Capital Goods damaged in floods in 2005 and cleared as waste and scrap in 2006 – whether cenvat credit required to be reversed on the capital goods so cleared?

PJ/Case Laws/2012-13/1027

Case: TOTAL OIL INDIA PVT. LTD. V/S COMMISSIONER OF CENTRAL EXCISE, BELAPUR

Citation: 2012 (276) E.L.T. 520 (TRI. – MUMBAI)

Issue:- Capital Goods damaged in floods in 2005 and cleared as waste and scrap in 2006 – whether cenvat credit required to be reversed on the capital goods so cleared?

Brief Facts:- Appellant had availed Cenvat credit on various inputs and capital goods received in their factory. The said goods were destroyed in the floods on 26.07.2005. Appellant received a sum of Rs. 1, 39, 69, 851/- towards insurance claim on the subject goods excluding VAT and Cenvat and the said claim included an amount of Rs. 27, 77, 437/- on account of loss of capital goods on which Cenvat was availed. Deparment issued show cause notice to the appellant demanding Cenvat credit of Rs 491810 on the depreciated value of the capital goods in terms of Notification No. 39/2007-CE dated 13.11.2007.

The Assistant Commissioner disallowed the cenvat credit and also imposed penalties and interest.

Thereafter, in appeal, the Commissioner (Appeal) upheld the Order-in-Original but the Cenvat credit was revised and was reduced to Rs. 4, 53, 278/-.

Hence, appellant is before the Tribunal.

Appellant’s Contention:- Appellant contended that capital goods were destroyed in flood had been intimated to the department at the relevant time. The capital goods were in use by the appellant and one of the capital goods were purchased on 2-3-2001 and was in use for the period for more than 4 years and another capital goods was in use for 1 year. Therefore they have not violated any provisions of the Cenvat Credit Rules 2004. There was no proposal in the Cenvat Credit Rules, 2004 regarding reversal on credit on capital goods lost on account of natural calamities. The Capital goods were demamged and became waste and scrap and where cleared as waste and scrap by discharging excise duty at the appropriate rate.

Appellant relied upon the judgments given in Motor Industries Co. Ltd v/s CCE, Bangalore [2004-TIOL-122-CESTAT-BANG]; Tata Advance Materials v/s CCE, Bangalore-I [2008-TIOL-2501-CESTAT-BANG] in support of their claim that there is no need to reverse cenvat credit. Relaice was placed on CCE, Mumbai IV v/s Ratnatraya Heat Exchangers Ltd [2011-TIOL-1538-CESTAT-MUM] wherein it was held that insurance claim received from the insurance company cannot be treated as a consideration for the goods destroyed and if the goods are sold as waste and scarp, only the value received for such sale should be considered for payment of duty.

Reasoning of Judgment:- The Tribunal held that there is no dispute that the capital goods were put to use and when the goods were in use, the floods happened and the capital goods were damaged and they could not be put to use. In as much as capital goods became waste and scrap, the appellant cleared the same on payment of duty applicable to the waste and scrap on the transaction value. Rule 3(5A) of the Cenvat Credit Rules, 2004 provides that “if the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on the transaction value”. This was done by the appellant in the present case.

The Tribunal noted that the department seeks to arrive at the cenvat credit required to be reversed by following two methods. The Assistant Commissioner has arrived at the value by providing depreciation for the period of use and has confirmed the demand of Rs. 4, 91, 810/-, the appellate authority has treated the insurance amount reeived as consideration for capital goods and have arrived at the demand by applying rate of duty on said amount. The Tribunal held that in case of CCE, Mumbai IV v/s Ratnatraya Heat Exchangers Ltd it was held that amount of compensation received from the insurance company was in relation to the damaged suffered by the appellant and it cannot be treated as consideration for the sale of goods which was sold as scrap. Therefore, there was no basis to treat the compensation received from the insurance company as the value of the capital goods cleared as waste and scrap and the order of the Commissioner (Appeal) was held to unsustainable.

With regard to quantification of cenvat credit by Assistant Commissioner on depreciation method, the Tribunal noted that the provision for determining value of capital goods when cleared after usage was introduced in the Cenvat Credit Rules, 2004 by Notfication No. 39/2007-CE(NT) dated 13.11.2007.
On facts of the case, it was noted that the goods were destroyed in 2008 and capital goods were cleared in 2006 as waste and scarp. At that time there was no provision based on the depreciatio method. Therefore, the order of the Assistant Commisisoner is also untenable in law.

It wa snoted that in Motor Industries Co Ltd it was held by the Tribunal that where the capital goods became waste and scrap by use over time and in case where such goods became wate and scrap dur to file accident, there was no provisions for making proportionate reversal of Modvat credit. Also, in Tata Advance Materials case, the Tribunal has held that there was no provision for demanding cenvat credit taken on the capital goods when they were put to use and subsequently destroyed due to fire accident. Thus, there was no provision in the law at the relevant tinme for reversal of cenvat Credit availd on capital goods if the same were destroyed due to natural calamities. Impugned orders set aside.

Decision:- Appeal allowed with consequential relief.

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PJ/Case Laws/2012-13/1027

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