The Budget 2015 has, quite notoriously, placed an amendment to Rule 6 of the Cenvat Credit Rules, 2004 by including non-excisable goods into its fold.

Vide Notification No. 6/2015, dated 1st March, 2015, two explanations have been added to Rule 6(1), after the proviso to these rules:

“Explanation 1. – For the purposes of this rule, exempted goods or final products as defined in clauses (d) and (h) of rule 2 shall include non-excisable goods cleared for a consideration from the factory.

Explanation 2. – Value of non-excisable goods for the purposes of this rule, shall be the invoice value and where such invoice value is not available, such value shall be determined by using reasonable means consistent with the principles of valuation contained in the Excise Act and the rules made thereunder.

The Central Government has decided to extend the definition of exempted products, or final products for the purpose of Rule 6 of CCR, 2004, to encompass “non-excisable goods cleared for a consideration from the factory”. In other words, for the purpose of Rule 6 of the CCR, this amendment has equated nonexcisable goods to exempted goods. Under Rule 6 of these Rules, the manufacturer of a good or a service shall pay an amount equal to six percent of the value of exempted goods and exempted services. Therefore, it can be inferred that if a good is an exempted or a non-excisable good is cleared outside a factory for a consideration, the manufacturer would be required to pay excise duty on the same. Prior to this amendment, many questions arose, as Rule 6 only covered exempted goods and not non-excisable goods. However, this amendment clears uncertainty in this regard.

The amendment, however, gives rise to its own set of ambiguities and consequent litigation, since the Central Government fails to provide any guidelines as to which goods classify as non-excisable and which do not. The only definition available is that of an excisable goods, which means any good that has been specified in the Central Excise Tariff Act, 1985, as being subject to a duty of excise. Thus, a taxpayer has no option left, but to assume that any goods other than excisable goods and exempted goods are nonexcisable goods. Other than this, the much disputed term ‘consideration’ has not been defined anywhere for the purpose of service tax. As a last resort, one may refer to the definition provided under section 2(d) of the Indian Contract Act, 1872, which states that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. The Customs Excise & Service Appellate Tribunal, in a decision given by it in 2002, has defined “consideration for sale” as what is transferred from the buyer to the seller and no the other way round. Even though it is clear that if there is no consideration, there is no change in the status of these non-excisable goods, the amendment fails to provide a clarification as whether a consideration is to be solely monetary or not.

A plain reading of the Explanation added would imply that Rule 6 shall not be applicable to nonmanufactured goods. Hence, it can be assumed that in situations where the goods cleared have not been manufactured by the manufacturer, he is not required to comply with Rule 6 of the CCR. No explanation has been provided in this regard. In addition to this, the budget also, fails to provide any clarification as to whether any by-products or waste products that are generated as a result of the technical process of a factory, shall be treated as non-excisable goods or not for the purpose of Rule 6 of the CCR.

Explanation 2, which has been inserted to Rule 6 by way of this amendment, states that the value of these non-excisable goods shall be the invoice value. With such a provision, there is always a risk of the invoice value as being an influenced value or being set too low. In the same explanation, it has been stated that in the absence of the invoice value, such value shall be determined by using reasonable means in accordance with the principles of valuation contained in the Excise Act and the rules framed. This creates further ambiguity as to the scope of the term ‘reasonable means’ and whether such an option can be availed even when the invoice is present. In addition to this, the amendment does not provide any clarification as to whether this provision shall cover the goods subject to State Excise law or not and whether in such cases, the valuation process under the Central Excise law or the State Excise law would be preferred.

Another point of controversy is that since this amendment has been inserted by way of Explanations, it could possibly be applicable in a retrospective manner as well. Hence, another vital question that arises in this regard is that will Rule 6 be applicable to non-excisable goods that have been manufactured in the past or not?