Credit availed and utilised before final product became exempt cannot be recovered.

PJ/Case Law /2013-14/2325

Case:- CHOKSI ENTERPRISES VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI-II

Citation:-2011 (274) E.L.T. 401 (Tri. - Mumbai)

Brief facts:-The facts of the case are that the appellant M/s. Choksi Enterprises are manufacturers of electrical switches, sockets and co-boxes falling under Chapter sub-headings 8536.90 and 8538.00 of the Central Excise Tariff Act, 1985. A show-cause notice dated 30-4-1990 was issued to the appellant that they availed duty exemption on the goods falling under Chapter sub-heading 8538.00 under Notification No. 144/89-C.E., dated 19-5-1989 and also took Cenvat credit of duty paid on excisable goods used as inputs in the manufacture of the goods under Rule 57A of the Central Excise Rules, 1944. Inasmuch as the goods were cleared by availing exemption under Notification No. 144/89, the inputs which are used in the manufacture of the said goods on which credit has been availed and the inputs which remained in process of manufacture on which credit have been taken are not eligible for the CENVAT credit and, therefore, the goods are required to be cleared on payment of duty. Show-cause notice also proposed imposition of penalties under Rule 173Q of the said Rules. The case was adjudicated vide order-in-original dated 12-6-2007, where-under the Assistant Commissioner confirmed the demand of Rs. 1,20,362.56 being the duty involved on the inputs used in the finished goods in stock and on the inputs in process on which Modvat credit was availed when they opted for exemption under Notification No. 144/89 dated 19-5-1989, under Section 11A of the Central Excise Act, 1944. A penalty of Rs. 10,000/- was also imposed under Rule 173Q of the Central Excise Rules, 1944. The appellant preferred an appeal before the Commissioner (Appeals) who vide impugned order dated 25-9-2009 upheld the order-in-original and rejected the appeal filed by the appellant. Hence the present appeal before this Tribunal.

Appellant’s contentions:-The learned Counsel for the appellant submits that the amount of Cenvat Credit of Rs. 1,20,362.56 which was proposed to be recovered from them has already been utilized by them before availing the exemption under Notification No. 144/89 dated 19-5-1989. When the credit was taken and utilized, the goods were liable to duty. Once the credit has been validly taken and utilized, the question of its recovery does not arise when at a later point in time the goods became exempted. He placed reliance on the judgment of Hon’ble Apex Court in the case of Collector v. Dai Ichi Karkaria Ltd. reported in 1999 (112)E.L.T.353 (S.C.). In the said case the Hon’ble Apex Court has held as follows :-
“17. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilized, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.”
The learned Advocate submits that the said judgment has been followed by the Hon’ble High Court of Himachal Pradesh in CCE v. United Vanaspati Ltd. -2010 (251)E.L.T.373 (H.P.)and by the High Court of Punjab and Haryana in the case of CCE, Chandigarh v. C.N.C. Commercial Ltd. - 2008 (224)E.L.T.239 (P&H).The learned Counsel further submits that in a recent case pertaining to Commissioner of Central Excise, Bangalore-II v. TAFE Ltd. reported in 2011 (268)E.L.T.49 (Kar.)the Hon’ble High Court of Karnataka has held as follows :-
“9. Therefore it is clear from the aforesaid judgment of the Apex Court that once the input credit is legally taken and utilized on the dutiable final product, it need not be reversed on the final product being exempted subsequently. Only if any products are purchased subsequent to the said exemption and if any tax is paid on such inputs, as the final product is exempted from payment of tax, the assessee would not be entitled to avail the Cenvat credit on such inputs. But the Cenvat credit availed on such inputs till the date of exemption, they vest in the assessee and the assessee cannot be divested of that credit as the law does not provide for the same. Therefore the authorities taking advantage of the notification exempting the final product cannot claim reversal of CENVAT credit either in respect of final product which have come into existence on the date of the notification or on the inputs stored in the godown or the work in progress and finished products.”

Respondent’s contentions:- The learned DR on the other hand submits that when the products are exempt from duty, as per Rule 57C of the Central Excise Rules, 1944, as it existed at relevant time, the manufacturer cannot take any credit of duty paid on inputs. In the instant case when the product became exempted under Notification No. 144/89, dated 19-5-1989, the appellant could not have taken any credit on the duty paid of the inputs utilized in the manufacture of the said products and he relies on the judgment in the case of Amrit Paper v. Commissioner of Central Excise, Ludhiana - 2006 (200)E.L.T.365 (S.C.) = 2008 (12)S.T.R.536 (S.C.). He also relies on the order of this Tribunal in the case of Khanbhai Esoofbhai V. Collector of Central Excise, Calcutta - 1999 (107)E.L.T.557 (Tri.)wherein the Larger Bench of this Tribunal held that when the product is exempted from excise duty from a particular date, the Modvat credit taken in respect of inputs which are in stock has to be reversed. Even the inputs that have been used in the manufacture of final products which have become exempt from excise duty, the Modvat credit on such inputs also becomes inadmissible and will have to be reversed.

Reasoning of judgment:- Tribunal carefully considered the rival submissions. In the Dai Ichi Karkaria Ltd. case (supra), the Hon’ble Apex Court had clearly held that once the credit of duty has been taken rightly and has been utilized also rightly, in terms of the provisions of law, then such credit becomes indefeasible and such credit cannot be recovered at a subsequent point of time on the ground that the product has become exempted at a later point of time. The same principle has been followed by the Hon’ble High Courts of Himachal Pradesh, Punjab & Haryana and also the Hon’ble High Court of Karnataka in the cases cited (supra). Therefore, what is relevant is at the time of taking credit and utilization of the credit, whether the assessee was entitled for the same. Once the assessee is entitled, then the question of reversal of the same at a subsequent point of time does not arise at all. In the case of Amrit Paper (supra) relied upon by the department, the facts of the case were different. In that case the Hon’ble Apex Court held that the Rule 57C provides in mandatory and categorical terms that no credit of the specified duty paid on the inputs used in the manufacture of a final product shall be allowed if the final product is exempt from the whole of the duty of excise thereon or is chargeable to nil rate of duty. Moreover on the facts of that case, it was found that the manufacturer had availed of the credit at the time of the clearance of the goods and had suo motu reversed it to avail the exemption later on almost after 11 months when he claimed refund of Modvat credit and, therefore, it was held that he was not entitled to exemption. Thus in the case of Amrit Paper (supra), it was the case of availing exemption and the exemption was based on the condition that the credit should not be availed on the inputs utilized in the manufacture of the product. In the instant case that is not the position and, therefore, the ratio of the Hon’ble Apex Court’s judgment in the aforesaid case will not apply. The facts of the present case are very similar to the facts pertaining in Dai Ichi Karkaria Ltd. case (supra) decided by the Hon’ble Supreme Court and TAFE Ltd. case (supra) decided by the Hon’ble High Court of Karnataka. When the credit was taken and utilized the goods were chargeable to excise duty and, therefore, the credit was rightly taken and rightly utilized; only at a later point of time the goods became exempted. Therefore, seeking reversal credit, when subsequently the final product becomes exempt from duty is not sustainable in law. What, at best, can be recovered is the credit which is still lying in the account which has not been utilized and such credit can be lapsed when the product becomes fully exempt from duty.
In view of the above position, the impugned orders are set aside and the appeal is allowed. However, if any duty credit was lying unutilized in the books of the account of the assessee, when final product became exempt, then such credit shall lapse. The appeal is disposed of in the above terms.

Decision:- Appeal allowed.

Comment:- The essence of this case is that the cenvat credit rightly availed and utilised before the final product became exempted cannot be recovered in light of the decision given in the case of Dai Ichi Karkaria Ltd. However, the credit balance available at the time the product became exempted would lapse.

Prepared by: Monika Tak

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PJ/Case Law /2013-14/2325

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