Rule 6(3)(b) applies only when separate account of dutiable and exempted goods manufactured by using common input are not maintained.

PJ/Case Law/2014-15/2337

Case:OKAY GLASS INDUSTRIES VERSUS COMMISSIONER OF C. EX., KANPUR

Citation:2013(295) E.L.T. 604 (Tri.-Del.)

Brief Facts:The appellants are manufacturers of different items of glass falling under Chapter 70 of the Central Excise Tariff. During the period 1-4-2008 to 31-3-2010, they had cleared some goods which were dutiable and some other goods were exempted from duty. The Revenue made a case that they had not maintained separate accounts in respect of inputs used in the manufacture of dutiable products and exempted products and for that reason, they had to pay 10% of the value of exempted products under provisions of Rule 6(3) of Cenvat Credit Rules. The rate of payment under Rule 6(3) for a part of the period was only 5%.

A notice was issued for recovery of amount as prescribed under Rule 6(3)(b) of Cenvat Credit Rules, 2004 has been adjudicated confirming demand of Rs. 95,51,744/- for the period 1-4-2008 to 31-3-2010 along with interest. Further a penalty equal to the said amount is imposed under Rule 15 of Cenvat Credit Rules, 2004. Aggrieved by the order, the appellants filed appeal.

Appellant Contention:The contention of the appellants is that they did not take Cenvat credit in respect of inputs that were used in the manufacture of exempted products and they have been maintaining accounts of such raw materials for which they had not taken Cenvat credit. Therefore, their main contention is that they have taken credit only as per Rule 6(1) of the said Rules and there is no case for invoking the provisions of Rule 6(3) because that rule is applicable only for a manufacturer who does not maintain separate accounts for inputs used in the manufacture of dutiable and exempted products. They further point out that the Cenvat credit taken by them was short of the amounts for which they would have been eligible for credit. They present the facts as under:

1	Period	April, 2008 – Sept. 2009	Percentage to Total	Oct. 2009- Mar. 2010	Percentage to Total
2	SCN	29-3-2010		29-10-2010
3	Demand as per SCN	Rs. 79,59,504/-		Rs. 15,92,240/-
4	Dutiable Goods value and percentage of total	Rs. 4,02,81,666/-	33%	Rs. 2,23,77,379/-	41%
5	Exempted goods value and percentage of total	Rs. 8,27,80,158/-	67%	Rs. 3,18,44,805/-	59%
6	Total	Rs/ 12,30,61,824/-		5,42,22,184/-
7	Cenvat Taken (Amount and percentage of total credit)	Rs. 23,20,811/-	30%	Rs. 5,44,427/-	20%
8	Cenvat not taken amounts and percentage of total	Rs. 55,50,508/-	70%	Rs. 21,44,905/-	80%
9	Total	Rs. 78,71,319/-		Rs. 26,89,332/-
10	Penalty imposed	Rs. 79,59,504/-		Rs. 15,92,240/-
11	Amount payable in terms of Rule 6(3)(ii)	Rs. 52,73,783/-		Rs. 15,86,706/-
12	Cenvat short taken	Rs. 2,76,725/-		Rs. 5,58,199/-

The appellants claimed that they were eligible for Cenvat credit which they have not taken as calculated above and shown in 12th row. They pointed out that there is no basis at all for demanding any short paid amount from them.

It was also argued that the Commissioner had not extended the benefit of retrospective amendment made in Rule 6 of the Cenvat Credit Rules, 2004 by Section 73 of the Finance Act, 2010 while deciding the matters for the period 1-4- 2008 to 30-9-2009.

They also argued that this is a case where they have been furnishing the required returns and there was no basis for invoking the extended period of five years for demanding any amount short paid. For the same reasons, they also submitted that no penalty was imposable on them.

Respondent Contention:The learned AR for Revenue submitted that the appellants had maintained separate account only in respect of Soda Ash and not in respect of other raw materials and therefore, their claim that they were maintaining separate accounts in respect of inputs is false. There is no evidence that they had taken only proportionate credit in respect of other inputs. Since such accounts were not maintained, the demand for 10%/5% of the value of exempted goods is proper.

Reasoning of Judgment:it was seen that the applicant had filed an application as prescribed in Section 73 of Finance Act, 2010 amending Rule 6 of Central Excise Rules, 2004 retrospectively. This was noted by the Commissioner in the impugned order. However, the Commissioner had denied the benefit for the reason that the appellants had not followed the condition prescribed as laid down in Rule 6 even after amendment of Central Excise Rules, 2002 by Notification No. 10/2008-C.E (N.T.), dated 1-3-2008 to be effective from 1-4-2008 and therefore, he had confirmed duty payable from 1-4-2009 to 31-3-2010. The Commissioner's finding in this regard were:-

"In the instant case, I find that the party was maintaining separate records of only one input used in the exempted final products as well as in the dutiable final products. For the rest of the inputs/input services, they left a certain amount of Cenvat credit of input/input service un-utilized presumably on the basis that those inputs have been used in the manufacture of exempted products. Further, in any opinion, it is impossible to co-relate the quantity of inputs consumed in the manufacture of finished goods especially when the party was manufacturing a number of varieties of exempted/dutiable final products in the only furnace and were maintaining single RG-1 Register, and that too by making entries in the units 'dozens/sets' whereas the inputs were being received, issued and accounted for in unit kgs. They were also having no record showing the co-relation with the weight of the material used in say one dozen of the finished goods. Thus I find that reversal of credit on proportionate basis is virtually impossible in the facts and circumstances of this case, and the party is liable to pay the amount at the prescribed rate during the relevant period."

As per the provisions of Section 73(3) of Finance Act, 2010, if the Commissioner found that the credit reversed by the assessee was not correctly reversed, the only option available to the Commissioner was to calculate it correctly and then ask them to reverse the correct amount. It goes without saying that before adopting the above manner of calculation, he had to give reasons as to why he considered that the calculation given by the assessee is not proper and he has to disclose the method he was going to adopt to the assessee so that the assessee can make submissions as to why the calculation adopted by him may or may not be justified. After the retrospective amendment made by Section 73 of Finance Act, 2010, there was no scope for demanding the assessee to pay 10%/5% of the value of the exempted product. Prima jack, we were convinced that the assessee hoc complied with the provisions of the amended Rule 6 of Cenvat Credit Rules, 2004. Therefore, it was found proper to grant waiver from pre-deposit of dues arising from the impugned order for admission of the appeal. After granting such waiver, appeal was taken up for disposal.

Since they were of the view that the Commissioner had not given proper reasons why benefit under Section 73 of Finance Act, 2010 is not applicable for the period April, 2008 to March, 2010. In there view, this retrospectively amended provisions were applicable for the impugned period also. If the calculations submitted by the appellant wers not correct, the Commissioner had to calculate the correct amount to be reversed explaining the method he proposes to adopt and giving an opportunity for hearing the appellant. Therefore, the impugned order was set aside and was remand the matter to the adjudicating authority to properly decide the quantum of input credit to be reversed by the appellants as per provisions of Rule 6 of Cenvat Credit Rules. Thus the stay petition and appeal are disposed of.

Decision:Appealdisposed of..

Comment: the gist of the case is that Rule 6 applies when dutiable and exempted product is manufactured by using common input. Rule 6(3)(b) is applicable when manufacturer has not maintained separate books of accounts. Whereas rule 6(1) is applicable when separate records are maintained by manufacturer in respect of inputs which are used in manufacturing of dutiable and exempted goods. Hence, once rule 6(1) was apply then rule 6(3)(b) does not apply.

Prepared by:- Hushen Ganodwala

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PJ/Case Law/2014-15/2337

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