CIR NO.754/70/2003-CX, DT. 09/10/2003

Availment to credit on inputs used exclusively for the manufacture of exempted finished goods

I am directed to say that Board’s attention has been drawn to the availment of credit on inputs falling under chapter-28 and 29 used exclusively for the manufacture of exempted goods by certain assesses manufacturing finished goods falling under chapter-30 of Schedule to Central Excise Tariff Act, 1985. It has been reported that these assesses are subsequently reversing an amount @ 8% of the price of the exempted goods under clause (b) of sub-rule (3) of rule 6 of CENVAT Credit Rules, 2002.

2. The matter has examined in Board in the context of admissibility of such credit or otherwise. In this connection, your attention is invited to sub-rule (1) of rule 6 of CENVAT Credit Rules, 2002 which prescribes that no CENVAT credit shall be allowed on such quantity of inputs which is used in the manufacture of exempted goods . The said sub-rule makes an exception of the circumstances in which such credit on inputs used for the exempted goods can be availed. Sub-rule (2) of the said rule gives an option to the manufacturer to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in for the manufacture of exempted and dutiable goods and in case, he does not opt for the separate records, clause (b) of sub-rule (3) requires a manufacturer to pay an amount equal to 8% of the total price of the exempted goods excluding Sales tax and other taxes as paid. Thus, it is clear that the option to maintain the separate accounts or payment of 8% of the price of the exempted goods can be exercised only in respect of common inputs used for the manufacture of dutiable and exempted goods. Where any inputs are clearly identifiable as used only in or in relation to the manufacture of final products which are exempt from payment of duty, CENVAT credit is not admissible on such inputs which are used exclusively for the manufacture of exempted final products. The circumstances specified in sub-rule (2), sub-rule (3) do not cover, or envisage availment of credit on inputs used exclusively for the manufacture of exempted final products.

3. It is therefore clarified that no credit can be taken on inputs which are used exclusively in or in relation to the manufacture of exempted final products. It may also be seen that this position was the same in erstwhile Central Excise Rules, 1944 and there has been no change in this principle. The procedural facility is prescribed to take care of the practical difficulties which may be faced by the manufacturers using the same inputs in both dutiable and exempted final products. Necessary action to recover the credit wrongly availed of, if any, may be taken at your end.

Yours faithfully,

(Vijay Mohan Jain )
Under Secretary to the Govt. of India

F.No. 267 /48/2003-CX-8

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