Cenvat credit deduction restricted, says tribunal

Manufacturing companies cannot claim deduction on Cenvat credit till it is utilised to pay excise duty. A Special Bench of the Income Tax Appellate Tribunal (Chandigarh) recently gave this ruling on a case involving healthcare products manufacturer Glaxo Smithkline Consumer Healthcare (GSK).

Till the set off is availed of at the next point the duty available for set off by the assessee is nothing but part of the cost of the materials purchased, the tribunal ruled.

The question before the tribunal was whether Cenvat credit available to the assessee on the last day of the previous year amounts to payment of central excise duty under Section 43B of the Income Tax Act, 1969.

Section 43B states that a deduction can be allowed for any sum payable by the assessee on an actual payment basis. The tribunal gave the ruling in favour of the revenue department, which had disallowed deductions on Cenvat credit to GSK.

"The judgment has clarified that unexpired Cenvat credit as on the last date of the previous year is in the nature of future entitlement, which is not equivalent to advance payment of duty. The judgment will help in reducing litigation on this count as well," said Rajiv Anand, executive director, PricewaterhouseCoopers.

The ruling is likely to impact large manufacturers who have been taking such deductions. However, GSK scored over the revenue department on another point. The department had disallowed deduction for excise duty on payment basis before incurring the liability to pay such amounts.

The tribunal ruling said under Section 43B, deduction for tax and duty is allowable on payment basis. The ruling is a reaffirmation of the Supreme Court ruling in Berger Paints case which was similar to this.

"In fact, many assessees have been using the advance payment of excise duty as a tax planning tool by making advance excise duty payments at year end to mitigate any advance tax shortfalls. This judgment appears to be validating such treatment," Anand said.