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A recent judgment of the Supreme Court in the case of a sugar plant exported to Vietnam, has disallowed the input credit of central excise duty paid on the parts constituting the plant. If this becomes the prevailing law, it will be a deterrent to exports. This issue, therefore, assumes a topical interest which deserves a careful scrutiny as to what really is the purport of the judgment and if the legal position can be redeemed so that the prospect of export is not hurt.
The present judgment, KCP Ltd vs CCE, Chennai-2013 (295) ELT353(SC), is about a case where the assessee was a manufacturer of machinery for sugar plant and parts thereof. They set up a sugar plant in Vietnam for which they manufactured certain machine in their own factory and bought some other items of machinery, cables, etc, that were necessary to complete the plant. Together they constituted a plant in completely knocked down (CKD) condition. They put all the items in a container and exported them to Vietnam where they assembled the plant at site. For the bought out items they availed of the Cenvat credit under Rule 57Q of the central excise rules declaring them as capital goods. The excise department and the tribunal disallowed the Cenvat credit on the grounds, inter alia, that none of these bought out items was used by the appellant in its factory premises in relation to the manufacture of the final product and that he was only a trader, not a manufacturer.
The appellant, that is, the exporter-manufacturer argued that all the parts, both manufactured by him and bought from the market, were together put in a container and exported to make (that is assemble at site) the sugar plant in Vietnam. This proves that they were exported from India in a CKD condition.
The Supreme Court pointed out that there are two conditions under Rule 57Q for getting the Cenvat credit namely the following:
(i) On raw materials i.e. on the inputs, the manufacturer must have paid duty and such raw material must have been used in the process of manufacturing the final product in his factory or premises.
(ii) Excise duty must have been levied on the final product. The Supreme Court held that these conditions have not been satisfied and so it disallowed the Cenvat credit.
The correct position is that the export of the plant, in semi-assembled or CKD condition, is done by Indian manufacturers when they manufacture most of the components and buy some parts from the market, which are known as 'bought out items'. It is not necessary to unpack them in India because they are standard products, which were unpacked in Vietnam. The Supreme Court has observed that "the appellant had purchased some machinery from others and such machinery had not even been unpacked by it and in the exact condition it had been transported along with the machinery manufactured by it to Vietnam. Thus, the appellant did not use the purchased machinery in its premises, or in the factory, and therefore necessary condition incorporated in the Rules (57Q) had not been complied with".
This view unfortunately cannot be considered as correct. The fact is that these rules are meant for factories installed in India. One has to take into account the fact that the factory itself was installed in Vietnam after the whole plant was exported in CKD condition to that country.
The fact is that Rule 57Q has been applied, which is totally irrelevant because it is a case of export and not a case of manufacture in the country.
The department knows it very well that in the case of export there is zero-rating, which means that the duty on input and the duty on the output will have to be refunded, or in any case not charged. Ignoring this fundamental point, the manufacturer has been called a trader. Even a trader is entitled to export refund, which means refund of duty on all goods exported.
Thus, it is a case where the exporter has been denied his due Cenvat Credit by applying wrong principles and wrong Rule. Maybe the exporter has not pointed it out, but Revenue should know it.
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