Reversal of cenvat credit when finished goods become exemp subsequently?

PJ/Case Laws/2010-11/1200

Case:-COMMISSIONER OF C. EX., BANGLORE-II v/s TAFE LTD. (TRACTOR DIVISION)

Citation:-2011(268) E.L.T. 49 (Kar.)

Issue:- Reversal of Cenvat credit – whether required when finished product is subsequently exempted from duty?

Brief Facts: -Respondent was manufacturers of tractors and the parts thereof. They were availing Cenvat credit on the inputs used in the manufacturing of their products under Cenvat Credit Rules, 2002. Thereafter, vide Notification No. 23/2004-CE, dated 1.3.2004 the tractors were exempted from the payment of Excise duty w.e.f. 9.7.2004. On 08.07.2004 the assessee had a stock of finished goods, which was manufactured using the inputs on which credit was availed and also a stock of inputs as such on which credit was availed. Department contended that as per Rule 6(1) of the Cenvat Credit Rules, 2002, Cenvat credit would not be allowed on such quantity of inputs which is used in the manufacturing of exempted goods. Therefore the show cause notice was issued to the assessee demanding the recovery of the Cenvat credit availed in respect of the inputs used in the manufacture of the finished goods in stock and the Cenvat credit availed in respect of inputs as such in stock along with interest and penalty.

The Adjudicating Authority confirmed the demand. In appeal, the Tribunal relying upon the judgment of the Supreme Court in Collector of Central Excise Pune v.s Dai Ichi Karkaria Ltd [1999 (112) ELT 353 (SC) has allowed the appeal and held that Cenvat credit need not be reversed if subsequently the final product is exempted from duty and when the credit has been taken legally.

Hence, Revenue is in appeal before the Tribunal.

Appellant’s Contention:-The appellant was contended that the tractors were exempted from the payment of excise duty. Hence the Cenvat credit availed by the assessee on the inputs which forms part of finished goods i.e. tractors as well as the inputs in the factory could not be clamed by the assessee and they were bound to reverse the same. As clarified in rule 3 the Cenvat credit shall not be allowed on the inputs used in the manufacture of exempted goods. As the assessee did not comply with the order, the adjudicating authority was justified in making the demand of reversal along with interest and penalty.

Respondent’s Contention:-The respondents argued that there was no provision in the Modvat rules which provided for a reversal of the credit where it has been legally and irregularly taken. He further contended that dealing with Cenvat credit and reversal of said credit, the Apex Court in the case of collector of central excise , Pune v. Dai Ichi Kakaria Ltd. reporte3d in 19991 (112) E.L.T. 353 (S.C.), at paragraph 17 and 18 interpreting Rule 57A and 57 of the central excise rules 1944, has held 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 credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in rules for a reversal of the credit by the excise except where it is illegally and irregularly taken. They said that credit taken by them was valid, and the benefit of the same was allowed to the manufacturer without any limitation in time. They also pointed out that there was no correlation of the raw material and the final product, it was not as if credit can be taken only on a final product. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.

Reasoning of Judgment:- The High Court held that the Tribunal was justified interfering with the order passed by the adjudicating authority. There was no provision in CCR, 2004 to reverse the credit. Further, It was held that the Punjab and Haryana High Court in the case of Commissioner of C.E., Panchkula v. M/s HMT Ltd., Pinjore, reported in 2010 TIOL 316-HC-P & H-CX held that when the input credit legally taken and utilized on the dutiable final products, need not to be reversed on the final products becoming exempt subsequently. Hence the observations of the aforesaid decision are also applicable to the current controversy.

Decision: The appeal was dismissed.

Comment: -This analogy that the credit need not to reverse the cenvat credit when the final product exempted subsequently. Even the department asks for the reversal of Cenvat credit when the assessee shifts to compounded levy scheme. It was not exemption but shifting by assessee from one type of duty to another type of duty. Hence the cenvat credit need not to be reversed on inputs as such, under process or on inputs contained in finished goods.

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PJ/Case Laws/2010-11/1200

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