Cenvat to be interpreted liberally

EXPERT EYE

The good news for those who are looking forward to a smooth functioning of Cenvat and VAT is that the Gujarat High Court, in its latest judgment in the case of Vimal Enterprise versus Union of India 2006(195) ELT 267 (Guj), has given a favourable judgment regarding the need to give liberal interpretation to the provisions of Modvat, now Cenvat.

The high court held that the input tax credit could not be denied on the technical plea that registration was obtained after a date before which invoice for inputs was issued.

The court observed the transaction was genuine and the identity of the supplier of the inputs was also established to show that there was transaction of duty paid inputs which were used in the final manufacture of products on which excise duty was also paid.

The court's ruling was that the interpretation should be such that the object of a beneficial provision should be achieved and that the benefit could not be denied on technical breaches.

This reiterates another recent judgment in the case of Tripathy Adhesives versus CCE, by the tribunal. Here also, the tribunal accepted the invoice, which had some technical defects, since it was a genuine duty paying document.

In another judgment in the case of Collector versus Indian Human Pipe co, reported in 1999(109) ELT 305(T), the tribunal held that credit cannot be denied only on the ground that the assessee had not applied during the relevant time.

In some other judgments, the courts have clearly enunciated the principle that Modvat provisions regarding procedures should be liberally interpreted since they are by nature machinery provisions and not charging provisions.

While exemptions per se are to be strictly interpreted (which is a well-settled principle), the Modvat rules, being procedural, are also to be liberally interpreted as enunciated in the case of FCI versus State of Bihar, reported in AIR 1988SC 361.

That is not the whole story. Modvat provisions are in the nature of exemptions. The basic charge of excise duty is on the manufacture of goods. When the credit of duty on inputs is allowed to the manufacturer, it acts like an exemption, since the extent of Modvat credit is debited to the revenue realised earlier from the same manufacturer.

Not only that, Modvat provisions are exemptions of promotional nature. Modvat credit has been introduced on the basis of an economic principle that the cascading effect (tax on tax) should be removed so that inputs are free from the burden of tax and only the value added is taxed.

This principle, when implemented, leads to promotion of export, removes distortions in fiscal administration and promotes economic development. It is, therefore, in the nature of a promotional provision in the shape of an exemption for advancing the progress of industrialisation.

Thus, these provisions should be interpreted liberally since promotional exemptions are required to be interpreted liberally as has been well-settled by the Supreme Court in several judgments, particularly in Broach District Co-operative versus CIT AIR 1989 SC 1493, CIT Versus Strawboard Manufacturing Co 1989 Supp (2) SCC 523 and Tata Oil Mills Versus CCE 1983 (43) ELT 183 SC.

The officers of the central excise have been denying Modvat credit to the manufacturers in the vast majority of cases on technical breaches.

Now that the government is avowedly focused on liberalisation in respect of fiscal reforms, the best way to achieve procedural reforms will be to announce the intention of the government in the shape of a binding circular under Section 37B of the Excise Act to make it clear that denying Modvat credit on procedural and technical grounds should not be resorted to if duty evasion has not taken place.