Whether credit balance on debonding of EOU unit is available for utilisation?

Case:- JOHN DEERE INDIA PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, PUNE-III

Citation:- 2015 (326) E.L.T. 205 (Tri. - Mumbai)

Brief facts:- This appeal is directed against Order-in-Original No. PUN-EXCUS-003-COM-007-13-14, dated 14-8-2013.
The relevant facts that arise for consideration are the appellants were holding the status of EOU and engaged in the manufacture of agricultural tractors and parts & components thereof. The appellant converted their EOU into DTA unit on 8-8-2011. On conversion of DTA unit, the appellant had discharged the applicable duties on the inputs in stock, inputs contained in finished goods and Work in Progress (WIP) as envisaged in the provisions due to the reason that being a EOU they have received inputs without payment of duty. After reversing/paying the duty on conversion to DTA there was a carry-over of unutilized credit lying in balance. The appellant utilized this credit towards discharge of the duty liability in respect of goods cleared from DTA unit. The department issued a show cause notice to the appellant directing them to show cause notice as to why Cenvat credit so carried forward to DTA unit be not held as lapsed and an amount of Rs. 1,05,98,681/- utilized/paid by them on clearances made to DTA through such Cenvat credit be not demanded with interest. Appellant contested the issue on merits. The adjudicating authority after following due process of law, did not agree with the contention raised by the appellant holding that the provisions of Rule 11 of Cenvat Credit Rules, 2004 will be attracted and the credit lying in balance when the appellant switched over from EOU to DTA need to lapse as the appellant’s final product “agricultural tractors” were fully exempted with effect from 1-3-2006.

Appellant’s contention:- Learned Consultant appearing on behalf of the appellant would take them through the entire case records. He would submit that the adjudicating authority has erred in coming to such a conclusion in as much the appellant is not only manufacturing agricultural tractors but also the manufacturer of parts and components on which applicable Central Excise duty is paid. It is his submission that prior to obtaining debonding order the appellant could not have procured inputs without payment of duty and therefore paid the duty on inputs and capital goods and availed Cenvat credit and could not utilize the same as being an EOU. It is his submission that the Central Excise duty payable on inputs lying in stock, on finished goods and on WIP was calculated and paid as soon as debonding order was received and such payment of duty is not in dispute. It is his submission that provisions of Rule 11 of the Cenvat Credit Rules will be applicable only when the appellant is manufacturing exempted goods and not when various goods are manufactured and duty liability is discharged. He would draw their attention to the registration granted by the Central Excise authorities and submit that the registration clearly states that appellant is manufacturing agricultural tractors and parts, aggregates and components of tractors. He would then explain the aggregates and components & parts of tractors or various items are required for repair of the tractors if need be and are cleared to the market on payment of proper excise duty and there is no exemption to these aggregates components and parts of tractors. He would rely upon the decision of the Tribunal in the case of Shree Baba Exports - 2015 (318)E.L.T.328 (Tri.-Del).

Respondent’s contention:- Learned DR would read the findings recorded by the adjudicating authority in the impugned order and more specifically Paragraphs 18 to 20. It is his submission that the main manufacturing activity of the appellant is agricultural tractors, aggregates and components & parts thereof may not be main manufacturing activity. It is his submission that when inputs are procured for manufacturing of agricultural tractors, provisions of Rule 11 Cenvat Credit Rules will directly apply. He would then read the provisions of Rule 11 of the Cenvat Credit Rules. It is his submission that sub-rule (3) of Rule 11 of Cenvat Credit Rules will be applicable in this case and the adjudication authority has applied the same correctly. He would also rely upon the decision of the Joint Secretary as a reviewing authority in the case of Technocraft Industry (India) Ltd. [2014 (313)E.L.T.888 (G.O.I.)] for the proposition that on debonding any Cenvat credit that is carried over has to lapse and cannot be used. He would also rely upon the judgment of the Tribunal in the case of Bajaj Foods Ltd. - 2012 (280)E.L.T.281 (Tri. - Ahmd.) for the same proposition.

Reasoning of judgment:- It is undisputed that the appellant herein had converted his unit from EOU to DTA, reversed the amount of appropriate duty on inputs, inputs in finished goods and WIP; carried forward the credit lying in balance in Cenvat credit in the books of DTA. It is also undisputed that the appellant had utilized this carried forward Cenvat credit for discharge of duty liability on aggregates, components and parts of tractors which are not exempted when cleared into home consumption; agricultural tractors which are cleared by the appellant are exempted by Notification 6/2006-C.E., dated 1-3-2006.
The entire case of the Revenue is that the amounts which have been carried forward after reversal of appropriate duty on the inputs lying in stock, finished goods and WIP, the balance credit lapses as per the provisions of sub-rule (3) of Rule 11 of Cenvat Credit Rules while it is the case of the appellant that they are eligible to utilize the amount for discharge of duty liability on other products manufactured by them.
They find from the impugned order that the adjudicating authority has not disputed the fact that the appellant utilized the carried forward Cenvat credit towards discharge of their duty liability in respect of goods i.e. aggregates, components and parts of tractors. This undisputed facts would mean that the appellant herein was not manufacturing only exempted agricultural tractors but was also manufacturing other products on which duty liability arises. On the background of such factual matrix, they have to consider the provisions of sub-rule 3 of Rule 11 which reads as under : -
“Sub-rule (3) of Rule 11:
“(3) manufacturer or producer of a final product shall be required to pay an amount equivalent to the Cenvat credit, if any, taken by him in respect of inputs received for use in the manufacture of the said final product and is lying in stock or in process or is contained in the final product lying in stock, if, -
(i) he opts for exemption from whole of the duty of excise leviable on the said final product manufactured or produced by him under a notification issued under Section 5A of the Act; or
(ii) the said final product has been exempted absolutely under Section 5A of the Act, and after deducting the said amount from the balance of Cenvat credit, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any other final product whether cleared for home consumption or for export, or for payment of Service Tax on any output service, whether provided in India or exported.”
It can be seen from bare perusal of the said sub-rule the same will apply only in a situation where final products are exempted and lying in stock. In their considered view the above sub-rule may not be applicable in the facts of this case which is not disputed that there is a discharge of Central Excise duty liability on the other finished products manufactured and cleared like aggregates, components & parts of tractors. The above said view is fortified by the judgment of the Tribunal in the case of Shree Baba (supra) wherein after extracting sub-rule 3 of Rule 11 of the Cenvat Credit Rules, the Bench recorded as under :-
“7.1 From a perusal of this sub-rule, it is clear that this sub-rule would be applicable if the some Cenvat credit availed inputs are being used for manufacture of a final product and that final product has become fully exempt from duty. In such a situation, the assessee would be liable to pay an amount equal to the Cenvat credit involved in respect of the inputs lying in stock or in process, or contained in the final products lying in stock on the date of exemption, and after deducting this amount from the Cenvat credit balance, if any, as on the date of exemption, if any Cenvat credit balance still remains, it shall lapse and the same shall not be allowed to be utilized for payment of duty on any goods whether cleared for home consumption or for export. In our view, this sub-rule would not apply when out of common Cenvat credit availed inputs, more than one final products are manufactured and while some final products have become exempt, others have remained dutiable. Since in terms of sub-rule (4) of Rule 3 of the Rules, the Cenvat credit may be utilized for payment of any duty of excise on any final product, if out of the same Cenvat credit availed inputs, more than one final product are manufactured and out of those final products, one final product has become fully exempt from duty, the Cenvat credit can be utilized for payment of duty on the other final products, which are dutiable and as such, the manufacturer’s right to utilize the Cenvat credit for payment of duty on the final products which are still dutiable cannot be taken away just because out of several final products, one final product has become exempt from duty. We, therefore, hold that the Revenue’s interpretation of Rule 11(3) is not correct.”
In their view, the ratio as reproduced above would be squarely applicable in the case in hand. Reliance placed by the learned DR in the case of Bajaj Foods Ltd. (supra) will not carry the Revenue’s case any further inasmuch the said Bajaj Foods Ltd. case, the factual findings are that the goods manufactured by the appellant therein when he converted to DTA were fully exempted from payment of duty and the reliance placed on the decision of Jt. Secretary, Department of Revenue in the case of Technocraft Industries (India) Ltd. (supra) also may not be applicable as in that case the issue was not the applicability of sub-rule (3) of Rule 11 of Cenvat Credit Rules.
In view of the foregoing and authoritative judicial pronouncement, they find that the impugned order is unsustainable and liable to be set aside and they do so.
The impugned order is set aside and the appeal is allowed.

Decision:-Appeal allowed.

Comment:-The analogy of the case is that the provisions of Rule 11(3) of Cenvat Credit Rules will not be applicable if the assessee is manufacturing dutiable and exempted goods. The assessee has converted from EOU into DTA Unit and has utilised the balance of unutilised credit for discharge of duty liability on clearance of goods from DTA Unit. Assessee is manufacturing parts and components of agricultural tractors also which not exempt and on which applicable Excise duty paid. Rule 11 is not applicable when out of common Cenvat credit availed inputs, more than one final product manufactured and when some final products become exempted while others remain dutiable. Utilisation of balance credit for discharge of duty on parts and components cleared in DTA is permissible.

Prepared by:- Monika Tak

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