Whether credit availed on the inputs consumed during the course of manufacturing liable to be recovered if semi-processed goods got destroyed in fire?

PJ/Case Law/2014-15/2135

Case:-M/s THEMIS MEDICARE LTD Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, DAMAN

Citation:-2014-TIOL-336-CESTAT-AHM

Brief facts:-The brief facts of the case are that a fire/explosion occurred in the factory premises of the appellant and certain materials under process were destroyed due to such fire/explosion. The Revenue authorities after following the due process issued a show cause notice proposing to recover Cenvat Credit availed on inputs which were utilized in the manufacturing of the under process finished goods destroyed in fire/explosion and also proposed to demand, interest and imposed penalty. Adjudicating authority confirmed demands alongwith interest and also imposed penalty. Aggrieved by such an order, appellant preferred an appeal to the first appellate authority. The first appellate authority did not agree with the contentions raised by the appellant and upheld the Order in Original solely on the ground that the appellant were compensated by the insurance company for a value which was much more, would indicate that they were compensated for Cenvat Credit involved in such inputs. He also held that no evidence was presented by the appellant to show that they had not claimed the amount of Cenvat Credit from the insurance company.

Appellant’s contentions:- Ld. Counsel submits that the show cause notice which was issued to the appellant was invoking the provisions of Rule 3(5C) of the Cenvat Credit Rules, 2004 seeking to reverse the Cenvat Credit availed on the inputs which were consumed in the manufacturing of goods which were destroyed even before they could reach the final stage. After reading the provisions of Rule 3(5C) of the Cenvat Credit Rules, 2004, he would submit that this rule will not be applicable in the case in hand. As regards the findings recorded by the first appellate authority as to appellant being compensated by the insurance company for the amount of duty liability on the inputs, he would submit that Hon'ble High Court of Karnataka in the case of Commissioner of C. Ex., Bangalore Vs. Tata Advanced Materials Ltd. - 2011 (271) E.L.T. 62 (Kar.) has specifically held it cannot render credit claimed by assessee as irregular. He produced the copy of the said judgment.

Respondent’s contentions:-Ld. Departmental Representative would take through the entire show cause notice and submits that the invocation of provisions of Rule 3(5C) is correct and the goods which were destroyed in fire / explosion were the finished goods or goods which are in process, hence, the appellant having not paid the duty on such goods, his duty bound to reverse the amount of Cenvat Credit on the inputs which were consumed.

Reasoning of judgment:- On perusal of the records, it transpires that the appellant herein had availed the Cenvat Credit on the inputs which were consumed for the manufacturing of final products. Before the final products could emerge, during the process, due to unfortunate fire / explosion, the goods got destroyed. It is also undisputed that the appellant had insured the premises and the stocks including the work in process stock with insurance agencies and had received the insurance claim lodged by him. On the background of such a factual matrix, it needs to be considered whether a denial of Cenvat Credit to the appellant on the inputs consumed during the course of manufacturing and got destroyed before reaching the stage of finished goods is liable to be recovered. On perusal of the provisions of Rule 3(5C) of the Cenvat Credit Rules, 2004, it is seen that the said rule envisages recovery of duty paid on inputs and availed as Cenvat Credit when an assessee seeks remission of duty under Rule 21 of the Central Excise Rules, 2002. In Tribunal’s considered view, the said Rule 3(5C) of the Cenvat Credit Rules, 2004, can be invoked as and when the assessee seeks remission of duty, which is not the case in hand. In the case in hand, there was no application filed by the appellant for remission of duty quite rightly so as the goods which were destroyed were semi-finished products or work in process and have not attained the stage of finished goods.

This takes Tribunal to the second ground of rejection of the appeal by the first appellate authority which is that the appellant had been compensated by the insurance agencies even for the duty paid on inputs. It was found that this reasoning which has been given by the Ld. first appellate authority seems to be at variance of the law as has been settled by the Hon'ble High Court of Karnataka in the case of Tata Advanced Materials Ltd. , wherein their Lordship's has recorded as under:

" Therefore, it is clear that there is no provision in the rules which provides for a reversal of the credit by the Excise Authorities except where it has been irregularly taken in which event it stands cancelled or if utilised has to be paid for. This is not the case of the revenue. In the instant case, when the assessee purchased the capital goods and when he has paid the excise duty on them, in law, he is entitled to get the credit on the duty paid while clearing the finished products from his factory. Accordingly, he utilised the cenvat credit and cleared the finished products. It is about three years after such payment, the capital goods were destroyed in fire. As the assessee had insured the said capital goods, he put forth a claim for payment of the loss sustained by him, which includes the payment of excise duty. The Insurance Company in terms of the policy has compensated the assessee. Merely because the Insurance Company paid the assessee the value of goods including the excise duty paid, that would not render the availment of the cenvat credit wrong or irregular. At the same time, it does not confer any sight, on the Excise Department to demand reversal of credit or default to pay the said amount. The assessee has paid the premium and covered the risk of this capital goods and when the goods were destroyed in terms of the insurance policy, the Insurance Company has compensated the assessee. It is not a case of double payment as contended by the department. At any rate, the Excise Department has no say in the instant case as held by the Apex Court. In that view of the matter, the substantial questions of law framed in this appeal are answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed."

It can be seen from the above reproduced ratio that the issue is now squarely covered by the judgment of the Hon'ble High Court of Karnataka. In view of the foregoing, it was found that the impugned order is liable to be set aside.

The impugned order is set aside and the appeal is allowed.

Decision:- The appeal is allowed.

Comment:- The crux of the case is that there can be no recovery of the credit availed on the inputs that have been consumed in the manufacturing process were contained in the semi-finished goods that were subsequently destroyed in fire. It is submitted that duty liability arises on manufacture of excisable goods and when no goods were manufactured, the question of remission of duty on finished goods does not arise. When there was no remission claimed, the revenue department cannot recover the credit availed on inputs contained in the semi-finished goods that were destroyed in fire. The contention that the assessee was compensated from the insurance company cannot be grounds for recovering the credit availed on inputs in view of the decision given in the case of Tata Advanced Materials Ltd.

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PJ/Case Law/2014-15/2135

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