Whether credit reversal required on subsequent exemption of final products.

Case:- COMMISSIONER OF CUS. & C.EX., MEERUT-I VERSUSAPCO PHARMA LTD.

Citation:- 2015 (319) E.L.T. 641 (Uttarakhand)

Brief Facts:- These three appeals involve the same question of law and are being decided together. The facts leading to the filing of the present appeal is, that the assessee M/s. Apco Pharma Ltd. is a manufacturer of medicines and the final product manufactured by them was excisable to excise duty. The assessee was availing Cenvat credit on inputs purchased by them under the Cenvat Credit Rules, 2002 (hereinafter referred to as the ‘Rules’). The Central Excise Department issued a Central Excise Notification No. 50/2003, dated 10th June, 2003, pursuant to which, the assessee undertook an expansion programme and became eligible for exemption of excise duty on the final product manufactured by them. The assessee opted to avail nil rate of duty with effect from 8th April, 2004 under the said Notification No. 50/2003. At that stage, the assessee had already availed Cenvat credit under the Rules, amounting to Rs. 4,78,260/- on inputs/work in progress/finished goods. The Superintendent, Central Excise, Range Haridwar, directed the assessee that since they are opting to avail exemption on the final product under the Central Excise Notification No. 50/2003, they cannot be given Cenvat credit on the raw materials/inputs and that the said Cenvat credit taken by them has to be reversed. Accordingly, on the direction of the Superintendent, the Cenvat credit was reversed by the Department.
On 4th July, 2005, the assessee filed an application for the refund of the duty contending that Cenvat credit was validly availed by them and the same could not be reversed by the Department. Instead of refunding the amount, the Department directed the assessee to show cause as to why the refund claimed by them should not be disallowed.
The Adjudicating Authority, namely, the Deputy Commissioner, Central Excise, by an order dated 6th July, 2005, allowed the application of the assessee and directed reversal of the credit of the said amount holding that the reversal of the Cenvat credit was not required to be done in the first instance and that the credit validly taken by the assessee could not be reversed. The Adjudicating Authority relied upon the decision of a five-member Bench of the Tribunal in Raguhvar (India) Ltd. v. Commissioner of Central Excise, Delhi - 2002 (140)E.L.T.280as well as the decision of the Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd.- 1999 (112)E.L.T.353, in which it was held that if the credit taken at the time when the final product was not exempted from duty and it was utilized, a subsequent exemption of the final product would not be a reason for the reversal of the credit by the Excise Authority.
The Department, being aggrieved by the said order, filed an appeal, which was allowed by the Commissioner (Appeals), Central Excise, Meerut, by an order dated 31st July, 2006. The Commissioner (Appeals) held that the provision of Rule 6 and Rule 9(2) of the Cenvat Credit Rules makes it evident that Cenvat credit could not be allowed on such quantity of inputs which was used in the manufacture of exempted goods. The Commissioner (Appeals) relied upon a decision of the Tribunal in the case of Albert David Ltd. v. Commissioner of Central Excise - 2003 (151)E.L.T.443, the appeal against which, was dismissed in limine by the Supreme Court as well as the decision in the case of Commissioner of Central Excisev. Explicit Trading and Marketing (P) Ltd. - 2004 (169)E.L.T.205. The Commissioner held that Cenvat credit on the inputs lying in stock as well as contained in the finished goods lying in stock at the time of option was not available to the assessee.
The assessee preferred an appeal before the Customs Excise and Service Tax Appellate Tribunal, which was allowed by an order dated 8th February, 2009 [2009 (248)E.L.T.896 (Tri.-Del.)]. The Tribunal relied upon a decision of the Tribunal in the case of TAFE Limited (Tractor Division) v. The Commissioner of Central Excise, Bangalore - 2007 (210)E.L.T.571as well as the decision of the Supreme Court in Dai Ichi Karkaria’s case (supra) as well as the decision of the Kerala High Court in Collector of Central Excise and Customs v. Premier Tyres Ltd.- 2001 (130)E.L.T.417.The Tribunal held that the Cenvat credit validly taken and utilized could not be reversed. The Tribunal further held that the assessee having correctly taken the credit when the final product was dutiable, there was no requirement to reverse the credit on the final product becoming exempted and that such credit could not be recovered under Rule-12 of the Rules.
The Department, being aggrieved by the aforesaid decision of the Tribunal, has filed the present appeal under Section 35G(1) of the Central Excise Act, which was admitted on the following question of law, namely :
“(a) Whether the Cenvat credit availed on inputs utilized in the manufacture of exempted goods (exempted under Notification No. 50/2003-C.E., dated 10-6-2003) is admissible to the party notwithstanding the provisions of Rule 6 of Cenvat Credit Rules, 2002 which clearly lays down that the Cenvat Credit shall not be allowed on such quantity of inputs, which is used in the manufacture of exempted goods?”

Reasoning of judgment:- Heard Sri Shobhit Saharia, the learned Counsel with Sri Hari Mohan Bhatia, the learned Counsel for the appellant-Department and Sri P.R. Mullick, the learned Counsel for the respondent-assessee.
The submissions of the learned Counsel for the parties have been taken into consideration. The Cenvat scheme is a scheme to remove the cascading effect of the Central Excise duty as the same is levied at every stage of manufacture. The Cenvat credit is available only if the final product suffered the excise duty. If no excise duty is leviable in respect of the final product, the question of availing the Cenvat credit does not arise as there is no duty of excise at more than one level.
To elucidate the matter, it would be appropriate to take a look at the provisions of Cenvat Credit Rules, 2002. Rule 2(d) of the Rules defines exempted goods as such goods which are exempted from the whole of the duty of excise leviable thereon, and includes goods, which are chargeable to nil rate of duty. Rule 2(e) defines final product to mean excisable goods manufactured or produced from inputs. Under Rule 3, a manufacturer or a producer of a final product shall be allowed to take Cenvat credit. Rule 4 provides conditions for allowing Cenvat credit, namely, that Cenvat credit in respect of inputs must be taken immediately on receipt of the inputs in the factory of the manufacturer. The relevant portion of Rule 4 is extracted hereunder :
“Rule 4. Conditions for allowing Cenvat credit. -(1) The Cenvat credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer.”
Rule 6 provides that Cenvat credit would not be allowed on such quantity of inputs which is used in the manufacture of exempted goods. The relevant portion of Rule 6, which is relevant for the purpose of this appeal, is extracted hereunder :
“Rule 6. Obligation of manufacturer of dutiable and exempted goods. - (1) The Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).”
The Department is also relying upon Rule 9(2) which provides for reversal of Cenvat credit in respect of inputs lying in stock or in process or contained in the final product. Rule 9(2) is extracted hereunder :
“Rule 9 (2). - A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking Cenvat credit on inputs before such option is exercised, shall be required to pay an amount equivalent to the Cenvat credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, 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 excisable goods, whether cleared for home consumption or for export.”
In the light of the aforesaid provision, the learned Counsel for the appellant contended that Rule 6(1) of the Cenvat Credit Rules, 2002 clearly states that Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods. Since the assessee opted to avail exemption under the Central Excise Notification No. 50/2003, the Cenvat credit availed by the assessee was rightly reversed at the time when the assessee opted for exemption from payment of Central Excise duty under the Notification No. 50/2003. The learned Counsel contended that the spirit of law was crystal clear to the extent that when the goods got exempted, then the credit on inputs lying as such or to the extent of the work in progress would have to be reversed as the inputs were being utilized for the manufacture of an exempted product. In furtherance of his submission, the learned Counsel submitted that under Rule 9(2) of the Cenvat Credit Rules, 2002, a manufacturer who opts for exemption under any notification has to pay an amount equivalent to the Cenvat credit taken on inputs lying in stock or in process or contained in final products lying in stock on the date when such option was exercised and after deducting the said amount, the remaining Cenvat credit would lapse. The learned Counsel submitted that even though the said Rule was based on the value or quantity of clearances in a financial year, nonetheless, the legislative intent was that Cenvat credit could not be utilized when the final product was exempted from duty. In the light of the aforesaid, the learned Counsel has placed reliance upon the certain decisions of the Tribunal which have been cited aforesaid.
Upon hearing the learned Counsel for the parties, the Court is of the view that the scheme of Cenvat Credit Rules makes it apparently clear, especially Rule 4, that Cenvat credit in respect of inputs is required to be taken immediately on receipt of the inputs in the factory of the manufacturer, that is to say, that the Cenvat credit is required to be taken on receipt of the inputs and not at the time when the final product is manufactured. All that the Department is required to ensure is, that the Cenvat credit taken by the assessee at the time of the receipt of the inputs is for the manufacture of the final product, on which Excise duty is payable. If the excisable duty is withdrawn subsequently, or the final product becomes exempted from payment of Excise duty by means of a notification, the Cenvat credit so taken and utilized cannot be reversed nor can the Department insist that the Cenvat credit should be reversed in view of Rule 6(1) of the Rules of 2002.
The Supreme Court, after considering the scheme of the Cenvat Credit Rules, held :
“It is clear from these Rules, 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 the credit at any time thereafter when making payment of Excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilized, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.”
The Supreme Court held that a manufacturer can avail Cenvat credit on the raw material to be used immediately upon receipt of the raw material and that there is no provision in the Rules which provides for a reversal of the credit by the Excise Authority. The Supreme Court further held that the Cenvat credit is available to the manufacturer without any limitation in time, that is to say, that the final product can be manufactured at any point of time after availing the Cenvat credit and there is no embargo on the time factor and consequently, the Supreme Court again emphasized that the credit availed by the manufacturer was indefeasible and that there was no co-relation of the raw material with that of the final product.
In the light of the aforesaid, the decisions cited by the learned Counsel for the appellant, namely the decisions cited before the Commissioner (Appeals), has no relevance in view of the decision of the Supreme Court in Dai Ichi Karkaria’scase (supra).
In similar circumstances, the Kerala High Court in Collector of Central Excise and Customs, Cochin v. Premier Tyres Ltd.- 2001 (130)E.L.T.417held that if at the time of taking the credit the final product was not exempted, it was not necessary to reverse the entry in the light of a subsequent notification relating to the end product.
In Commissioner of Central Excise, Panchkula v. M/s. HMT (TD) Ltd. Pinjore, District Panchkula, the Punjab & Haryana High Court held that the assessee was entitled to the benefit of Cenvat credit for the inputs utilized in the manufacture of the final exempted product and the same could not be reversed.
In the light of the aforesaid, the decision of the Tribunal in the case of Commissioner of Central Excise, Rajkot v. Ashok Iron and Steel Fabricators - 2002 (140)E.L.T.277,Raguhvar (India) Ltd. v. Commissioner of Central Excise, Delhi - 2002 (140)E.L.T.280and TAFE Limited (Tractor Division) v. The Commissioner of Central Excise, Bangalore - 2007 (210)E.L.T.571, which has been affirmed by the Supreme Court of India by an order dated 16-9-2011 is approved.
The learned Counsel for the appellant submitted that in Central Excise Appeal No. 4 of 2008, the Commissioner (Appeals) had directed the refund of the credit in cash. The learned Counsel submitted that the assessee availed the benefit in credit and the same could not be refunded in cash.
Upon hearing the learned Counsel, the Court finds that the adjudicating authority had sanctioned the refund claimed by way of credit in their RG23A Part II account. The Court finds that the assessee is availing exemption and is not in a position to utilize the credit and if the assessee is not able to utilize the credit, the very basis of the refund is defeated. Consequently, the Commissioner (Appeals) was justified in giving the assessee the cash refund of the credit. In Commissioner of Central Excise v. Ashok Arc - 2006 (193)E.L.T.399 = 2007 (7)S.T.R.365, the High Court of Jharkhand held that the assessee is entitled for the refund in cash. In view of the aforesaid, the submission of the learned Counsel for the appellant cannot be accepted.
In the light of the aforesaid, the opinion is that CENVAT credit which was validly availed at the time of the receipt of the inputs for the manufacture of the final product, on which excise duty was payable, but subsequently utilized for the manufacture of the same final product which became exempted from payment of excise duty pursuant to a subsequent notification, was not liable to be reversed under Rule 6(1) of the Cenvat Credit Rules, 2002. The question of law is answered accordingly.

Decision:- All the appeals are dismissed.

Comment:- The crux of the case is that there is no requirement for reversing a validly earned Cenvat credit where subsequently the final products have become exempt from payment of excise duty by means of an exemption notification.

Submitted By:- Somya Jain

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PJ/CASE LAW/2015-16/2754

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