Whether credit shall be allowed on inputs which are used in the manufacture of goods that are declared as exempted subsequently?

Case:- COMMISSIONER OF C. EX., PANCHKULA VERSUSHMT (TD) LTD.

Citation:- 2015 (322) E.L.T. 342 (P & H)

Brief facts:- As common questions of law and facts are involved in the aforementioned appeals, therefore, they propose to decide the same by this single judgment, in order to avoid the repetition. However, for facilitation, the bare minimum facts that need a necessary mention, have been extracted from Central Excise Appeal No. 78 of 2009 titled as Commissioner of Central Excise, Panchkula v. M/s. H.M.T. (T.D.) Ltd., Pinjore.
The brief facts, relevant for disposal of the instant appeal emanating from the record, are that respondent-assessee M/s. H.M.T. (T.D.) Ltd., Pinjore (hereinafter to be referred as “the assessee”) was engaged in the manufacturing of agricultural Tractors, Tractor parts and Engines, clearing its goods on payment of appropriate Central Excise duty and was availing Cenvat credit on the inputs used in the manufacture of final products.
The Revenue claimed that the assessee has wrongly claimed the Cenvat credit after the amendment of the scheme vide Notification dated 9-7-2004, amending thereby earlier Notification dated 1-3-2002 specifying NIL rate of duty on the Tractors and parts used within the factory production for manufacturing of final goods. Therefore, a show cause notice (Annexure A/1) was issued to the assessee as to why (i) reversal of the Cenvat credit be not ordered (ii) penalty, personal penalty and interest be not imposed and recovered in this relevant connection.
In the wake of show cause notice, the assessee filed reply, inter alia, reading as under :-
“That they were manufacturing 28 models of tractors in their factory; that the benefit of exemption on their finished goods under Notification No. 23/2004-C.E. was only in respect of excise duty payable under first & second schedule to Central Excise Tariff Act, 1985; that out of 28 models of tractors, they were manufacturing 23 models of capacity exceeding 1800cc on which they were also paying Automobile Cess @ 0.125% since 9th July, 2004 and hence, the tractors of capacity exceeding 1800cc could not be considered as exempted goods that they were also paying Education Cess @ 2% on Automobile Cess since 9th July 2004 that Automobile Cess had its origins under Section 30 of the Industrial (Development & Regulation) Act, 1951 (IDRA) under which Notification dated 29-12-1984 of the Ministry of Industry was issued; that thereafter, Automobile Cess Rules, 1985 were issued; that as per Rule 2(e) of these Rules, Cess means the Cess levied and collected in terms of Notification No. SO-932(E), dated 28-12-1983 of Department of Heavy Industry issued under section 9 of the IDRA; that consequently, the levy of Automobile Cess is traceable to Section 9 of IDRA Notification No. SO-932(E), dated 28-12-1983 as reported at 1984 Volume 4 (ECR) Part I Page 26A; and that in terms of the above Notification, the Automobile Cess is levied & collected as duty of excise.”
In all according to the assessee, that since, it has legally availed the Cenvat credit, so question of imposing penalty or interest did not arise at all. It will not be out of place to mention here that the assessee, stoutly denied all other allegations contained in the show cause notice and prayed for its withdrawal.
The explanation put-forth by the assessee did not find favour and the Commissioner of Central Excise, Panchkula, confirmed the demand of duty, imposed penalty, ordered the recovery of interest and confiscated the goods (inputs lying in the stock) vide order dated 22-9-2005 (Annexure A/2).
The assessee filed the appeal before the Principal Bench of Customs, Excise & Service Tax Appellate Tribunal, New Delhi, which was accepted, wherein the Tribunal has held that “when the input-credit legally taken and utilised on the dutiable final products, need not be reversed on the final product becoming exempt subsequently” and the matter was placed before the Regular Bench for final decision vide order dated 24-10-2008 (Annexure A/3).
The Customs, Excise and Service Tax Appellate Tribunal relying upon the following observations of the Larger Bench accepted the appeal of the assessee vide order dated 12-12-2008 [2008 (232)E.L.T.217 (Tri.-LB)] (Annexure A/4) :-
“In view of the above discussions, we hold that when the input-credit legally taken and utilised on the dutiable final products, need not be reversed on the final product becoming exempt subsequently w.e.f. 9-7-2004. The decision of the Bangalore Bench in the case of TAFE Ltd. (Tractor Division) v. CCE, Bangalore - 2007 (210)E.L.T.571 (Tri.) = 2007 (79) RLT 706(Tribunal-Bangalore) enunciated the correct position of the law. The issue is thus, answered in favour of the assessee and against the Revenue”.

Appellant’s contention:- The Revenue did not feel satisfied with the impugned order (Annexure A/4) and filed the present appeal, which was admitted to consider the following questions of law :-
“1. Whether Tribunal has erred in law by not appreciating the language of the relevant sub-rule (1) of Rule 6 of Cenvat Credit Rules, 2002, which clearly state that Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods.
2. Whether the Tribunal was correct in ignoring the Hon’ble Supreme Court judgment in the case of M/s. Albert David Ltd. v. CCE, Meerut as reported in 2003 (157) E.L.T. A81 (S.C.)?”
Assailing the impugned order, learned counsel for the Revenue has contended with some amount of vehemence that as per Rule 6 of Cenvat Credit Rules, 2002 (for brevity the relevant “Rules”), the assessee is not entitled to avail the benefit of Cenvat credit on inputs used in exempted goods, but the Tribunal erred in granting the same to the assessee and, thus, he prayed for acceptance of the present appeal.

Respondent’s contention:-Hailing the impugned order, on the contrary, learned counsel for the assessee has urged that once the Cenvat credit has been duly availed on the inputs used in manufacturing of final products, which were subsequently exempted from duty, the benefit of Cenvat credit cannot be reversed and no interference is warranted in the connection. In support of his contention, he has placed reliance upon the judgments of the Hon’ble Apex Court in cases Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd. - 1999 (112)E.L.T.353 (S.C.).Commissioner of Central Excise v. Life Long Appliances Ltd. - 2006 (196) E.L.T. A144 (S.C.) and Chandrapur Magnet Wires (P) Ltd. v. Collector of Central Excise, Nagpur - 1996 (81)E.L.T.3 (S.C.), a Division Bench judgment of this Court in case Commissioner of Central Excise, Chandigarh v. C.N.C. Commercial Ltd. - 2008 (224)E.L.T.239 (P&H),and a judgment of the Larger Bench of the Tribunal between the parties reported in case H.M.T. v. Commissioner of Central Excise, Panchkula - 2008 (232)E.L.T.217 (Tri.-LB).

Reasoning of judgment:- They have heard the learned counsel for the parties and have gone through the record of the case with their valuable help.
Above being the position on record, now the core question that arises for determination in this appeal, as to whether Cenvat credit availed by a dealer on such quantity of duty-paid inputs, which is used in the manufacture of subsequently exempted final goods, is liable to be reversed or not?
An identical question arose before the Hon’ble Apex Court in Dai Ichi Karkaria’s case (supra). Having interpreted the relevant provisions of the scheme, it was ruled 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. It was held 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 legally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. It was also held that once the credit has been validly taken and its benefit is available to the manufacturer without any limitation in time or otherwise, the right to avail credit is, therefore, indefeasible, as 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 and the credit under the Modvat scheme was as good as tax paid. The same view was reiterated by this Court in C.N.C. Commercial Ltd.’s case (supra).
Similarly, in case Commissioner of Central Excise, Rajkot v. Ashok Iron & Steel Fabricators - 2002 (140)E.L.T.277 (Tri.-LB), the Larger Bench of the Tribunal has held that once the manufacturer had availed the credit and utilised the same during the period when final products dutiable for manufacture of the final product, the same cannot be reversed when subsequently final product exempted from duty. The order of the Tribunal was upheld by the Hon’ble Apex Court in SLP (Civil) No. 14193 of 2002 filed by the Commissioner of Central Excise, Rajkot vide order dated 11-11-2002 [2003 (156) E.L.T. A212 (S.C.)].
Likewise, in Chandrapur Magnet Wires’s case (supra), it was, inter alia, observed by the Hon’ble Apex Court that if the debit entry is permissible to be made, credit entry for the duties paid on the inputs utilised in manufacture of the final exempted product will stand deleted in the accounts of the assessee. In such a situation, it cannot be said that the assessee had taken credit for the duty paid on the inputs utilized in the manufacture of the final exempted product under Rule 57A. In other words, the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken credit of the duty paid on the inputs used in manufacture of these goods. The same view was reiterated by the Hon’ble Apex Court in Life Long Appliances Ltd.’s case (supra).
Similarly, the Principal/Larger Bench of the Tribunal after considering the various judgments mentioned in case H.M.T. v. Commissioner of Central Excise’s case (supra) (between the parties) has held that when the input-credit legally taken and utilised on the dutiable final products, need not be reversed on the final product becoming exempt subsequently. The observations of the aforesaid judgments “mutatis mutandis” are applicable to the present controversy.
This is not the end of the matter. In pursuance of the law laid in Chandrapur Magnet Wires (P) Ltd.’s case (supra) the Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, Government of India issued Circular No. 232/66/96-CX, dated 25-7-1996 and clarified that the credit of the duty paid on common inputs is admissible when used in the manufacture of the final product (exempted and dutiable) provided the said credit of duty paid on inputs going into the exempted category of the final product is debited in the RG 23A Part-II account before the removal of exempted final product on actual or pro rata (estimated) basis.
Moreover, a Division Bench of this Court in case Commissioner of Central Excise, Ludhianav. Ralson India Ltd. - 2006 (202)E.L.T.759 (P&H) = 2008 (10)S.T.R.505 (P&H)has ruled that “this provision allows to a manufacturer credit of any duty of excise etc. paid on the goods used in the manufacture of the specified goods and being a beneficial legislation, its object of input duty relief to a manufacturer should not be defeated on a technical and strict interpretation of the Rules governing Modvat”.
In the instant case, it is not a matter of dispute that the assessee has paid the duty on inputs used in the indicated manufacturing of final goods, the assessee has maintained separate accounts/record, duly entered credit of duty-paid on the inputs in manufacture of final goods and validly availed the Cenvat credit. Therefore, the same cannot be reversed on the ground that the final product (i.e. agricultural Tractors) were subsequently exempted from tax. Thus, the contrary arguments of the learned counsel for the Revenue ‘stricto sensu’ deserve to be and are hereby repelled under the present set of circumstances. No contrary judgment has been cited on behalf of the Revenue. Therefore, the aforesaid judgments are the complete answer to the problem in hand.
In the light of aforesaid reasons, the assessee is held entitled to the benefit of Cenvat credit in the obtaining circumstances of the case. Hence, question No. 1 is answered against the Revenue and in favour of the assessee.
In view of the law laid down by the Hon’ble Apex Court in the aforesaid judgments and the answer to question No. 1 in favour of the assessee, question No. 2 does not survive; for adjudication by this Court.
For the reasons recorded above, as there is no merit in the appeal filed by the Revenue, therefore, the same is hereby dismissed with no order as to costs.

Decision:- Appeal dismissed

Comment:- The analogy of the case is that cenvat credit validly availed cannot be denied at a later stage if the inputs received by the assessee have been used in manufacture of goods which subsequently became exempted. When credit has been availed validly with proper accounting thereof, then the same cannot be reversed on subsequent exemption from payment of duty on final product. Once Cenvat credit has been rightly availed on the inputs used in manufacturing of final products, which were subsequently exempted from duty, the benefit of Cenvat credit cannot be denied later on.

Prepared by:- Monika Tak

Comments

PJ/CASE LAW/2015-16/2866

Post a Comment

Query