Recovery of Cenvat credit on process goods destroyed in fire is not sustainable when insurance claim received without excise duty

PJ/Case Laws/ 2012-13/ 1196

Case:-ARVIND INTERNATIONAL LTD. VERSUS COMMISSIONER OF C.EX., JAIPUR
Citation: -2012(282) E.L.T. 232 (Tri-Del.)
Issue: - Recovery of Cenvat credit on process goods destroyed in fire is not sustainable when insurance claim received without excise duty.
Brief fact: - The Appellant are manufacturing PU Rebounded Foam Sheets & mattresses chargeable to Central Excise duty. On 12-5-2008, there was a fire accident in their factory in which among other goods certain quantity of inputs in process involving duty of Rs. 15,66,597/- were destroyed. The Department sought recovery of Cenvat credit on the inputs in process destroyed in fire and after issue of show cause notice, the jurisdictional Additional Commissioner vide order-in-original dated 23-3-2011 confirmed of the Cenvat credit demand of Rs. 15,66,597/- along with interest and imposed penalty of equal amount on the appellant. On appeal to Commissioner (Appeals), the order of the Additional Commissioner was upheld in toto vide order-in-appeal, dated 26-9-2011. Against the order of the Commissioner (Appeals), this appeal along with stay application has been filed.
Appellant Contention: - The Id. Counsel for the Appellant pleaded that the Cenvat credit, in question, which is sought to be recovered has been availed in respect of inputs which were in process when the fire accident took place and the inputs were totally destroyed and the insurance claim received by them in respect of inputs in process does not include the element of Central Excise duty, this is clear from the certificate dated 3-3-2011 issued by the National Insurance Company Ltd. which settled their insurance claim. In terms of the judgment of the Tribunal in the case of CCE, v. Indchem Electronics - 2003 (151) E.L.T. 393 (Tri.-Chennai) no Cenvat credit is required to be reversed in respect of the inputs in process destroyed in fire accident; that, SLP No. 2877/2003 filed by the Department against this judgment of the Tribunal has been dismissed by the Apex Court vide judgment reported in [2003 (157) E.L.T. A206 (S.C.)] and that in view of this, the impugned order is not correct.
Respondent Contention:- The Department defended the impugned order relying upon the Boards Circular No. 907/27/2009-CX., dated 7-9-2009, relevant portion of which is reproduced below :-
"2. The matter has been examined. Rule 3(5B) of the CENVAT Credit Rules, 2004, provides that if the value of any input on which Cenvat credit has been taken is written off fully in the books of accounts, then the manufacturer is required to reverse the credit taken on the said input. As far as finished goods are concerned, it is stated that excise duty is chargeable on the activity of manufacture of product. Even though liability for payment of tax has been postponed to the time of removal of goods for the factory, but still the legal liability to pay the excise duty has been fastened on the goods, when it has been manufactured or produced. Therefore, normally all goods manufactured suffer excise duty at the time of removal, but if the manufactured goods are destroyed due to natural causes etc., Rule 21 of Central Excise Rules, 2002, provides for remission of duty. Further, Rule 3(5C) of CENVAT Credit Rules, 2004, also requires reversal of credit on the inputs when the duty is ordered to be remitted under the said Rule 21. Therefore, if the goods have been manufactured, in that case, a manufacturer is liable to pay excise duty unless duty is remitted under Rule 21. Therefore, if the value of finished goods is written off, the manufacturer would be liable to pay excise duty or he would be reverse the credit on the inputs used, if duty has been remitted on finished goods.
“3 As regards writing off work-in-progress (WIP), it is stated that if the WIP has reached the stage, when it can be considered as manufactured goods, in that case, the same treatment as applicable to finished goods, discussed in para 2 above would apply. However, if the activity carried out on the WIP goods cannot be considered as amounting to manufacture, in that case, the said goods should be considered as input and the treatment for reversal of credit applicable to input would be applicable".

Reasoning of Judgment: There is no dispute about the fact that the insurance claim received by the appellant in respect of loss of the work-in-process inputs does not include the element of Central excise duty. Tribunal find that the issue regarding admissibility of Cenvat Credit in respect of the inputs in process destroyed in fire is squarely covered by the judgement of the Tribunal in the case of CCE, Chennai-III v. Indchem Electronic (Supra) the SLP against which is dismissed by the Apex Court. In view of this, the board circular being contrary to the decision of the Tribunal, doesn’t help the Department.
The Impugned order is, therefore, not sustainable. The same is set aside.

Decision:- Appeal allowed

Comment:- This is very good decision when the cenvat credit on inputs cannot be disallowed when the under process goods are destroyed in fire and they have reached to the stage of finished goods. Secondly, the insurance claim amount does not contain the cenvat duty amount. But when the insurance claim have cenvat amount then the service tax is payable.

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PJ/Case Laws/ 2012-13/ 1196

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