’s production backlog had reached such proportions that top management decided not to accept any further ...
16,733.71 24,266.12 29,694.89 13,964.94 4,756.46 5,866.93 7,688.52
137.40 132.74 147.61
Articles of Iron & Steel (Chapter 73)
2004-05 2005-06 2006-07
108.93 204.85 222.80
77.34 86.36 109.42
2007-08 4,492 903.44 2,576.37 3,479.81 Figures furnished by commissionerates. Figures for the year 2007-08 are upto September 2007 only.
Audit observed that:The percentage of cenvat availed of, to duty paid in cash in respect of iron and steel and articles thereof had been consistently and significantly higher than the all India figures for all commodities. The percentage of duty paid through Cenvat to PLA ranged between 132.74 (2005-06) to 147.61 (2006-07) in respect of Iron and Steel under Chapter 72 and from 108.93 (2004-05) to 222.80 (2006-07) in respect of articles of Iron and Steel under Chapter 73. In Ahmedabad III and Kolkata VII commissionerates, percentage of cenvat to duty paid in cash in respect of iron and steel products under chapter 72 during the year 2006-07 was as high as 3,488 per cent and 4,242 per cent, respectively. In Siliguri and Raigad commissionerates, percentage of cenvat to duty paid in cash in respect of articles of iron and steel manufactured under chapter 73 during the year 2006-07 was as high as 1,202 per cent and 2,812 per cent, respectively. Thus, in the iron and steel sector, audit has observed that duty payment through cash (PLA) has been far less than the duty payment made through use of cenvat credit. The excessive use of cenvat credit indicates the likelihood of misuse of cenvat credit by these manufacturers. This is further elaborated by the fact that this audit review has identified Rs. 407.16 crore of cenvat credit which had been incorrectly used by these manufacturers. Even earlier, cases of Rs. 110.73 crore cenvat being incorrectly used by the manufacturers of this sector, had been noticed by audit and pointed out through the Audit Reports 2004 to 2008 on Union Government – Indirect Taxes (Central Excise, Service Tax and Customs).
6
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Recommendation No. 1 The Government may investigate/ascertain the exact reasons for such a high duty payment by cenvat rather than by cash in iron & steel sectors and based on such investigation (i) plug the loopholes to avoid misuse of cenvat by Iron & Steel sector and (ii) incorporate cenvat to PLA ratio as a risk factor based on which internal audit/investigation of a unit should be undertaken. Responding to the first part of the recommendation, the Ministry clarified (November 2008) that the cenvat to PLA ratio of iron and steel sector is in consonance with the all India ratio of cenvat to PLA if ‘Petroleum oil lubricants (POL)’ commodities are excluded. It added that as the value addition in the downward industry of iron and steel is very less, this ratio is adverse in this sector, compared to other sectors. Agreeing to the second part of the recommendation, the Ministry informed (November 2008) that cenvat to PLA ratio of a unit, its periodic variance and its value vis-à-vis the all India ratio of the commodity manufactured by the unit are few factors based on which the identification/selection of the unit is made for internal audit. The Ministry also indicated a few steps which it had taken in line with the recommendation of the audit. 1.6.1.2 Opportunity to augment revenue from a value adding process Integrated steel plants are marketing bulk of their products through stockyards located throughout the country. At the stockyards points, certain processes like cutting and bending are undertaken on iron and steel products according to customers needs. Additional amounts are being charged from the customers at the stockyards over and above the value on which duty liability was being discharged at the factory gate. The CESTAT-Bangalore in a judgment dated 30 July 2004 in the case of M/s Rashtriya Ispat Nigam Ltd. (RINL) Visakhapatnam (2005) 179 ELT 65 (Tribunal-Bangalore) held that the process of cutting and bending undertaken at stockyards did not amount to manufacture and that the goods sold at stockyards being the same goods as cleared from the factory, the additional amounts charged at stockyards for cutting and bending were not includible in assessable value. Subsequent to this decision, suitable amendment to chapter notes notifying these processes as amounting to manufacture were not considered by the Ministry despite the fact that these processes undertaken at stockyards to customise the products add to the value of the products sold at depots/stockyards and bulk of the products are cleared only from such depots/stockyards. Audit noticed that M/s Rashtriya Ispat Nigam Ltd. (RINL), Visakhapatnam, through their two integrated steel plants at Nagpur and Faridabad, had collected (during the period from August 2004 to December 2007) cutting and bending charges amounting to Rs. 21.30 crore as additional consideration from their customers. However, in the absence of appropriate provisions in section/chapter notes in the Act, declaring the process of cutting/bending as amounting to ‘manufacture’, revenue of Rs. 3.29 crore could not be levied and collected from these three units alone. The impact of the absence of provision to charge duty on the process of bending, cutting and the resultant value addition at an all India basis would be much larger.
7
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Recommendation No. 2 The Government may consider inserting an appropriate chapter/section note to deem the process of cutting and bending as ‘manufacture’ to augment revenue from a value adding process. The Ministry stated (November 2008) that the recommendation was not feasible as these processes are carried out by a large number of small job workers and such processes are used in other sectors as well, inserting chapter/section notes making these processes as ‘manufacture’ would require a large number of job workers requiring registration. 1.6.1.3 Misuse of cenvat scheme as no restrictions/cap on inputs cleared ‘as such’ Under Rule 3(1) of Cenvat Credit Rules, 2004, a manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit of duty of excise and service tax paid on input/capital goods and used for manufacture of final products. However, Rule 3(4) of the Cenvat Credit Rules, 2004 allows clearance of inputs as such by requiring reversal of cenvat credit availed. There is, however, no restriction on the quantity of inputs cleared as such visà-vis procured and used in the manufacture of final products. The absence of such a restrictive clause could lead to misuse of the scheme as few manufacturers could buy/procure huge quantities of inputs after availing quantity discounts, much in excess of their own requirement for manufacturing finished goods and clear the inputs as such (after reversing the cenvat credit availed) at a premium. A few of such cases are discussed in the following paragraphs:Three assessees in Rohtak commissionerate and one assessee in Faridabad commissionerate, engaged in manufacture of steel tubes and pipes, purchased HR coils, MS strips and skelp from Steel Authority of India for manufacturing of final products and had availed cenvat credit. They had purchased 5,73,964.413 MT of material, out of which 2,56,492.495 MT was cleared ‘as such’ after reversing the availed cenvat credit of Rs. 92.87 crore. The credit was passed on to the downstream buyers/manufacturers. The percentage clearance of the raw materials/inputs ‘as such’ compared to raw material/inputs procured was 100, 66, 45 and 31 per cent. It was clear that the major activity of these so called ‘manufacturers’ was trading rather than manufacturing. Additionally, it was observed that while the purchase price of these inputs by these manufacturers was Rs. 592.83 crore, these were cleared ‘as such’ at a combined sale price of Rs. 656.95 crore (premium of Rs. 64.12 crore).
Obviously, this profit element remained out of the central excise tax net by resorting to this modus-operandi. On this being pointed out (October 2007), the department admitted the observation in one case and stated (January 2008) that in order to avail the quantity discount, M/s Bansal Poles Ltd., Bahadurgarh had procured enhanced quantity of raw material than the actual requirement for use as input for manufacturing purposes from SAIL every year and sold the inputs ‘as such’.
8
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Recommendation No. 3 The Government should consider amending the Act and applicable rules to restrict the percentage clearance of inputs cleared ‘as such’ which have been procured by the manufacturers. Alternatively, the duty reversal/payment should be at the enhanced sale value of the inputs cleared ‘as such’. The Ministry did not agree with the recommendation and stated (November 2008) that this is not in line with business practices and central excise duty is to be levied on manufacturing and not trading activities. However, the concern flagged by audit will be taken care of, when ‘Goods and Services Tax, (GST)’ on all transactions is introduced by the Government. 1.6.1.4 Need for probing units where the capacity has been substantially under-utilised Audit is of the opinion that where installed capacity has been substantially under-utilised, there is a risk of suppression of production and corresponding loss of revenue, in cases where such short utilisation cannot be explained. A few of such cases where there could be suppression of production as capacity was grossly under-utilised and probable loss of corresponding revenue are given in the following table: Table no. 2 (Amount in crore of rupees) Name of the assessee Period involved 2004-05 to 2006-07 2004-05 to 2006-07 2005-06 to 2006-07 Short utilisation of capacity (%) 21 per cent to 55 per cent 22 per cent to 46 per cent 32 per cent to 39 per cent Probable suppression (in MT) 1,46,402 1,68,001 Probable loss of revenue 20.93 44.77
M/s Rungta Mines Ltd., Bhubaneshwar M/s IDCOL Kalinga I.W. Ltd., Bhubaneshwar II M/s MSP Sponge Iron Ltd., Bhubaneshwar
30,538
4.94
Recommendation No. 4 Government should institute an internal control which should trigger audit/investigation of units which declare their production and pay duty on the declared production below a pre-defined percentage of installed capacity. The Ministry accepted (November 2008) the recommendation and stated that the Government had inserted a new sub-rule (2A) in rule 12 of the Central Excise Rules, 2002 (notification dated 29 September 2008) prescribing an annual installed capacity statement from the assessees, which will be compared by the jurisdictional officers with the actual production data as reported by the assessees in its excise returns for further investigation, wherever necessary.
9
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.6.1.5 Need of assigning input-output norms to act as a control against suppression of production (i) Section 37(2) (v) of the Central Excise Act, 1944, empowers the Government to make rules to regulate the production or manufacture of excisable goods. In the erstwhile Central Excise Rules, 1944, the department was empowered to fix input-output norms. But in the revised Central Excise Rules, 2002, no such provisions were made. Furthermore, no standard inputoutput norms have been prescribed for domestic production on the pattern of standard input-output norms (SION) fixed by Director General of Foreign Trade (DGFT) for similar export items. M/s Bindal Sponge Ltd., in Bhubaneshwar-I commissionerate, and SAIL, Rourkela Steel Plant, in Bhubaneshwar-II commissionerate, engaged in production of sponge iron and slabs respectively, did not file any declaration about input-output ratio during 2004-05 to 2006-07. These assessees produced 53,19,088 MT as against a possible production of 57,89,823 MT if SION norms were made applicable. There could be a probable short accountal of 4,70,735 MT of finished goods involving excise duty of Rs. 121.95 crore including education cess. While the local conditions and various other factors can affect the volume of production of a commodity, if some indicative input-output norms are prescribed for domestic industry as well, this can act as a benchmark against which the actual production could be measured and in cases of extreme variations, should trigger a detailed investigation/internal audit. (ii) In 24 other cases, the production of iron and steel was not commensurate with the SION norms, resulting in probable suppression of production with duty implication of Rs. 236.69 crore including education cess. 1.6.1.6 Probable suppression of production with reference to standard electricity norms A technical opinion report of IIT, Kanpur made available to the department during year 2000, established a relation between the consumption of electricity to the production of iron and steel and articles thereof. As per these norms, a maximum of 1,046 electricity units were required for production of 1 MT of mild steel ingots. Besides 1,046 units, nearly 200 units of electricity were required on a comparative basis for conversion of ingots into bars/rods. (i) Audit scrutiny of the records of M/s Adithya Ferro Alloys Pvt. Ltd., a mini plant in Karaikal, in Trichy commissionerate, engaged in manufacture of both ingots from scraps and bars/rods from ingots, revealed that the consumption of electricity exceeded 1,246 units per MT resulting in difference of production of 17,871.72 MTs during the period 2004-05 to 2006-07 with a corresponding duty effect of Rs. 5.64 crore. On this being pointed out (November 2007), the department stated (January 2008) that the production might not be normal at all times and tend to vary due to difference in power supply, labour problem and quality of raw material used. The reply is not consistent and convincing as the department had itself conducted raids three times during July 2003 to July 2005 and had established
10
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
suppression of production and issued show cause notices (SCNs) which were not adjudicated as yet. (ii) In 27 other cases, the assessees had shown less manufacturing of finished products than that obtainable as per the prescribed norm of electricity consumption with corresponding probable duty loss of Rs. 29.96 crore including education cess. Recommendation No. 5 The Government should prescribe indicative input-output norms for domestic industries which can act as a benchmark against which the actual production could be measured and cases of significant variations should act as a trigger for detailed investigation/internal audit for detecting suppression of production and revenue loss. The Ministry stated (November 2008) that general input-output norms for an industry cannot be prescribed as these norms vary from unit to unit based on the capacity of the machines, quality of inputs used and other related factors. However, instructions have been issued to the jurisdictional officers to compare the input-output norms as declared by the assessee in an annual excise return (ER 5) with the norms given in the SION published by DGFT. 1.6.1.7 Need to collect duty on ‘Zinc dross’ Section 2(d) of Central Excise Act, 1944, stipulates that the ‘excisable goods’ means goods specified in the first schedule and the second schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise. Zinc dross and ash come into existence during the course of manufacture of castings and also during galvanizing of steel pipes and tubes. Zinc dross is classifiable under chapter heading 7902 of ‘Central Excise Tariff Act (CETA)’ and was chargeable to excise duty. Zinc dross is sold extensively in India and the percentage of recovery of zinc from Zinc dross ranges up to 90 per cent. The Supreme Court decision in the case of CCE Patna Vs M/s Tata Iron and Steel Co. Ltd. {2004 (113) ECR 408 (SC)} dismissed the appeal of the Government and held that Zinc dross is not an excisable good and hence not chargeable to duty. (i) M/s Bhusan Power & Steel Ltd., in Chandigarh commissionerate, engaged in manufacture of iron and steel products under chapter 72 was clearing zinc dross on payment of duty upto 31 August 2005. Thereafter, it stopped paying duty in the light of the above decision of the Supreme Court. During the month of September 2005, the assessee cleared Zinc dross valuing Rs. 2.58 crore without payment of duty of Rs. 42.13 lakh including education cess. (ii) In another case, M/s Ganges International (P) Ltd., in Puducherry commissionerate, took cenvat credit on Zinc ingots at the time of purchase for galvanizing steel structure. But the zinc dross of Rs. 3.02 crore, obtained while galvanization during the period February 2006 to September 2007 was sold without payment of duty. This resulted in non levy of duty of Rs. 49.53 lakh including education cess.
11
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
On this being pointed out (January 2008) the department stated (February 2008) that as per the Supreme Court judgment in the case of TISCO 2004 (165) ELT 386 (SC), Zinc dross was not goods because it was not marketable. However, it was further stated that as it appeared marketable and was a high value input for rubber industry, zinc electro plating and paint industries, the Board was considering the revenue impact as it had considerable commercial value. (iii) Similarly, in two other cases viz. M/s Rawalwasia Ispat Udyog Ltd. and M/s Sahni Strips &Wires Ltd., in Rohtak commissionerate, had also not paid duty on Zinc dross and ash valuing Rs. 1.05 crore during the period January 2005 to September 2007. This resulted in non payment of duty of Rs. 17.26 lakh including education cess. Recommendation No. 6 The Government may, amend the Act suitably to make ‘Zinc dross’ excisable and the process of obtaining ‘Zinc dross’ as manufacture in view of the value and marketability of the commodity. The Ministry informed (November 2008) that an amendment has since been carried out in section 2 of the Central Excise Act, 1944 vide section 78 of the Finance Act of 2008, and accordingly duty is payable on zinc dross.
1.7
Compliance issues
1.7.1 Manufacture
1.7.1.1 Suppression of production by showing reduced sales Rule 10 of Central Excise Rules, 2002, provides that every assessee shall maintain proper records on a daily basis indicating therein particulars regarding description of goods produced, opening balance, quantity manufactured, quantity removed, assessable value, duty payable and particulars regarding amount of duty actually paid. Sub rule (1) of rule 9(A) of the Cenvat Credit Rules, 2004, stipulates that a manufacturer of final product shall furnish a declaration in the prescribed form (ER-5) to the department in respect of each of the excisable goods manufactured or to be manufactured by him, the principal inputs and the quantity of such inputs required for use in the manufacture of unit quantity of such final product. Sub rule 2 of the above rule further stipulates that all alteration in the information to the Central Excise Officer together with the reasons for such alteration should be submitted before the proposed change or within fifteen days of such change in the form specified by the Board under sub rule(1).
(i) M/s Jindal Steel and Power Ltd., in Raipur commissionerate, engaged in manufacture of sponge iron, were selling sponge iron by packing it in HDPE bags of capacity of 50 kilogram each. During 2004-05 to 2006-07, 17,83,292.350 MT of sponge iron was shown as sold for which 3,56,65,847 bags were required for packing. However, 5,44,06,460 bags were issued from the store. Thus, there was an excess issue of 1,87,40,613 bags, the use of which in any other department/section of the factory could not be explained. Under these circumstances, the possibility of suppression of production and
12
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
subsequent clandestine removal of sponge iron could not be ruled out. This involved 9,37,030.650 MT of sponge iron on which duty payable works out to Rs. 137.39 crore (approximately) including education cess. (ii) In eight other cases, the assessees had short accounted for their production which resulted in loss of revenue of Rs. 19.44 crore. In one case, SCN for Rs. 47.56 lakh was issued (May 2008).
1.7.1.2 Escapement of central excise duty due to short production As per norms fixed by M/s Steel Authority of India Ltd., the production of MS bar/TMT bar from billets and ingots should be 95 per cent per MT of ingots. All ISO licence holder companies have to observe these norms of production. (i) M/s Sri Rathi Steels Ltd., Ghaziabad, in Meerut-II commissionerate, engaged in manufacture of M.S. Bar from ingots was an ISO licence holder company. While the assessee had consumed 2,18,808.790 MT of ingots, only 2,01,329.830 MT of MS Bars produced, during the years 2003-04 to 2007-08 against the normative production of 2,07,963.350 MT. Accordingly, there was a short production of 6,633.516 MT of MS Bars with an assessable value of Rs. 16.15 crore and duty involvement of Rs. 2.64 crore including education cess. On this being pointed out (January 2008), the department stated (May 2008) that SCN for Rs. 2.64 crore had been issued in April 2008. (ii) In 21 other cases, there was short production of TMT/MS Bar and other final products during the period 2004-05 to 2007-08 (up to September 2007) resulting into probable evasion of duty of Rs. 31.94 crore including education cess. 1.7.1.3 Production shown less in excise records/returns than in annual accounts Rule 4 of Central Excise Rules, 2002 stipulates that no excisable goods on which duty is payable shall be removed from a factory or warehouse without payment of the requisite duty. Duty not paid, short paid by suppressing of facts or by fraud, misstatement etc. attracts penalty under section 11 AC of the Central Excise Act, 1944. (i) M/s Ghaziabad Precision Products Pvt. Ltd., in Ghaziabad commissionerate, is engaged in manufacture of Rocker soft, lever assembly and adjusting screw falling under chapter 73 of CETA, 1985. Scrutiny of records revealed that the assessee had shown less production in RG 1/ER-1 against the production shown in the balance sheet in respect of rocker soft53,216, lever assembly-4,29,331 and adjusting serve-4,10,622 during the year 2006-07. This short accountal of production resulted in non-levy of central excise duty of Rs. 6.37 crore including education cess. The assessee is also liable to pay an equal amount of penalty. The total amount of duty along with penalty foregone was Rs. 12.74 crore including education cess. (ii) In another case, M/s Sree Lakshmi Industrial Forge and Engineers Ltd., in Bangalore I commissionerate, engaged in manufacture of articles of iron and steel under chapter 73, had also shown less production in ER-1 vis-àvis balance sheet which resulted in short payment of duty of Rs. 81.25 lakh including education cess, during the year 2006-07.
13
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.7.1.4 Suppression of production with reference to assessee’s own norms of production Some units manufacturing articles of iron and steel under chapter 73 had fixed its own norms of production on the pattern of SION. (i) During the scrutiny of records, it was noticed that vis-à-vis norms of production fixed by M/s Sundaram Fastners, Chennai, in Chennai-II commissionerate itself, there was a shortage of production of 2,149.000 MT of finished goods, during the period 2005-06 to 2006-07 resulting in a probable loss of duty amounting to Rs. 3.92 crore including education cess. On this being pointed out (December 2007), the department stated (April 2008) that the assessee reconciled its records and paid duty of Rs. 59.63 lakh pertaining to the year 2005-06 and a part period of 2006-07. Reply on the balance amount of duty of Rs. 3.32 crore pertaining to remaining period of 2006-07 had not been received (November 2008).
(ii) Two other assessees viz. M/s Wichitra Auto Ltd. and M/s Ganges International Pvt. Ltd., in Chennai II and Puducherry commissionerates respectively, have shown less production of goods in spite of the norms which were fixed by them, this resulted in a probable revenue loss of Rs. 56.58 lakh. (iii) M/s Bokaro Steel Plant (SAIL), in Ranchi commissionerate, engaged in the manufacture of crude steel, saleable steel etc. under chapter 72, manufactured these products as per their own production norms. Test check of the records of the assessee revealed that as per consumption figure of raw materials appearing in cost sheet, there should be higher quantity of production as per the norms than that shown in the accounts during the years 2004-05 to 2006-07. The short accountal of production of saleable steel of Rs. 747.86 crore resulted in escaping of duty of Rs. 122.04 crore including education cess. 1.7.1.5 Non levy of duty on final products found short Rule 10 of Central Excise Rules, 2002, provides that every assessee shall maintain proper record of goods produced or manufactured, quantity removed, assessable value and amount of duty actually paid. Further, rule 4 of the above Rules stipulates that no excisable goods on which duty is payable shall be removed from a factory or warehouse without payment of the requisite duty. However, rule 21 provides for remission of duty in case where it is shown to the satisfaction of the commissioner that goods have been lost or destroyed by natural cause or on unavoidable accident or became unfit for human consumption/marketing before their removal. Duty not paid, short paid by suppressing of facts or by fraud, misstatement etc. attracts penalty under section 11 AC of Central Excise Act, 1944. Scrutiny of records of M/s Hi-Tech Pipes Ltd., in Noida commissionerate, engaged in manufacturing of pipes, revealed that there was shortage of pipes in the years 2004-05 and 2005-06 as certified by Accountant in Tax Audit Report issued under section 44AB of Income Tax Act, 1961 but the assessee adjusted these shortages in the books of accounts without assigning any reason. Such adjustment was not permissible as per the Excise Rules and the assessee was liable to pay duty of Rs. 18.44 lakh including education cess with
14
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
an equal amount of penalty. The duty and penalty amounting to Rs. 36.88 lakh needs to be recovered.
1.7.2 Valuation
1.7.2.1 Short payment of duty of Rs. 54.02 lakh due to non addition of additional consideration in the assessable value Rule 6 of the Central Excise Valuation Rules, 2000, stipulates that where the excisable goods are sold in the circumstances specified in section 4(1)(a) of the Central Excise Act, 1944 except the circumstances where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. (i) In December 2003, M/s Amitasha Enterprises Pvt. Ltd., in Nagpur commissionerate, engaged in manufacture of angles/TMT bars and transmission line tower parts under chapters 72 and 73, received purchase order from M/s Tata Power Company Ltd., Mumbai for supplying transmission line tower parts for Vishnu Prayag line, falling under CETH 73082011. During the period 2004-05 and 2005-06, the assessee supplied 5,660.65MT of tower parts to the buyer on contracted value for which the buyer made advance payment as material advance. This advance accounted for more than 80 per cent of the total payment made for inputs supplied and the assessee retained the advance for more than a year. The contracted value was less than the comparable price of the goods supplied. Audit observed that due to non-addition of the interest amounting to Rs. 3.31 crore on the advance, a flow back to the assessee, there was a short payment of duty of Rs. 54.02 lakh including education cess. (ii) In 74 other cases of undervaluation/incorrect valuation, duty of Rs. 17.26 crore including education cess was short paid/short levied. The department accepted the audit observations in 11 cases involving duty of Rs. 1.56 crore out of which duty of Rs. 60.24 lakh had been recovered. 1.7.2.2 Undervaluation on account of incorrect determination of cost of production Rule 8 read with rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 envisages that where excisable goods are not sold by the assessee but are consumed by the assessee or on behalf of the assessee by a related person for manufacture of other articles, the assessable value of such goods shall be one hundred and fifteen per cent (one hundred and ten per cent from 6 August 2003) of the cost of production of manufacture of such goods. Further, the Board had clarified on 30 June 2000 that the value of goods consumed captively should be determined on cost construction method only. (i) M/s IISCO Steel Plant (a unit of SAIL with effect from 16 February 2006), Burnpur, in Bolpur commissionerate, engaged in manufacture of iron and steel products under chapters 72 and 73 cleared MS ingots to M/s Durgapur Steel Plant, Durgapur, a unit under Steel Authority of India Ltd., at a
15
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
price which was much lower than its cost of production during the year 200607 though the cost data was available with the assessee. As the clearances were inter unit transfer of goods for consumption in the manufacture of other articles, its valuation was to be done at the rate of 110 per cent of the cost of production. This incorrect valuation resulted in short levy of duty of Rs. 1.26 crore including education cess during April 2006 to March 2007. Further, the assessee made clearances of angles, channels, TMT Bars, etc., for its own consumption during 2006-07 and 2007-08 (up to August 2007).
However, the assessable value for such clearances were much lower than their respective cost of production (instead of 110 per cent of cost of production) for the year 2006-07. Adoption of incorrect valuation had resulted in short levy of duty of Rs. 74.24 lakh including education cess. On this being pointed out (September 2007), the department accepted (February 2008) both the observations and stated that SCNs were being issued. (ii) In another case relating to M/s Sree Rengaraj Ispat Ltd., in Salem commissionerate, it was seen that the goods were valued at a lower rate based on transaction value instead of the value required to be arrived by cost construction method during the period 2005-06 and 2006-07. On this being pointed out to the department (October 2007), the assessee re-worked the cost of goods and paid Rs. 87.50 lakh towards duty including education cess on 28 January 2008 and interest of Rs.16.90 lakh in March 2008. (iii) M/s Ennore Foundries Ltd., in Chennai I commissionerate, is engaged in manufacture of cast articles of iron under chapter 73. The assessee undervalued goods as it did not add ten per cent of value to the cost for the purpose of calculation of excise duty while clearing the goods valuing Rs. 469.19 crore for captive consumption, to a fellow subsidiary company (related person in terms of section 4(3)(b) of Central Excise Act, 1944) M/s Ashok Leyland during the period 2004-05 to 2006-07. The additional duty which needs to be paid up worked out to Rs. 7.65 crore including education cess. On this being pointed out (February 2008), the department stated (March 2008) that the observation was not accepted as these companies were not related persons as defined in clause (b) of sub-section (3) of section 4 of Central Excise Act, 1944. However, the Ministry of Law and Justice, GOI in their U.O. dated 13 July 2004 held that they were related parties and hence, additional duty pointed out by audit was recoverable. 1.7.2.3 Undervaluation and short payment of duty due to clearance of goods as scrap Rule 10 of Central Excise Rules, 2002, provides that every assessee shall maintain proper records on a daily basis, of goods produced or manufactured, quantity removed, assessable value and the amount of duty actually paid. M/s IDCOL Kalinga Iron Works Ltd., in Bhubaneshwar II commissionerate, manufacturing pig iron, deducted pig iron from the daily stock account and sold the same as scrap during April 2004 to September 2007 at a lesser price than the price of pig iron. Price of pig iron varied between Rs. 11,892 to Rs. 16,452; price of pig iron cleared as scrap varied from: Rs 7,765 to Rs. 12,589 which resulted in undervaluation of the goods by Rs. 2.48 crore
16
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
and consequential short payment of duty of Rs. 38.54 lakh including education cess. On this being pointed out (December 2007), the department stated (February 2008) that the scarps deducted from the stock were pig iron with some metals attached to it in addition to small particles of scrap at stockyard. The reply is not tenable in view of the fact that the full quantity of pig iron was shown as ‘production’ during the years 2004-05 to 2006-07 in the R.G-1 (Stock Accounts) and then a reduction entry made, subsequently to adjust pig iron as scrap. 1.7.2.4 Short payment of duty due to non-inclusion of cost of waste and scrap retained by job worker Rule 6 of the Central Excise Valuation Rules, 2000 read with CBEC circular dated 19 February 2002 stipulates that in respect of goods manufactured on job work basis, assessable value would be the job charges plus the cost of the materials used in the manufacture of the item. Further, as per SC’s judgment in the case of M/s General Engineering Works Vs CCE Jaipur 2007(212) ELT 295 SC which was also relied in the case of M/s Llyods Steels Industries Ltd. 2007 (213) ELT 339 (SC), the cost of waste and scarp retained by the job worker is to be included in the assessable value. M/s Amitasha Enterprises Pvt. Ltd., in Nagpur commissionerate, engaged in manufacturing of angles/TMT bars under chapter 72 and transmission line tower parts under Chapter 73 on conversion basis, retained waste & scrap generated during the manufacture of finished goods from raw materials supplied by the principal manufacturer during the period from June 2003 to March 2006 and cleared the finished goods on the value intimated by the principal manufacturer instead of adopting the value in accordance with Board’s instructions and SC judgment quoted above. This resulted into undervaluation of goods by Rs. 1.38 crore and short payment of duty of Rs. 22.04 lakh including education cess. On this being pointed out (October 2006), the department accepted (October 2007) the objection and partially recovered Rs. 17.12 lakh pertaining to the period April 2003 to March 2005. It further intimated that the SCN for the balance amount was being issued. 1.7.2.5 Short levy of duty due to undervaluation of inputs by reducing the price and ignoring the increased value of inputs Where excisable goods are not sold by the assessee but are used for consumption by the assessee or on behalf of the assessee by a related person for manufacture of other articles, the assessable value is to be determined under section 4(1) (b) of the Central Excise Act, 1944, read with rule 8 of Central Excise (Valuation) Rules, 2000 on the basis of one hundred and ten per cent (from 5 August 2003) of the cost of production or manufacture of such goods. Further, the Board clarified on 30 June 2000 that the value of goods consumed captively shall be determined on cost construction method only. (i) M/s Jai Balaji Industries Ltd., in Bolpur commissionerate, engaged in manufacture of iron and steel products of chapter 72, had cleared steel ingots meant for further manufacture to its sister units on payment of duty on a
17
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
provisional value. On finalisation of annual account, however, the assessee redetermined the cost of production of such steel ingot for the relevant period and accordingly, paid the differential duty on the value so determined. Scrutiny of records revealed that actual cost of raw material consumed in production had been reduced by deducting an amount of Rs. 14.69 crore to absorb the price variation of steel ingots which was incorrect as per cost accounting standards 4 (CAS 4) and additionally did not include Rs. 2.81 crore paid for raw materials through supplementary invoices. Thus, the incorrect application of cost construction method for valuation led to undervaluation of steel ingots and consequential short payment of duty of Rs. 1.32 crore including education cess during the period 2005-06. (ii) In a similar case M/s MSP Steel (P) Ltd., in Bhubaneshwar II commissionerate, engaged in manufacture of MS ingot and MS round under chapter 72, procured sponge iron from its related unit M/s MSP Sponge Iron Ltd. during 2004-05 to 2006-07 for manufacture of MS ingots which were captively consumed in manufacture of MS round. The rate of sponge iron supplied by the above related unit was subsequently revised on the basis of cost sheet prepared under CAS-4 and duty paid on such differential value of Rs. 246 crore. The incidence of duty was passed on to the assessee unit through supplementary invoices on which cenvat credit was availed of during October 2005, October 2006 and February 2007. Though the cost of sponge iron (input) was increased, the same was not taken into account by the assessee as no cost sheet was prepared in respect of MS ingots as required under the rules, which were captively consumed for manufacture of MS rounds. Thus, non addition of cost of raw material led to undervaluation of finished goods to that extent and consequential short levy of duty of Rs. 40.07 lakh including education cess. Further, it was observed that the assessee procured MS ingots from the market for manufacture of MS round at prices ranging from Rs. 19,999 to Rs. 20,751 PMT during 2005-06 and 2006-07, whereas the average sale price of MS round of the assessee was Rs. 16,776 and 15,994 PMT during the said period which confirms the fact of undervaluation. 1.7.2.6 Short levy of duty due to exclusion of retained sale tax from transaction value Section 4(3)(d) of Central Excise Act, 1944, stipulates that transaction value of goods chargeable to central excise duty shall not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. The CEGAT in the case of M/s Andhra Oxygen Pvt. Ltd. Vs CCE (Tribunal-Kolkata) 2003 (156) ELT 283 held that sales tax collected from buyers and not paid to the sales tax department when it was exempted under Sales Tax Act shall be considered as additional consideration flowing to assessees. M/s Tata Metaliks Ltd., in Haldia commissionerate, engaged in manufacture of pig iron under chapter 72, had enjoyed the benefit of sales tax remission under section 41 of West Bengal Sales Tax Act, 1994. Scrutiny of records revealed that the assessee had collected sales tax of Rs. 1.87 crore from the buyers during April 2003 and March 2005 and had retained the tax so collected. The non inclusion of the retained sales tax in the assessable value
18
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
led to undervaluation and consequent short levy of duty of Rs. 29.90 lakh including education cess during the said period. 1.7.2.7 Short levy of duty due to undervaluation of goods sold at depots Rule 7 of Central Excise (Valuation) Rules, 2000, as amended, provides that where the excisable goods are not sold at the time and place of removal but are transferred to depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the place of removal and where the assessee and the buyer of the said goods are not related and the price is the sole consideration for the sale, the value shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold at or about the same time, at the time nearest to the time of removal of goods under assessment. (i) M/s IISCO Steel Plant (a unit of SAIL), in Bolpur commissionerate, engaged in manufacturing iron and steel products under chapter 72, transferred stock of TMT bars, angles etc. to its depots located at different places all over India after paying duty at the plant’s (factory) gate. Scrutiny of records revealed that these goods were sold at higher prices than the assessable value at which duty was paid. This resulted in undervaluation of goods with duty implication of Rs. 15.78 lakh including education cess during the period from January 2006 to March 2006. (ii) M/s Concast Ferro Inc., in Visakhapatnam I commissionerate, engaged in the manufacture of pig iron under chapter 72 of CETA, cleared major part of their manufactured goods to their depots/consignment agents at or about the same time on which duty was payable at the time of removal from the factory was not available. In the absence of the relevant information/invoices of the consignment agents/depots, the correctness of the values adopted for payment of duty at the time of removal from factory was not established by the assessee. As the value of goods cleared at depots/consignment agents gets added up with freight, depot expenses, agencies commission and other incidentals, the differential duty liability on the goods cleared through depots/consignment agents during the years 2006-07 and 2007-08 worked out to be Rs. 1.83 crore. On this being pointed out (December 2007), the department reported (December 2007) that the assessee had paid Rs. 18.96 lakh on 11 December 2007 in respect of two consignment agents and promised to recover the balance amount of differential duty of Rs. 1.64 crore, the recovery particulars of which are awaited (March 2008).
1.7.3 Cenvat credit
Under the cenvat scheme, credit is allowed for duty paid on ‘specified inputs’ and ‘specified capital goods’ used in the manufacture of finished goods and service tax paid on any input or capital goods or any input service. The cenvat credit can be utilised towards payment of duty on finished goods and service tax on output service subject to fulfilment of certain conditions. A few cases of incorrect availing of cenvat credit and utilisation to the extent of
19
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
Rs. 407.16 crore were noticed in cases test checked in audit. Some of these are elucidated in the following paragraphs: 1.7.3.1 Irregular utilisation of cenvat credit Rule 3(4) of Cenvat Credit Rules, 2004, stipulates that cenvat credit may be utilised for payment of any duty of excise on any final product or on input/capital goods cleared as such and also for service tax on any output service. M/s Bhusan Power and Steel Ltd., Hoogly, Kolkata-IV commissionerate, engaged in manufacture of H.R. Coil, Galvanized Plain Sheet etc., preferred an appeal to the CESTAT against an order of the Commissioner (Appeal).
The CESTAT directed the assessee to pre-deposit the amounts of Rs. 20.92 lakh and Rs. 45.59 lakh in dispute, as a pre-condition to hear the case. Further, the assessee filed a writ petition before the High Court at Kolkata after debiting the amount of Rs. 66.51 lakh as pre-deposit from the Cenvat credit account instead of by cash. Payment of pre-deposits by debiting cenvat account instead of through PLA/cash was not permissible and resulted in irregular utilisation of credit. 1.7.3.2 Inputs used in manufacture of exempted final products Rule 6(1) of the Cenvat Credit Rules, 2004, stipulates that no credit of specified duty shall be allowed on inputs which are used in the manufacture of final products which are exempt or are chargeable to ‘nil’ rate of duty. Rule 6(3)(b) of the Cenvat Credit Rules, 2004, provides that if cenvat credit is availed of on common inputs which are used in manufacture of exempted goods as well as in dutiable goods and separate accounts of their use are not maintained, then the manufacturer shall pay an amount equal to eight per cent (ten per cent from 10 September 2004) of the total price excluding taxes, charged at the time of its clearance. (i) M/s National Steel & Agro Industries Ltd., in Indore commissionerate, engaged in manufacture of CR coils/sheets and GP coils/sheets availed cenvat credit on inputs and utilised it towards payment of duty on dutiable final products. The assessee was engaged in the manufacture of dutiable as well as exempted goods. The assessee cleared zinc dross valuing Rs. 23.42 crore as non excisable goods during the period April 2004 to March 2007 but had not maintained separate account of inputs used for exempted goods. However, an amount of Rs. 2.30 crore equivalents to eight per cent (ten per cent from 10 September 2004) of value of the zinc dross was not paid. (ii) In another case, M/s Neelachal Ispat Nigam Ltd., in Bhubaneshwar I commissionerate, engaged in production of pig iron (chapter 72), BF coke and crude tar (chapter 27), availed of cenvat credit on inputs and did not maintain separate account of inputs. The assessee partly used coke in the manufacture of pig iron and partly sold it and crude tar in the market during the period 2005-06 and 2006-07 without payment of excise duty. The assessee was required to pay an amount of Rs. 61.42 crore being ten per cent of the total price of Rs. 614.27 crore of these exempted goods at the time of their clearance. The assessee was also liable to pay interest and penalty.
20
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(iii) M/s Nava Bharat Venture Ltd., in Hyderabad commissionerate, engaged in the manufacture of ferro alloys, produced electricity in their captive generation units and utilised it partly in the manufacture of final products and sold a part to Reliance Industries and others. The assessee utilised cenvat credit on inputs like carbon paste and input services like manpower engaged in coal dozing, boiler scrap removal, laying of pipelineoil cooler, turbo generator maintenance etc. but did not maintain separate inventory and accounts for such inputs/input services used in generation of electricity cleared for sale. Out of the total electricity produced, 78,71,588 units during 2005-06 and 2006-07 were sold to outside agencies. Hence, the assessee was required to reverse or pay 10 per cent on the value of electricity sold amounting to Rs. 10.53 crore. On this being pointed out (November 2007), the department contended (February 2008) that since electricity was not an excisable item covered by schedules to CETA, 1985, that could not be considered either as an exempted product or a product which attracted ‘nil‘ rate of duty and hence the provisions of rule 6 (3) (b) of Rules above were not applicable. The contention of the department is not tenable in as much as electrical energy of 1,000 KWH has been notified in the schedules to the CETA as an excisable item carrying no rate of duty with effect from 1 April 2005 vide entry no. 27160000 of first schedule and, therefore, cenvat provisions are applicable to electricity. (iv) In other three cases, M/s Jindal Steel & Power Ltd., M/s Singhal Enterprises (P) Ltd. and M/s Mahendra Sponge & Power Ltd., in Raipur commissionerate, generated electricity and sold a part of that valuing Rs. 800.21 crore from April 2004 to July 2007 to Chhattisgarh Electricity Board and others but did not pay duty of Rs. 80.02 crore, being ten per cent of the amount of sale, as the assessees had not maintained separate accounts of the common inputs. 1.7.3.3 Irregular availing of service tax credit Section 66 of the Finance Act, 1994, covers leviability of service tax on the value of specified taxable services and the person providing the service is liable to pay such tax. However, section 66 A provides that such liability of tax is on the recipient of services who receives such services in India from a foreign service provider. Rule 3(1) (ix) of Cenvat Credit Rules, 2004, allows credit of service tax leviable only under section 66 of the Finance Act, 1994, but not on such credit of service tax leviable under section 66 A of the above Act. (i) M/s Durgapur Steel Plant (a unit of SAIL), in Bolpur commissionerate, manufacturing iron and steel, made a payment of service tax during the period from November 2006 to March 2007 as a recipient of service for consulting engineering service provided by different foreign companies. The payment was made in foreign currency. Audit scrutiny revealed that the assessee took credit of service tax paid on such services in contravention of above stated rules which resulted in irregular availing of cenvat credit to the tune of Rs. 2.12 crore including education cess.
21
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(ii) Three other assessees, M/s Ruchi Strips & Alloys Ltd. and M/s National Steel & Agro Ltd., in Indore commissionerate and M/s Good Luck Steel Tubes Ltd. in Noida commissionerate, also irregularly availed cenvat credit of Rs. 1.78 crore of service tax paid under section 66 A of the above Act. 1.7.3.4 Irregular availing of cenvat credit on capital goods used in manufacture of final product Rule 4(2)(b) of Cenvat Credit Rules, 2004, stipulates that the balance 50 per cent of cenvat credit paid on capital goods may be taken in any subsequent financial year to the financial year in which the capital goods were received in the factory of manufacturer, if the capital goods are in possession. M/s Southern Iron and Steel Company Ltd., in Salem commissionerate, engaged in manufacture of Iron and Steel availed 50 per cent of cenvat credit in the first financial year during the period 2004-05 to 2007-08 and the balance 50 per cent in the subsequent years on lancing pipes which were capital goods as per rule 2 (a) of the above Rules. As the said capital goods were used in the manufacture of final products and not in possession in the subsequent financial years, the assessee was not eligible for cenvat credit of remaining 50 per cent credit. This resulted in irregular availing of credit for Rs. 14.24 lakh. On this being pointed out in audit (December 2007), the department accepted (May 2008) the observation. 1.7.3.5 Suo moto credit instead of following prescribed refund procedures Section 11B of the Central Excise Act, 1944, provides for claiming refund of the excise duty by an application for refund before the expiry of one year from the relevant date. There is, however, no provision in the Act/Rules under which suo moto credit of the excise duty/cenvat can be taken. CESTAT in the case of M/s Comfit Sanitary Napkins(I) Ltd. {2004(174) ELT 220} also held that the assessee could not take suo moto refund/credit but should follow the procedure laid down under section 11 B of the above Act. Audit noticed that M/s Southern Iron and Steel Company Ltd., in Salem commissionerate, engaged in manufacturing of Iron and Steel had debited the cenvat account for the wrong availing of credit of Rs. 41.10 lakh. The department insisted to reverse the amount by remittance through PLA instead of debiting the cenvat account. Accordingly, the assessee paid the entire amount of duty through PLA but took suo moto cenvat credit after five days without following the procedure of section 11 B. On this being pointed out (December 2007), the department accepted the observation (March 2008) and stated that action was being taken to protect the Government revenue. 1.7.3.6 Incorrect availing of service tax credit on wind mill Sub-rules (1) and (4) of rule 4 of Cenvat Credit Rules, 2004, stipulate that cenvat credit paid on inputs, capital goods and service tax paid on service received by a manufacturer can be utilised against payment of duty on the manufactured final products. The Board clarified in March 2006 that the cenvat credit will not be allowed on service tax paid on erection and
22
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
commissioning of wind mills located outside the factory as no nexus existed between the wind mill and the production process. Therefore, the service tax paid on lease rentals of wind mills situated outside the factory was also not admissible. Audit scrutiny of records of M/s Ennore Foundries, in Chennai commissionerate, engaged in the manufacture of rough iron castings, revealed that they had availed service tax credit of Rs. 2.47 crore during June 2006 and September 2007 towards lease rent for the wind mills located outside the factory which was not in order as per the above clarification of the Board. On this being pointed out (February 2008), the department accepted (March 2008) the observation and stated (July 2008) that SCN for Rs. 2.47 crore had been issued in June 2008. 1.7.3.7 Irregular availing of cenvat credit on outward freight Rule 2(1) of Cenvat Credit Rules, 2004, stipulates that input service means any service used by the manufacturer in or in relation to manufacture of final products and clearance of final product from the place of removal and includes inward transportations on inputs or capital goods and outward transportation up to the place of removal. Under rule 3(1) (ix) of the above said Rules, the service tax paid on input service can be taken as cenvat credit. (i) Audit scrutiny of the records of M/s Electro Steel Castings Ltd., in Chennai commissionerate, engaged in manufacture of cast iron pipes and ductile iron fittings, revealed that they had availed cenvat credit of Rs. 20.29 lakh paid on outward transportation of finished goods, ex-factory, beyond place of removal, during the period March 2005 to September 2007, which was not covered by the input service. Availing of credit was irregular. On this being pointed out (September 2007), the department stated (February 2008) that SCN had been issued in January 2008. (ii) In three other cases, assessees in Kanpur, Luchnow and Ghaziabad commissionerates, incorrectly availed cenvat credit of service tax of Rs. 4.93 lakh on outward transportation beyond place of removal during the period January 2005 and September 2007 in contravention of above Rules. 1.7.3.8 Incorrect availing of credit on inputs cleared as such Rule 2(k) read with rule 2 (1) of Cenvat Credit Rules, 2004, defines that input/input service means all input/input services that are used in or in relation to the manufacture of final goods. Further, rule 3(5) of the above Rules stipulates that where inputs or capital goods are removed as such by a manufacturer he shall reverse an amount equal to the credit availed of on such inputs/capital goods. (i) Audit scrutiny of records of M/s Sree Rangaraj Ispat (P) Ltd., in Salem commissionerate, engaged in manufacture of sponge iron, revealed that the assessee had availed of cenvat credit of Rs. 11.10 lakh on inward freight of coal and stevedoring1 charges on imported coal. The coal was not utilised in the production of final product but sold. The availed cenvat credit was required to be reversed.
1
Loading and unloading of ships at a dock
23
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(ii) In three other cases, the assessees M/s Mahalakshmi Profiles (P) Ltd., M/s Dilpreet Tubes Pvt. Ltd. and M/s Sarita Steel Industries Ltd., in Hyderabad I, IV and Visakhapatnam II commissionerates respectively, availed service tax credit of Rs. 10.26 lakh on input services which were cleared as such but the credit was not reversed at the time of clearance of such input services. On this being pointed out (November 2007), the department reported (February 2008) that a total recovery of Rs. 9.44 lakh had been made in the cases of M/s Mahalakshami Profiles and M/s. Sarita Steel Industries Ltd. (iii) M/s Beehive Foundry Engineering Work, in Chennai I commissionerate, engaged in the manufacture of fabricated structural materials purchased input structural materials, in terms of actual weight of materials received which were cleared as such. While clearing the materials, these were weighed in section weight which was found to be lower than the actual weight by one to three per cent and duty was discharged on the section weights. During the period from 2004-05 to 2007-08 (up to September 2007), a total quantity of 16,883.925 MT of input materials were cleared as such by adopting section weight resulting in understatement of weight to the extent of 358.070 MT. Since the duty credit was taken based on actual weight, the duty credit reversible on the differential quantity worked out to Rs. 14.92 lakh approximately. On this being pointed out (January 2008), the department accepted (April 2008) the objection and reported the recovery of Rs. 14.32 lakh along with interest. 1.7.3.9 Incorrect availing of cenvat credit based on ineligible documents Rule 9(1) (a) of Cenvat Credit Rules, 2004, stipulates that the assessee is eligible to take cenvat credit based on an invoice issued by a manufacturer or an importer. M/s Concast Ferro Industries and M/s KGN Deccan Engineering Industries Pvt. Ltd., in Visakhapatnam I and Hyderabad IV commissionerates respectively, availed cenvat credit of Rs. 16.56 lakh based on invalid documents. The assessees need to reverse this credit. 1.7.3.10 Premature availing of cenvat credit of service tax paid on Goods Transport Agency service Sub rule 7 of rule 4 of Cenvat Credit Rules, 2004, provides that the cenvat credit on input service shall be allowed on or after the day on which payment is made of the value of input service and service tax. M/s Bindal Sponge Iron Ltd., in Bhubaneshwar I commissionerate, engaged in manufacture of sponge iron paid service tax for GTA service for April 2006 to September 2007 through TR-6 challans on the 4th or 5th day of subsequent month but took the credit during the month prior to the payment of the service tax. This resulted in premature availing of service tax credit of Rs. 99.20 lakh which was irregular. 1.7.3.11 Excess availing of cenvat credit on capital goods As per Rule 2(a) of Cenvat Credit Rules, 2004, capital goods include refractory bricks, refractory materials, pipes, moulds and spares, accessories like belts, impeller etc. Rule 4(2)(a) stipulates that credit in respect of capital goods received in a factory or in the premises of the provider of output service
24
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
at any point of time in a given financial year shall be taken only for an amount not exceeding 50 per cent of the duty paid on such capital goods in the same financial year. (i) M/s Neelachal Ispat Nigam Ltd. and M/s Shree Metaliks Ltd., in Bhubaneshwar I commissionerate, engaged in manufacture of pig iron and sponge iron, availed 100 per cent cenvat credit of Rs. 46.62 lakh on capital goods viz. refractory bricks, refractory material, pipes, moulds and spares, accessories like belts, impeller, etc. during 2006-07 treating them as inputs. This resulted in excess availing of credit of Rs. 23.31 lakh which needs to be reversed along with interest and penalty. (ii) In 64 other cases, the assessees availed/utilised cenvat credit on capital goods incorrectly which resulted in misuse of cenvat credit amounting to Rs. 6.79 crore. On the observations being pointed out, 24 observations involving a duty of Rs. 37.42 lakh were accepted by the department and of these in 22 cases the department recovered a sum of Rs. 33.56 lakh. In four cases the department issued SCNs for Rs. 35.08 lakh. 1.7.3.12 Incorrect availing of cenvat credit on input services having no nexus with manufacturing activity and clearance of final product
Rule 2(l) of Cenvat Credit Rules, 2004, stipulates that input service means any service used by a provider of taxable service for providing an output service or used by manufacturer in or in relation to the manufacture of final products and clearance of final products from the place of removal. The CESTAT, Ahmedabad in the case of Ultratech Cement Ltd. Vs CCE Bhavnagar {2007(6) STR-364-Tri Ahd.} stated that activities relating to business used in relation to manufacture and clearance of final products from the place of removal to be considered. In this regard the CESTAT in another judgment of Excel Crop Care Ltd. Vs CCE Ahmedabad {2007(6) STR-451-Tri Ahmedabad} held that credit of service tax paid on custom house agent services was not admissible. (i) M/s Shah Alloys Ltd., in Ahmedabad III commissionerate, engaged in the manufacture of excisable goods under chapter 72 and 73 of schedule to CETA, availed customs house agent service and clearing & forwarding services for export of goods during July 2006 and April 2007 and paid Rs. 2.51 crore towards these services. The assessee paid service tax of Rs. 30.78 lakh on these services and took cenvat credit of the same. In view of the above stated CESTAT judgments, availing of cenvat credit was incorrect. On this being pointed out (July 2007), the department stated (August 2007) that SCN had since been issued. (ii) Similarly in another case, M/s Essar Steel Ltd., in Surat I commissionerate, paid Rs. 228.92 crore to non residents as commission, during November 2005 to September 2007. The assessee paid service tax and education cess of Rs. 27.29 crore on the amount of commission and took cenvat credit. This availing of cenvat credit of Rs. 27.29 crore was incorrect as this service had no nexus with the production activities of the assessee.
25
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.7.3.13
Irregular availing of cenvat credit on unspecified input services
As per rule 3 of Cenvat Credit Rules, 2004, the assessee was entitled to avail cenvat credit of specified duties on inputs/input services as specified in rule 2 of the above Rules. M/s Maharashtra Seamless Ltd., in Raigad commissionerate, engaged in manufacturing of goods under chapters 72 & 73, availed credit of service tax of Rs. 15.30 lakh paid on construction of residential buildings during 2006-07. The service rendered was not in or in relation to manufacturing activity and was not a specified input service. This led to irregular availing of service tax credit. On this being pointed out (October 2007), the department admitted (November 2007) the observation and intimated that the credit had since been reversed. 1.7.3.14 Excessive availing of credit and utilisation thereof Rule 3(4) read with rule 14 of Cenvat Credit Rules, 2004, provides that while paying duty, the cenvat credit should be utilised to the extent such credit is available on the last day of the month for payment of duty relating to that month. Wrongly utilised credit shall be recovered along with interest from the manufacturer. (i) M/s Vipras Castings Ltd., in Raigad commissionerate, engaged in the manufacture of goods falling under chapters 72 & 73, in their excise records had reversed excess cenvat credit of Rs. 49.69 lakh on six occasions. Interest leviable thereon was also paid. On scrutiny of records, it was found that assessee had availed excess cenvat credit which was ten times more than the duty actually paid and the same was reversed at a later date. Frequent availing of excess credit clearly showed the intention of avoiding payment of duty in cash. Had the incorrect credit not been availed, then the assessee would have paid duty through PLA. Although the excess credit taken was reversed subsequently, yet the fact remains that no SCN was issued. The assessee was also liable for equivalent penalty of Rs. 49.69 lakh. On this being pointed out (September 2007), the department accepted the observation and stated (February 2008) that SCN was being issued. (ii) In 198 other cases, cenvat credit on inputs/input services was incorrectly taken by the assessees which resulted in misuse of cenvat credit of Rs. 58.20 crore. In 90 cases valuing Rs. 8.05 crore, the department accepted the audit observations and of these in 68 cases the department further recovered a sum of Rs. 1.44 crore. In 17 other cases, SCNs for Rs. 1.12 crore were issued. 1.7.3.15 Irregular transfer of cenvat credit Rule 10 of Cenvat Credit Rules, 2004, provides that if a manufacturer shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to the joint venture with the specific provision for transfer of liabilities of such factory, then the manufacturer shall be allowed to transfer the cenvat credit lying unutilised in his accounts to such transferred, sold,
26
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
merged, leased or amalgamated factory. Further, as per rule 3 of the above Rules, the transfer of the cenvat credit shall be allowed only if the stock of inputs as such or in process, or the capital goods are also transferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for, to the satisfaction of the Central Excise Officer. (i) Audit scrutiny of the records of M/s KEC International Ltd., in Nagpur commissionerate, revealed that on 21 January 2006 the assessee informed the CE Division II that due to composite scheme of arrangement between its sister units, their power transmission business was sold to M/s KEC Infrastructure Ltd. from 1 April 2005. Further, the names of said two companies were interchanged. Hence, prima facie there appeared to be no change as all assets and liabilities along with share capital were transferred to M/s KEC Infrastructure Ltd. which was renamed as M/s KEC International Ltd. Further, as per paragraph 1.7.2 (g) of the above scheme, liabilities of Rs. 25 crore relating to Power transmission business of KEC was excluded from the scope of such transfer. Hence, the condition of rule 10 was not fulfilled as transfer of liabilities was not effected. The assessee had un-utilised cenvat credit of Rs. 39.42 lakh on 1 April 2005 which was transferred. This transfer of credit of Rs. 39.42 lakh was irregular because (i) the condition of rule 10 was not fulfilled and (ii) such transfer was not done after obtaining the permission from the department. On this being pointed out (March 2007), department issued SCN for reversal of credit (October 2007).
(ii) In another case, M/s Orange City Alloys Pvt. Ltd. which was originally registered as M/s Saggu Castings Pvt. Ltd. prior to 26 September 2005, in Nagpur commissionerate, transferred cenvat credit of Rs. 42.31 lakh as there was a change in ownership and the name of the assessee, attracting the provisions of rule 10 of the above Rules. As the cenvat credit balance was carried forward to the new entity without following the procedure i.e. obtaining prior permission of transfer of cenvat credit and getting stock verified by the department, it was irregular. On this being pointing out (November 2007), the department admitted (January 2008) that there was a procedural lapse. 1.7.3.16 Incorrect availing of credit on inputs The CBEC, in consultation with the Ministry of Law, clarified on 4 January 1991 that in the event of manufacturer availing cenvat credit and paying duty on exempted/nil rate of duty final products on his own volition, the payment would not be in the nature of duty and were to be treated as deposits and hence credit of duty paid on such inputs was not admissible. Further, the Kolkata Tribunal in their decision -Commissioner Vs Steel Authority of India2003(154) ELT 65 (Tri-Kolkata) held that the iron ore mining from mines and then subjecting to process of crushing, grinding, screening and washing with a view to remove foreign materials and to concentrate such ores do not result in the manufacture of different commercial commodity, hence no central excise duty is leviable on iron ore concentrate under heading 26.01 of the Central Excise Tariff Act, 1985.
27
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(i) M/s Tata Steel Ltd., Bistupur, in Jamshedpur commissionerate, engaged in manufacture of pig iron, hot metal, billets, H.R. coils, wire rods etc under chapter 72, availed of cenvat credit on iron ore concentrate of its own captive mines at Noamundi and iron ores purchased from TISCO Mines Ltd., Joda for Rs. 127.73 crore. This resulted in irregular availing of cenvat credit of Rs. 127.73 crore. The utilisation of cenvat credit of the same amount subsequently in payment of duty on the final product was also incorrect. On this being pointed out, the department intimated (May 2006) that SCN had been issued on 23 March 2006 for Rs. 33.25 crore. (ii) In another case, M/s Singhal Enterprises Pvt. Ltd., Raigarh, in Raipur commissionerate, availed of cenvat credit of duty of Rs. 1.38 crore paid on iron ore during 2004-05 and 2005-06 which was to be treated as ‘deposits’. This resulted in incorrect availing of credit of Rs. 1.38 crore. 1.7.3.17 Incorrect availing of cenvat credit on non-taxable input service According to Finance Act (No. 2) 2004, as made effective from 10 September 2004, business auxiliary service means any service in relation to production of goods on behalf of the client but does not include any activity that amounts to ‘manufacture’ within the meaning of Section 2(f) of the Central Excise Act, 1944. M/s Gandhi Special Tubes Ltd., in Vadodara-II commissionerate, engaged in the manufacture of seamless steel tubes, ERW precision, nuts and sleeves falling under chapter 73, engaged job workers for production of goods on behalf of the clients. The job workers dealt with activities which were manufacturing in nature and not covered under business auxiliary services. The assessee paid Rs. 2.34 crore to them during September 2004 to September 2007 and paid service tax of Rs. 21.33 lakh also. The assessee availed cenvat credit of this service tax of Rs. 21.33 lakh which was incorrect. 1.7.3.18 Inadmissible cenvat credit on unspecified inputs As per rule 2(k) of Cenvat Credit Rules, 2004, input means all goods except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final products, goods used as paints or as packing material or as fuel or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production. As per Indian Oil Corporation (IOC), carbon black feed stock (CBFS) is the raw material used by tyre industry for the manufacture of carbon black or used by processors to make various downstream chemicals like agarbati oil, white oil or used for manufacture of rubber process oils, etc. Scrutiny of records of M/s Hisar Metal Industries, in Rohtak commissionerate, engaged in manufacture of CR strips under chapter 72 of CETA, revealed that the assessee availed credit of Rs. 1.13 crore during the period from April 2004 to September 2007 on CBFS used as fuel in the furnace. CBFS fell neither in the category of inputs specified for iron and steel industry for use in or in
28
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
relation to manufacture of final products nor in the category of fuel. Credit availed by the assessee on CBFS was, therefore, not admissible. This resulted in inadmissible availing of credit of Rs. 1.13 crore. 1.7.3.19 Irregular availing of cenvat credit on capital goods Rule 2 of Cenvat Credit Rules, 2004, defines capital goods as those which are used/installed in the factory of the manufacturer of final products. The Tribunal in the case of M/s Madras Cement Ltd. Vs CCE Hyderabad (1998 (99) ELT 395 (T)) held that mining is not a part of the manufacture of cement, hence capital goods used in mines are not eligible for credit. M/s Tata Steel (Mining Division), in Jamshedpur commissionerate, engaged in extracting and selling iron ore, availed cenvat credit of Rs. 4.47 crore and Rs. 9.13 crore on capital goods used on the surface of own iron ore mines during 2000-01 to 2003-04 and 2004-05 to 2006-07, respectively. The iron ore was shipped to the factory and cenvat credit of the same was availed of by M/s Tata Steel Ltd., Jamshedpur. Credit of Rs. 13.60 crore availed of on capital goods was incorrect and recoverable along with interest. On this being pointed out (April 2006) the department intimated (May 2006) that SCN for the period from February 2005 onwards has been issued. 1.7.3.20 Simultaneous availing of cenvat credit on capital goods and depreciation under Income Tax Act
Rule 4(4) of Cenvat Credit Rules, 2004, stipulates that cenvat credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer claims as depreciation under section 32 of Income Tax Act, 1961. M/s Tyco Electronics System India Pvt. Ltd. (Energy Division), in Bangalore II commissionerate, engaged in manufacture of double tension string and single suspension string falling under chapter 73 of CETA, received capital goods (rubber injection moulding machine etc.) during 2005-06 and 2006-07 on which cenvat credit of Rs. 25.76 lakh was availed. Scrutiny of records revealed that they have claimed depreciation on the entire value of capital goods under section 32 of Income Tax Act, 1961 also. The availing of cenvat credit of Rs. 25.76 lakh was, therefore, incorrect and the assessee was liable to reverse the credit and pay interest of Rs. 3.46 lakh and also penalty under section 11C of Central Excise Act, 1944, equivalent to duty amount. 1.7.3.21 Irregular utilisation of cenvat credit on input GTA service Rule 3(4) of Cenvat Credit Rules, 2004, stipulates that cenvat credit may be utilised for payment of any duty of excise on any final product or on input/capital goods cleared as such and also for service tax on any output service. (i) M/s Kesoram Spun Pipes and Foundaries, Hooghly, in Kolkata IV commissionerate, engaged in manufacturing spun pipe falling under chapter 73, utilised the cenvat credit for payment of service tax payable by the manufacture on input GTA service which was not correct. Service tax in such cases was required to be paid through PLA. The irregular utilisation of cenvat
29
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
credit worked out to Rs. 12.57 lakh (including education cess) during April 2005 to September 2006. (ii) In a similar case, M/s Bhusan Power and Steel Ltd., in Kolkata IV commissionerate, had also irregularly utilised cenvat credit of Rs. 58.82 lakh (including education cess) during the period from January 2005 to October 2005. 1.7.3.22 Pre-mature availing of cenvat credit on inputs stored outside the factory premises
Rule 14 of Cenvat Credit Rules, 2004, stipulates that where the cenvat credit has been taken or utilised wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of section 11A and 11AB of the Central Excise Act, 1944, shall apply mutatis mutandis for affecting such recoveries. Further, rule 8 of the above Rules, provides that the Deputy Commissioner/Assistant Commissioner of Central Excise, having jurisdiction over the factory of manufacturer of final products may permit the manufacturer to store cenvatable inputs outside the factory subject to certain limitations and conditions as he may specify to safeguard revenue. The Board has issued clarification vide Ahmedabad commissionerate Trade Notice No. 93/2004-2005(179) ELT (T-16) prescribing the procedures for the assessees willing to store cenvatable inputs outside the factory premises. The cenvat credit in such cases shall be taken in the books of accounts by the manufacturer only when the entire inputs covered by an invoice are received in the factory. M/s SPS Rolling Mills Ltd., Durgapur, in Bolpur commissionerate, engaged in manufacture of enrolled products of iron and steel under chapter 73, got permission for storing a consignment of 3,691.4 MT of raw materials involving cenvat credit of Rs. 72.29 lakh outside the factory premises on 23 August 2005. The entire consignment of the raw material stored outside the factory premises was received in the factory during the period between 11 August 2005 to 18 June 2006 in a phased manner. But the assessee availed entire cenvat credit on the said consignment on 31 August 2005 though the credit should have been availed only after 18 June 2006 and utilised the same towards payment of duty. This resulted in premature availing of cenvat credit of Rs. 72.29 lakh and consequent benefit to the assessee. The duty should have been paid through PLA only. Interest amounting to Rs. 7.44 lakh is also recoverable from the assessee. 1.7.3.23 Non payment of duty on the clearance of capital goods as waste and scrap Rule 3(5A) of Cenvat Credit Rules, 2004, stipulates that if capital goods on which credit of cenvat has been availed are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on the transaction value. M/s Durgapur Steel Plant, (a unit of SAIL), in Bolpur commissionerate, engaged in manufacture of iron and steel products falling under chapter 72 and 73, availed cenvat credit on various capital goods including goods under chapter 69 i.e. refractory bricks used as lining material for their furnaces. Scrutiny of their records revealed that the assessee cleared large quantity of
30
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
such bricks after its uses without discharging duty leviable on the transaction value. This resulted in non payment of duty of Rs. 56.69 lakh during the period between April 2005 and March 2007. 1.7.3.24 Inadmissible availing of cenvat credit on inputs not used in manufacture Section 2(f) of Central Excise Act, 1944, defines ‘manufacture’ as any process which incidental or ancillary to the completion of a manufactured product and which is specified in relation to any goods in the section or chapter notes of the first schedule to the CETA, as amounting to manufacture. In the case of M/s Hindustan Zinc Ltd. Vs CCE-2005(181)ELT 170(SC), the Supreme Court held that before central excise duty can be imposed on any articles, it must satisfy two basic conditions that (i) the article should be goods and (ii) it should have come into existence as a result of manufacture. M/s Surya Roshni Ltd., in Rohtak commissionerate, engaged in manufacture of CR sheet, black and galvanized pipes under chapter 72, procured HR sheets and after pickling sold it as pickled HR sheets during April 2006 to September 2007. Since the process of pickling of HR sheets did not amount to manufacture, cenvat credit of Rs. 2.54 crore availed was not admissible to the assessee which needs to be reversed. On this being pointed out (February 2008), the department stated (July 2008) that SCN for Rs. 2.42 crore for the period May 2006 to September 2007 has been issued.
1.7.4 Exemptions
1.7.4.1 Incorrect availing of exemption by person other than Goods Transport Agency (GTA) Service tax on transport of goods by road has been re-imposed with effect from 1 January 2005. Goods Transport Agency (GTA) is liable to pay service tax on gross transportation charges collected from customer in relation to transport of goods by road. However, vide notification no. 35/2004-ST dated 3 December 2004, liability to pay service tax has also been cast on the recipient of services from GTA, when recipient of services is consignor or consignee of the goods and falls under any one of the seven categories mentioned therein (a factory, company, corporation, society, cooperative society, dealer of excisable goods or a corporate body).
By notification no. 32/2004-ST dated 3 December 2004, 75 per cent value of the taxable service provided by GTA to a customer is exempt from levy of service tax subject to the conditions that credit of duty paid on inputs or capital goods used for providing such taxable service is not taken and benefit of notification no. 12/2003-ST dated 20 June 2003 is not availed by GTA. (i) Test check of records of 16 manufacturers, in Kanpur, Lucknow, Meerut-II, Noida and Ghaziabad commissionerates, engaged in manufacturing of iron and steel and articles of iron and steel falling under chapters 72 and 73, revealed that they received services from GTA and paid these agencies transportation charges amounting to Rs. 64.88 crore during the period January 2005 to September 2007. Though the service tax was payable on gross
31
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
transportation charges, yet they paid service tax of Rs. 1.86 crore at 25 per cent amount of freight charges after claiming exemption under notification No. 32/2004-ST instead of Rs. 7.54 crore. The claiming of exemption was incorrect as they failed to produce a certificate from GTA on consignment notes for not availing cenvat credit on inputs/ capital goods used for such services and have not availed the benefit of notification No. 12/2003-ST dated 20 June 2003. These companies were liable to pay the balance service tax of Rs. 5.68 crore with interest of Rs. 78.86 lakh and penalty of Rs. 5.68 crore also. On this being pointed out (February 2008), the department issued SCN for Rs. 1.74 crore in three cases. (ii) In another case, the department issued SCN (April 2007) to M/s Southern Iron and Steel Company, in Salem commissionerate, for alleged non payment of service tax on GTA service for the period from January 2005 to September 2006 on the freight charges paid but SCN for the subsequent period (October 2006 to September 2007) was not issued on the freight value of Rs. 13.91 crore for which service tax of Rs. 1.70 crore including education cess was payable. On this being pointed out (February 2008), the department issued SCN for Rs. 1.05 crore. Action taken for the balance amount was not furnished. 1.7.4.2 Incorrect grant of exemption (i) Notification No.67/95-CE dated 16 March 1995 specified that inputs manufactured in a factory and used within it are exempt from duty, provided the final product is not exempt or chargeable to ‘nil’ rate of duty other than those goods which are cleared (i) to a unit in Free Trade Zone, (ii) to a hundred per cent export oriented undertaking, (iii) to a unit in an Electronic Hardware Technology Park, (iv) to a unit in a Software Technology park, (v) under notification No.108/95-CE and (vi) by a manufacturer of dutiable and exempted final products after discharging obligation under rule 6 of Cenvat Credit Rules. Thus, clearance of goods under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 or under notification No. 43/2001-NT is not covered under the above-mentioned exemption notification. Notification No. 43/2001-NT stipulates that the goods manufactured or processed using the excisable goods so procured without payment of duty under this notification shall be exported in terms of sub-rule (1) of rule 19 of the Central Excise Rules, 2002. M/s SAIL, Rourkela Steel Plant, in Bhubaneshwar-II commissionerate, consumed 9,615.419 M.T of slabs valuing Rs. 21.28 crore captively (during 2005-06 and 2006-07) availing exemption under the above mentioned notification dated 16 March 1995 for manufacture of 9,377.683 MT of H.R Strips and Plates and cleared the same to a domestic unit, M/s Anurag Ferro Products Ltd. without duty under notification No. 43/2001-NT. As notification dated 16 March 1995 has no connection with notification No. 43/2001-NT, availing of exemption for captive consumption is irregular and the assessee is required to pay duty of Rs. 2.53 crore including education cess leviable on the intermediate goods i.e. slabs consumed captively.
32
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(ii) As per notification No. 67/95-CE dated 16 March 1995, as amended from time to time, capital goods and specified inputs manufactured in a factory and used within the factory of production in or in relation to the manufacture of final products are exempted from paying central excise duty provided that manufactured final products are not exempted or chargeable to ‘nil’ rate of duty. M/s IISCO Steel Plant, Burnpur, in Bolpur commissionerate, engaged in the manufacture of iron and steel products under chapter 72 and 73 entered into an agreement with M/s Associated Cement Company (ACC) for delivery of molten slag from the Blast Furnace within the plant premises to the receiving troughs of the granulation Plant of M/s ACC through rail-run rakes of ‘ladles/slag pot’. The assessee manufactured such slag pot/ladles falling under chapter heading 7325 and cleared the same without payment of duty in terms of the said notification. However, the assessee did not utilise the said slag pot for the manufacture of their own final products but put it to use only for delivering non-excisable ‘molten slag’ to M/s ACC for the manufacture of ‘granulated slag’ belonging to the buyer. Thus, the slag pot/ladles manufactured in the factory were not used in further manufacture within the factory of production and so the assessee was not entitled to the benefit of exemption under the said notification. This resulted in non-levy of duty of Rs. 64.12 lakh including education cess during the period from July 2006 to August 2007. On this being pointed out (September 2007), while not admitting the audit observation, the department contended (February 2008) that the exemption under the notification was applicable only to inputs for its use in dutiable products and not to capital goods which was exempt unconditionally for its use in the manufacturing process. The contention of the department is not tenable since the capital goods, ‘slag pot/ladles’ were not utilised for production of any goods within the factory and thus, the primary condition of the above notification had not been fulfilled. (iii) In 11 other cases, the assessees were irregularly granted exemptions under various notifications for duty totalling Rs. 1.39 crore.
1.7.5 Export
1.7.5.1 Non levy of duty Rule 19 of Central Excise Rules, 2002 stipulates that excisable goods can be exported without payment of duty subject to the condition and procedure as laid down in the notification dated 26 June 2001 as amended, issued under this rule; One of the conditions stipulates that the goods should be exported within six months from the date on which these were cleared for export or such extended period as might be allowed in any particular case. M/s Shree Metaliks Ltd., in Bhubaneshwar II commissionerate, engaged in manufacture of MS billets, cleared their products in February 2007 for export through merchant exporter. Scrutiny revealed that billets valuing Rs. 1.15 crore were not exported till December 2007. As no extension of time was obtained from the competent authority, the assessee was liable to pay duty of Rs. 18.85 lakh involved therein since more than six months had elapsed. The
33
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
department was required to recover the duty of Rs. 18.85 lakh alongwith interest of Rs. 2.17 lakh upto September 2007. In another case, the assessee did not fulfil their export obligations and was liable to pay customs duty/additional duty of excise amounting to Rs. 4.22 lakh and interest of Rs. 0.96 lakh. The department accepted (December 2007) the observation and reported the recovery of Rs. 5.18 lakh. 1.7.5.2 Non payment of duty on export rejects Rule 19(1) of the Central Excise Rules, 2002, provides for exports of excisable goods without payment of duty and such exports shall be subject to such conditions, safe guards and procedures specified in the notifications issued thereunder and also governed by the supplementary instructions issued by the Board. (a) M/s Sundaram Fastners, in Chennai commissionerate, engaged in manufacture of articles of iron and steel under chapter 73, exported their finished goods to other countries. During the years 2005-06 and 2006-07, goods exported valued at Rs. 48.69 lakh were rejected by foreign buyer and the same were accounted for under ‘export rejects’ in the trial balance, but the goods were not brought back to factory on cost grounds. In respect of similar exports during the years 2001-02 to 2004-05, the department had issued three SCNs of Rs. 24.31 lakh. In the Board’s supplementary instruction regarding simplified procedure, it was specified that foreign remittance certificate was accepted as proof of export, besides producing copy of shipping bill and bill of loading attested by the customs authorities. Further, according to ExportImport (EXIM) Policy, 2001, foreign remittance had to be received within 360 days from the date of export of goods. Since the foreign remittance has not been received in all these cases, the assessee was required to pay Rs. 7.95 lakh for foreign rejects and Rs. 24.31 lakh covered by SCNs mentioned above. On this being pointed out (November 2007), the department stated (December 2007) that as against the projected duty of Rs. 7.95 lakh for the export rejects for the period 2005-06 and 2006-07, the assessee had paid Rs. 3.31 lakh on 14 November 2007 but regarding the balance amount Rs. 4.64 lakh and Rs. 24.31 lakh in respect of the period covered in SCNs, the details were not furnished. Thus, the duty of Rs. 32.26 lakh alongwith interest was due from the assessee. (b) Further, in 16 other cases of export by this assessee, sale proceeds of Rs. 1.68 crore for the period 2004-05 to 2006-07, were pending realisation for period of more than 360 days as prescribed in the EXIM Policy, 2001. The un-realised duty worked out to Rs. 27.49 lakh. 1.7.5.3 Non-receipt of proof of export Para 13.2 of Chapter 7 of Central Excise Manual stipulates that the manufacturer exporter is required to furnish a statement in Annexure-19 specified alongwith copies of ARE 1, bill of lading and shipping bills. In case of non export within six months from the date of clearance, the exporter shall deposit excise duty along with interest. M/s Siscol, an integrated steel plant, in Salem commissionerate, engaged in manufacture of MS Bars, flats and billets, etc. under chapter 72, exported their
34
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
products of Rs. 9.69 crore involving central excise duty of Rs. 1.58 crore during the year 2006-07. Test check of records revealed that even after the expiry of six months of export, the proof of export for these cases had not been received and the annexure 19 statement had also not been furnished. The assessee was, therefore, required to pay duty of Rs. 1.58 crore but the department had not recovered the duty so far. 1.7.5.4 Other cases In seven other cases where export lapses had been noticed, loss/ short payment of duty of Rs. 45.23 lakh was observed. In two cases, the department accepted the audit observation of Rs. 2.02 lakh and reported recovery.
1.7.6 Cases pending adjudication
Section 11 A of Central Excise Act, 1944, stipulates that where SCNs had been issued, central excise officer was required to adjudicate these within six months in normal cases and within one year, in cases of non levy/short levy due to fraud, collusions, etc. where it was possible to do so. Test check of relevant records revealed that in 40 commissionerates of central excise, 272 cases of adjudication of SCNs issued to manufacturers of iron and steel and articles of iron and steel involving revenue of Rs. 248.48 crore were pending for adjudication. Fifty per cent of the cases constituting 56 per cent of the total revenue were more than a year old. Approximately, 31 per cent of the cases, involving 21 per cent of the value of all outstanding cases were pending adjudication for more than three years.
1.7.7 Refunds
1.7.7.1 Inadmissible refund According to CEGAT judgment in the case of M/s Mohta Ispat Ltd. Vs CCE Indore {1996(63) ECR 201 (T)}, runners and risers arising in the course of manufacture of ingots are not manufactured products and these are neither ingots nor melting scrap, hence neither covered under CETA nor are these liable to duty. M/s Narbada Steel Ltd., in J&K commissionerate, engaged in the manufacture of MS ingots under chapter 72, cleared 500.637 MT runners and risers during the period September 2004 to March 2007 on payment of duty of Rs. 13.17 lakh and subsequently claimed for the refund of duty. The refund was allowed to the assessee in terms of notification dated 15 November 2002 (regarding the area based exemption).
As the effect of duty wrongly paid had already been passed on to the buyer, this refund was not permissible under the aforesaid notification. 1.7.7.2 Suo-moto availing of refund Section 11B of the Central Excise Act, 1944, provides for claiming refund of the excise duty by making an application for refund before the expiry of one year from the relevant date. However, there is no provision for suo-moto availing of refund of duty.
35
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
(i) Test check of records of M/s KEC International Ltd., in Nagpur commissionerate, revealed that the assessee raised the bill on Power Links Transmission Ltd., Lucknow vide bill dated 20 March 2006 and paid duty of Rs. 30.49 lakh through cenvat credit from their own account though the bill pertained to their sister unit at Jabalpur. Subsequently, the said duty was paid from Jabalapur unit on 12 June 2006 and assessee suo moto took the credit of Rs. 30.49 lakh without filing refund claim which was irregular. The period of filing refund claim was also over. On this being pointed out (February 2007), the department accepted (June 2007) the observation and agreed to issue a SCN. (ii) Three other assessees, M/s Ratnami Metal and Tubes Ltd., Suraj Stainless Ltd. and M/s Panchmahal Steel Ltd., in Ahmedabad III and Vadodara II commissionerates, engaged in manufacture of iron and steel products under chapters 72 & 73, suo moto took cenvat credit of Rs. 29.26 lakh of duty without following the provisions of section 11B which resulted in incorrect availing of refund of Rs. 29.26 lakh. On the observations being pointed out (August 2007), the amount of Rs. 7.81 lakh was recovered from M/s Suraj Stainless Ltd.
1.7.8 Physical verification of records
1.7.8.1 Escapement of duty on goods found short Rule 10 of Central Excise Rules, 2002 provides that every assessee shall maintain proper records on the basis of goods produced, quantity removed, assessable value and amount of duty actually paid. In terms of rule 4 of Rules above, no excisable goods on which duty is payable shall be removed from a factory or warehouse without payment of duty. However, rule 21 of the Rules above provides for remission of duty in case where it is shown to the satisfaction of the commissioner that goods have been lost or destroyed by natural cause or on unavoidable accident or become unfit for consumption/marketing before their removal. Duty not paid by suppression of facts attracts penalty under section 11AC of Central Excise Act, 1944. (i) M/s SAIL, Rourkela Steel Plant, in Bhubneshwar II commissionerate, engaged in manufacture of iron and steel products under chapters 72 and 73, maintained production records on estimated basis and at the end of the year carried out physical verification. Scrutiny of physical verification reports for the years 2004-05 to 2006-07 disclosed shortage of 5,751.242 MT of iron and steel products and such shortages were adjusted in production register by reducing the opening balance of such goods for the next year without assigning any reason. The duty of Rs. 2.28 crore payable on such inadmissible adjustment was not paid. The department has not demanded the duty. The assessee though applied for condonation of shortage but the same was not condoned till the date of audit. (ii) In four other similar cases of M/s R.S. Infra Project Pvt. Ltd., M/s Ghaziabad Precision Products Pvt. Ltd., M/s Haryana Pipes Pvt. Ltd. and M/s Rashtriya Ispat Nigam Ltd., in Ghaziabad and Visakhapatnam I commissionerates, engaged in manufacture of iron and steel under chapters 72
36
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
and 73, adjusted the shortages in their books of accounts without assigning any reasons and did not pay duty of Rs. 1.65 crore. This resulted in non payment of duty of Rs. 1.65 crore along with equal amount of the penalty of Rs. 1.65 crore. (iii) M/s IISCO Steel Plant (a unit of SAIL), in Bolpur commissionerate, engaged in manufacture of iron and steel, did not show the actual clearance of waste and scrap in excise records during the year 2004-05. By short accounting 4,329 MT of waste and scrap in excise records, the assessee evaded/avoided duty payment of Rs. 76.13 lakh. Further, while carrying forward the closing balance of the stock at the end of the year 2006-07 as opening balance for the year 2007-08, the assessee had shown substantial shortages and discrepancies in respect of quantity, value, inventory of goods, etc. In some cases daily stock report exhibited even minus balances of major items. The assessees could neither show any records of payment of central excise duty nor reconcile the discrepancies. Exhibiting such minus balances in the statutory records violated the provisions of Rule 4(1) of Central Excise Rules, 2002 and resulted in probable evasion of duty of Rs. 5.56 crore. On this being pointed out (October 2007), the department stated (February 2008) that SCN was being issued.
1.7.9 Interest and Penalty
1.7.9.1 Interest on delayed payment of duty Section 11AB of Central Excise Act, 1944 stipulates that where any duty of excise has been short levied or short paid, the person who is liable to pay the duty shall, in addition to the duty, be liable to pay interest from the first day of the month succeeding the month in which the duty ought to have been paid till the date of payment of such duty. M/s Mukund Ltd., in Belgaum commissionerate, engaged in the manufacture of alloy and non alloy steel falling under chapter 72, paid duty belatedly on the differential values based on actual cost and profit calculated for the years 2000-01, 2001-02, 2003-04 and 2004-05. However, the applicable interest amounting to Rs. 1.30 crore was not paid, which should be recovered. On this being pointed out (December 2005 and October 2007), the department admitted (February 2008) the audit observation and confirmed the demand for interest. 1.7.9.2 Non levy of interest on duty determined under section 11A (2) Section 11 AA of Central Excise Act, 1944, prescribes that where an assessee is charged with duty determined under sub section (2) of Section 11 A and fails to pay such duty within three months from the date of such determination, the assessee shall pay in addition to duty, interest at the appropriate rate on such duty from the date immediately after the expiry of the said period of three months till the date of payment of such duty. However, if the duty is determined before 26 May 1995 (viz. the date of enactment of Finance Act, 1995) and the assessee fails to pay such duty within three months from the said date of enactment, then such assessee shall be liable to pay interest under this section from the date immediately after three months from such date till
37
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
the date of payment of such duty. Where the duty determined to be payable is reduced by the Commissioner (Appeals), Appellate Tribunal or as the case may be, the Court, the date of such determination shall be the date on which an amount of duty is first determined to be payable. Bhubaneshwar II commissionerate confirmed one demand of Rs. 1.99 crore for the period from 1992-93 to 1996-97 on 19 December 2005 on account of duty on net excess quantity of excisable goods removed from the plant to depot and stockyard than the quantity shown in the RG- 1/RT-12/ER-IReturns by M/s SAIL, Rourkela Steel Plant, Rourkela. A duty of Rs. 14.56 crore was originally confirmed by the Commissioner, Bhubaneshwar II on 24 December 1998. The case was remanded back by CEGAT, New Delhi and accordingly the Commissioner confirmed the demand of Rs. 1.99 crore on 19 December 2005. The assessee paid the entire duty by 31 December 2005 but did not pay the interest of Rs. 1.42 crore for the period from 24 March 1999 to 31 December 2005 for such delayed payment till July 2007. The Department had also not taken any action. 1.7.9.3 Other cases Similarly, during the period 2005-06 to 2007-08 (upto September 2007) in 42 other cases, the assessees did not pay the interest of Rs. 82.17 lakh, in 11 cases, penalty of Rs. 3.07 crore was not levied and in seven cases duty of Rs. 26.36 lakh was not paid. On this being pointed out, the department accepted 18 cases involving a duty of Rs. 83.39 lakh and recovered Rs. 27.16 lakh in 15 cases. In four cases, SCNs for Rs. 1.38 crore were also issued to the assessees.
1.7.10 Service Tax
1.7.10.1 Non payment of service tax by business auxiliary service provider Business Auxiliary Service has been brought under service tax net with effect from 1 July 2003. Section 65(19) of the Finance Act, 1994 defines business auxiliary service to mean any service in relation to production or marketing or sale of goods or promotion or marketing of services or any customer care services in any manner to a client. Failure to deposit service tax attracts penalty equal to service tax not paid under section 78 of the above Act. Test check of records of five assessees in Rohtak commissionerate and two assessees in Faridabad commissionerate, engaged in manufacture of iron and steel products under chapter 72 and 73, revealed that they purchased raw material and passed it on to downstream manufacturers and earned a profit of Rs. 70.79 crore which was in the form of commission classifiable under the ‘Business Auxiliary Services’. They were, therefore, liable to pay service tax including education cess amounting to Rs. 8.69 crore approximately and penalty of an equal amount. Interest was also chargeable under section 11 AB of Central Excise Act, 1944.
38
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.7.10.2 Short payment of service tax by construction service provider Section 66 of the Finance Act, 1994, as amended, provides levy of service tax at the rate of 12 per cent in place of 10 per cent with effect from 18 April 2006. Two per cent education cess on the aggregate amount of service tax was also leviable under section 95 of the above Act. M/s Inter Arch Building Products Pvt. Ltd., in Noida commissionerate, engaged in manufacture of iron and steel products under chapter 72, earned Rs. 270.95 crore by providing construction service during the period April 2006 to March 2007 and paid service tax at the rate of 10.20 per cent (including education cess) instead of 12.24 per cent (including education cess) applicable. Thus, the assessee had paid service tax short by Rs. 5.53 crore including education cess. The assessee was, therefore, liable to pay Rs. 5.53 crore along with interest of Rs. 71.00 lakh. 1.7.10.3 Short payment of service tax by manpower recruitment agency Test check of the records of M/s Advance Steel Tubes Ltd., in Ghaziabad commissionerate engaged in manufacture of iron and steel products under chapter 72, revealed that the assessee company received service charges, by providing manpower recruitment or supply agency service, amounting to Rs. 7.65 crore between April 2002 to March 2007 and service tax of Rs. 68 lakh was payable on this amount. However, the company paid service tax of Rs. 11.17 lakh only, short by Rs. 56.82 lakh. The assessee was also liable to pay interest Rs. 16.66 lakh and penalty of Rs. 56.82 lakh. 1.7.10.4 Non payment of service tax on Erection & Commissioning and Installation service M/s Inter Arch Building Products Pvt. Ltd. and M/s Advance Steel Tubes Ltd., in Noida and Ghaziabad commissionerates respectively, engaged in manufacture of iron and steel and its products under chapter 72 & 73, rendered erection, commissioning and installation work of pole and structure and received Rs. 15.69 crore during the period April 2003 to March 2007 on which service tax of Rs. 1.55 crore including education cess, was payable. Both the assessees have not paid the service tax. Thus, the service tax of Rs. 1.55 crore including education cess, interest of Rs. 57 lakh and penalty equal to service tax Rs. 1.55 crore was payable by these assessees. On this being pointed out (March 2008), the department admitted (September 2008) the observation in respect of M/s Advance Steel Tubes Ltd., Ghaziabad and reported issue of a SCN for Rs. 70.99 lakh. 1.7.10.5 Non payment of service tax on services obtained from foreign service providers By Rule 2(d) (iv) of the Service Tax Rules, 1994, inserted with effect from 16 August 2002, a person receiving taxable services in India has been made liable for payment of service tax on services provided by a person who is a non resident or is from outside India and does not have any office in India. (i) Consulting Engineer Services M/s Southern Iron & Steel Company Ltd., in Salem commissionerate, paid Rs. 1.37 crore through foreign currency towards import of design and
39
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
engineering and drawings for the wire rod mill in August 2006 but the applicable service tax of Rs. 16.77 lakh under the ‘consulting engineer services’ was not paid. The assessee was liable to pay service tax of Rs. 16.77 lakh including education cess with interest of Rs. 2.36 lakh and penalty of Rs. 16.77 lakh including education cess, under section 78 of the Act above. On this being pointed out (December 2007), the department accepted (January 2008) the audit observation and stated that SCN was being issued. (ii) Underwriting service M/s Nava Bharat Ventures Ltd., in Hyderabad III commissionerate, engaged in manufacture of ferro alloys, incurred an expenditure of Rs. 3.04 crore in foreign currency towards ‘underwriting service’ payment to Lehman Brother (foreigner having no office in India) for FCCB issue but did not discharge service tax liability of Rs. 37.19 lakh including education cess, as service receiver. The assessee was also liable to pay interest and penalty. (iii) Business Auxiliary Service M/s Tata Steel Ltd., in Jamshedpur commissionerate, engaged in manufacture of pig iron, billets etc. under chapter 72, paid Rs. 33.10 crore and Rs. 95.32 crore during the years 2005-06 and 2006-07 respectively to foreigner firms (having no office in India) towards commission and commitment charges covered under business auxiliary service but did not pay service tax including education cess of Rs. 15.05 crore. The assessee was also liable to pay interest and penalty 1.7.10.6 Non payment of service tax on ‘Real Estate Agent’ Service Test check of records of M/s Shivam Iron and Steel Company Ltd., in Ranchi commissionerate, engaged in manufacture of iron and steel ingot, MS bars under chapter 72, revealed that the assessee received Rs. 4.05 crore during 2005-06 on account of profit from dealing of land. This income is covered under real estate agent service income. The assessee was liable to pay service tax of Rs. 41.31 lakh including education cess on this income which has not been paid. The assessee is, therefore, liable to pay interest of Rs. 10.74 lakh for two years and penalty of Rs. 41.31 lakh. The total amount payable was Rs. 93.36 lakh. 1.7.10.7 Non payment of service tax by contractors for temporary supply of manpower As per section 65(68) of the Finance Act, 1994, as amended with effect from 16 June 2005, the service regarding supply of manpower temporarily or otherwise to a client falls under the category of manpower recruitment or supply of agency services and service tax is payable on such services. During the period 1 July 2005 to 30 June 2007, M/s Mohan Steel Ltd., in Kanpur commissionerate, engaged in manufacture of iron and steel products under chapter 73, paid a sum of Rs. 2.70 crore for getting the work executed on occasional basis. The work relating to shifting, peeling, cutting CFD and processing was got executed through contractor. In terms of the provisions mentioned above, the service tax was payable by the contractors. Audit scrutiny revealed that none of the contractors had charged service tax in their bills nor they were registered with Central Excise department for service tax
40
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
purposes. Evidently the service tax was neither paid by the contractors nor by the assessee company. Thus, service tax of Rs. 33 lakh including education cess, was recoverable; besides interest of Rs. 3.32 lakh and penalty of Rs. 33 lakh was also payable. On this being pointed out (March 2008), the department accepted (April 2008) the audit observation and stated that it is determining the service tax liability of the contractors. 1.7.10.8 Non payment of service tax due to incorrect availing of exemption Section 65(19) of the Finance Act, 1994, defines business auxiliary service to mean, inter-alia, any service in relation to production or marketing or sale of goods or promotion or marketing of services or any customer care services in any manner to a client. As per notification No. 8/2005-ST dated 1 March 2005 exemption has been provided from service tax to a person producing goods from the inputs received from a manufacturer and sending the resultant product to the same manufacturer for further manufacture of final products, on which excise duty is payable. M/s SAIL Rourkela Steel Plant, in Bhubaneshwar II commissionerate, engaged in manufacture of iron and steel products under chapter 72, received Rs. 7.62 crore from M/s Mishra Dhatu Nigam Ltd. during 2004-05 to 2006-07 towards conversion charges for conversion of slabs into plates against supply of slabs through challans on job work basis. The assessee cleared such plates without payment of duty/service tax. Since M/s Mishra Dhatu Nigam Ltd., Hyderabad is a defence organisation, they have not made payment of any duty on the final products manufactured out of the said plates. Hence, the assessee was liable to pay service tax of Rs. 82.35 lakh including education cess, on the conversion charges so received by them. 1.7.10.9 Non payment of service tax on Business Support Service Business Support service was covered in service tax net from 18 April 2006 and infrastructural support services are covered under the category of business support services. Infrastructural support service includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security. M/s Tata Metaliks Ltd., in Haldia commissionerate, engaged in manufacture of pig iron under chapter 72, entered into an agreement with M/s Inox Air Products Ltd. for oxygen enrichment facility to be installed at the premises of the assessee by M/s Inox Air Products on ‘build own operate’ basis. The assessee supplied a plot inside its premises along with some services to M/s Inox Air Products for installation of the facility and generation of oxygen. Scrutiny of agreement and other records revealed that the assessee rendered infrastructural support service of Rs. 3.22 crore on which service tax of Rs. 39.65 lakh including education cess payable during the period from May 2006 to January 2008 was not paid.
41
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.7.10.10 Non levy of service tax on lease rent covered under banking and other financial services M/s Tata Steel Ltd., in Jamshedpur commissionerate, engaged in manufacture of iron and steel products under chapter 72, purchased railway wagon and gave it to railway for supply of goods (own and other) and received lease rent from Railways. The assessee received lease rent of Rs. 10.35 crore from railways during the year 2003-04 to 2006-07 but did not pay applicable service tax of Rs. 97.60 lakh including education cess. Additionally, penalty equal to service tax of Rs. 97.60 lakh and interest of Rs. 30.20 lakh was also payable for the default. The total amount payable was Rs. 2.25 crore. 1.7.10.11 Non imposition of penalty for late payment of service tax Section 76 of the Finance Act, 1994, as substituted with effect from 18 April 2006, provides for payment of interest and penalty for delayed/non-payment of service tax. M/s Essar Steel Ltd., in Surat I commissionerate, engaged in manufacture of iron and steel products under chapter 72, availed of intellectual property services, banking and financial services and erection & commissioning services from foreigners. The assessee paid service tax of Rs. 1.80 crore but delayed by periods ranging between 26 to 427 days. The assessee was liable to pay penalty of Rs. 25.79 lakh which was not paid. 1.7.10.12 Other cases In 99 other cases, the assessees did not pay/short paid the service tax of Rs. 15.48 crore including education cess. In 35 cases the assessees were also liable to pay interest of Rs. 93.72 lakh on short payment of service tax and in 27 cases penalty of Rs. 2.31 crore was chargeable. In 24 cases involving service tax of Rs. 1.05 crore, the department accepted the related audit observations and recovered Rs. 89.63 lakh from 19 service providers. In six cases SCNs for Rs. 1.59 crore were also issued. Recommendation No. 7 In our opinion, the root cause of cases of non payment of service tax by the manufacturers was the absence of cross linked information on taxable services provided by the manufacturers in the corresponding excise returns. The Government may consider integrating the excise and service tax returns to mitigate the risk of evasion of duties/tax more so as the environment of all tax administration is becoming e-enabled. The Ministry was in agreement (November 2008) with the above recommendation during the exit conference.
1.7.11 Internal controls
Rule 6 of the Central Excise Rules, 2002, stipulates that the assessee is required to follow self assessment procedures. The departmental officers are, inter-alia, responsible for ensuring the correctness of the assessments made by the assessees, issuing show cause notice (SCN) in the event of non payment, short payment or erroneous refunds, adjudicating SCN within the prescribed
42
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
time limit, and enforcing recovery in case of confirmed demands. As per para 2 (Part VI-Chapter 3) of CBEC Central Excise Manual of Supplementary Instructions read with Board’s circular dated 15 July 2005, the Range Superintendent/Assistant Commissioner/Deputy Commissioner/Additional Commissioner/Joint Commissioner are required to scrutinise the returns as per prescribed limit by calling for documents and records from the assessees. Some illustrative cases of ineffective internal controls, noticed during the course of the audit review are narrated below: 1.7.11.1 Loss of revenue due to non-raising of demand Rule 57 of the erstwhile Central Excise Rules, 1944 provides that no credit of input used in the manufacture of final products shall be allowed if the final product is exempt from the whole of the duty of excise or is chargeable to ‘nil’ rate of duty (amended rule 6 of Cenvat Credit Rules, 2004).
The SC in the case of Madhumilan Syntax Pvt. Ltd. {1988(35) ELT 349 (SC)} held that unless a SCN was issued under section 11A of the Central Excise Act, 1944, the department was not entitled to recover any dues. M/s Salem Steel Plant, in Salem commissionerate, engaged in manufacture of stainless steel sheets/coils of chapter 72 and coin blanks of chapter 73, cleared stainless steel coil blanks with payment of duty, during the period from 1 January 1994 to 12 October 1994 to Indian government mint as the Government of India granted adhoc exemption for the period from January 1994 to July 1995. The assessee preferred a claim for refund of duty of Rs. 3.27 crore paid by them for the period from 1 January 1994 to 12 October 1994. In the SCN issued on dated 3 April 1995, the department rejected a sum of Rs. 1.18 crore since the claim was time barred. Subsequently, a corrigendum to the order-in-original was issued in August 1995 after adjusting the credit of duty of Rs. 1.58 crore taken on the entire inputs consumed in the manufacture of coin blanks cleared (September 1995).
The assessee went in appeal. CESTAT allowed the assessees’ appeal (September 2004), quoting the ruling dated 28 September 2001 that confirmation of demand of duty could not traverse beyond the scope of SCN and allowed refund of Rs. 1.58 crore. The assessee also took (April 2005) re-credit of Rs. 1.58 crore in his Cenvat account. Non-raising of demand at the time of issue of SCN had resulted in loss of revenue of Rs. 1.58 crore. 1.7.11.2 Inaction of the department in cases relating to default in payment of duty Rule 8(3) of Central Excise Rules, 2002, as applicable from April 2003, stipulates that if an assessee fails to pay the amount of duty on excisable goods cleared in a month by the due date, he shall be liable to pay the outstanding amount alongwith interest. Rule 8(3A) as existed prior to 1 June 2006 further stipulated that where any assessee defaulted in payment of duty beyond thirty days from the due date, the facility of monthly payment of duty was to be forfeited for two months starting from the date of communication of orders passed by the AC/DC or till such date on which all dues including interest thereof were paid, whichever is later and during the period, the assessee could discharge his duty liability on consignment basis without utilising cenvat credit till date of payment of outstanding amount including interest. The
43
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
provision of two months was substituted vide notification dated 1 June 2006 with condition to pay on consignment basis till date of payment of outstanding amount with interest. In the event of failure in clearance of such goods, the same would be deemed to have been cleared without payment of duty and consequences and penalties as provided in these rules would follow. In the event of failure in clearance of such goods, the same would be deemed to have been cleared without payment of duty and consequences and penalties as provided in these rules will follow. Rule 25 of the Rules above, provides that if any manufacturer removes any excisable goods in contravention of any of the provisions of those Rules or the notifications issued under these Rules, all such goods are liable to confiscation and the manufacturer is liable to a penalty not exceeding the duty payable on the excisable goods or rupees ten thousand, whichever is greater. (i) M/s Shree Metaliks Ltd., Barbil, in Bhubaneshwar-II commissionerate, engaged in manufacture of Sponge iron, Pig iron etc. under Chapter 72, defaulted in payment of central excise duty of Rs. 3.70 crore relating to December 2005, March 2006 and April 2006 which was paid in installments between February 2006 to June 2006 after a delay of 31 days to 66 days. The orders forfeiting the facility to pay dues on installments and debarring the assessee to use cenvat credit were not issued by the department. As no such orders were issued, the assessee continued to pay duty on clearance made during the said period on monthly payment basis using cenvat credit instead of paying on consignment basis from PLA. (ii) Similarly, M/s Shree Metaliks Ltd., Angul, in Bhubaneshwar-I commissionerate, defaulted in payment of duty of Rs. 2.74 crore for the months of November, December 2006 and June to August 2007 by more than 30 days but continued to pay duty on monthly basis. The assessee also paid less interest of Rs. 0.28 lakh for delayed payment of duty. However, the department did not take any action for forfeiture of the facility and the assessee continued to utilise the cenvat credit. As such the assessee in both cases was liable to pay penalty of Rs. 6.44 crore on this account. On the observations being pointed out (December 2007), the department did not accept the first observation and stated (December 2007) that the rule has been amended allowing such utilisation from 1 June 2006. The reply is not relevant as the period of objection was before 1 June 2006. In the second case, the reply was awaited. 1.7.11.3 Misclassification of ‘Secondary and Higher Education, (SHE)’ cess Secondary and Higher Education Cess (SHE) was introduced with effect from 1 March 2007 at the rate of one per cent of basic excise duty. The proceeds of this fund were intended to finance higher education. The Principal Chief Controller of Accounts (PCCA), CBEC vide circular dated 13 April 2007 specified that the temporary accounting code for accountal of “SHE-Receipt awaiting transfer” was 00380086. The PCCA, CBEC subsequently vide circular dated 4 October 2007 intimated operation of new minor head and issued correction slip to account code.
44
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
M/s Vikram Ispat, in Raigad commissionerate, while making payment of duty through TR challans for the period from March 2007 to September 2007 had classified SHE Cess under accounting head 00380087 other receipts instead of under correct head 00380086. This resulted in mis-classification of SHE cess of Rs. 65.70 lakh. On this being pointed out (October 2007), the department accepted (November 2007) the observation and stated that the matter would be taken up with PAO for taking appropriate action. 1.7.11.4 Other cases Two other assessees, in Thane II and Raigad commissionerates, had also misclassified SHE cess amounting to Rs. 33.50 lakh during the period March 2007 to September 2007. 1.7.11.5 Non-submission of periodic returns Rule 12(2) (a) of Central Excise Rules, 2002, stipulates that every assessee shall submit a financial information statement for the preceding financial year to which the statement relates, in the form ER-4 by 30 November of the succeeding year. Further rule 9 A (1) of Cenvat Credit Rules, 2004, stipulates that a manufacturer of final products shall furnish annually by 30 April of each financial year, a declaration in the form ER-5 in respect of each of the excisable goods manufactured or to be manufactured by him, the principal inputs required for use in the manufacture of unit quantity of such final products. Similarly, rule 9A(3) of the Rules above, stipulates that a manufacturer of final products shall submit, within ten days from the close of each month, a monthly return in the form ER-6 in respect of information regarding the receipt and consumption of each principal input with reference to the quantity of final products manufactured by him. (i) Test check of records of M/s Singhal Enterprises Pvt. Ltd., in Raipur commissionerate, engaged in manufacture of iron and steel products, revealed that ER-4 returns were not submitted during 2005-06 and 2006-07, ER-5 returns were not submitted during the period 2005-06 to 2007-08 and ER-6 returns were not submitted for June 2007 to December 2007. On this being pointed out (January 2008), the department accepted (January 2008) the observations and stated that the assessee were being advised to file the returns immediately and action proposing penalisation will also be initiated for alleged contravention of the Rules. (ii) In nine other cases, non submission of returns (ER-4, ER-5 and ER-6) were noticed in Chennai I, II, Coimbatore, Salem, Madurai, Puducherry and Trichy commissionerates. On these being pointed out (September 2007 to February 2008), the department reported (February 2008) that in two cases returns have been filed by the assessees.
45
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.7.12 Other cases of interest
1.7.12.1 Mis-reporting of demand cases pending adjudication Amended section 11A(2) of Central Excise Act, 1944 stipulates that adjudication of cases remanded back by appellate authorities for denovo adjudication are also required to be entered into the records as new cases and finalised within prescribed time as in the case of SCNs. M/s Jotindra Steel and Tubes Ltd., in Faridabad commissionerate, engaged in manufacture of iron and steel products under chapter 72, had shown a liability of Rs. 48.02 lakh in their balance sheet for the year 2006-07 as central excise demand on account of case remanded back by CEGAT pending assessment afresh. The Central Excise Officer of Division I of Faridabad commissionerate had furnished nil information in January 2008 in respect of cases pending in unconfirmed demand register against the assessees. Thus, this case was not reflected in Monthly Technical Report also and resulted in misreporting of cases with substantial amount. 1.7.12.2 Incorrect grant of registration certificate Rule 9 of Central Excise Rules, 2002, read with notification dated 26 January 2001 (No. 35 and 36 /2001-CE (NT)) provides that if the person has more than one premises requiring registration, separate registration certificate (RC) shall be obtained for each of such premises. However, the commissioner may provide single RC if two or more premises of the same factory (where premises are interlinked) are segregated by public road, railway line or canal, the commissioner of central excise may, subject to proper accountal of the movement of goods from one premises to other and such other conditions namely interlinked process products manufactured/produced in one premises are substantially used in other premises of the manufacture of final products common electricity supplies common labour/work force, common administration/work management etc. Test check of records of M/s Joneja Bright Steel (P) Ltd., in Faridabad commissionerate, engaged in manufacture of bright bar and specialty wire under chapter 72, revealed that the assessee had two plants at separate plots No 239 and 244 in sector 24 of Faridabad with separate registrations. The assessee applied for single RC in August 2003 for both the plants which was granted by the department. The single registration was not applicable in this case as per provisions referred to above. The allowance of single registration by the commissioner was not correct and the clearance of manufactured goods at plot No. 239 to sister concern at plot No. 244 without payment of duty was not permissible and it was required to be cleared on payment of duty by adopting value equivalent to 110 per cent of cost of production from April 2004 to September 2007. On this being pointed out (October 2007), the department issued (July 2007) a SCN for Rs. 1.49 crore pertaining to the period June 2007 to March 2008.
46
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
1.8
Conclusions
Audit review has revealed a few system as well as compliance weaknesses relating to the assessment and collection of duty from Iron and Steel sector. These are summarised below: The payment of duty through cenvat rather than by cash is excessive indicating possible misuse of cenvat credit facility. This is an area of concern, which the Ministry needs to address after investigating the reasons for such excessive cenvat credit use by these sectors and include this criterion (cenvat to PLA ratio) as a risk factor for investigation/internal audit of the assessees. Furthermore, while many products are cleared from stockyards (and not factory gates where duty is paid) after undergoing value addition through customization, this value addition escapes duty as ‘cutting and bending’ has not been declared as ‘manufacture’. Accordingly, there is a need to amend the chapter notes appropriately. Absence of a restrictive clause on the quantity of inputs cleared ‘as such’ vis-à-vis procured and used in the manufacture of final products could lead to misuse of the cenvat scheme as some manufacturers could buy/procure huge quantities of inputs after availing quantity discounts, much in excess of their own requirement for manufacturing finished goods, and clear the inputs ‘as such’ at a premium. The Government should consider amending the Act and applicable rules to restrict the percentage clearance of inputs cleared as such which have been procured by the manufacturers. Alternatively, the duty reversal/payment should be at the enhanced sale value of the inputs cleared ‘as such’. In a few cases, the production declared on which duty was paid was substantially lower than the declared capacities. Government should institute an internal control which should trigger audit/investigation of units which declare their production and pay duty on the declared production below a pre-defined percentage of installed capacity. Additionally, in the absence of standard input-output norms for the domestic industry, the risk of suppression of production has not been adequately mitigated. The Government should prescribe some indicative input-output norms for domestic industries which can act as a benchmark against which the actual production could be measured, and cases of significant variations should act as a trigger for detailed investigation/internal audit for detecting suppression of production and revenue loss. There is a need for the Government to amend the Act suitably to make ‘Zinc dross’ excisable and the process of obtaining ‘Zinc dross’ as manufacture in view of the value and marketability of the commodity. The compliance issues identified in audit related to suppression of production by showing reduced sales, undervaluation on account of incorrect determination of cost of production, incorrect availing of and use of cenvat credit and non-payment of service tax. The Government, therefore, needs to strengthen the existing internal control mechanism to
47
Report No. PA 24 of 2009-10 – Union Government (Indirect Taxes)
ensure that the Government dues are realised efficiently and revenue evasion, frauds, etc. are dealt with effectively. While the total financial implication of this audit intervention is Rs. 1373.94 crore, the direct additional revenue which could come to the Government is Rs. 904.67 crore. Of these, observations with money value of Rs. 25.32 crore had been accepted (till November 2008) by the department and Rs. 6.12 crore recovered. Seven specific recommendations designed to address the system deficiencies and mitigate the risk of similar irregularities in future, have been included in the report. Five of these recommendations have been agreed to, by the Ministry.
48