Whether deemed credit and actual credit (double credit) can be avail on inputs?

Case:-COMMISSIONER OF C. EX., AHMEDABAD-I VersusASHIMA DYECOT PVT. LTD.

Citation:-2014 (305) E.L.T. 493 (Guj.)

Brief facts:- The present Tax Appeal is preferred by the Central Excise Department, through the Commissioner of Central Excise, Bhavnagar, under Section 35G of the Central Excise Act, 1944, and is directed against order dated 6-5-2011 passed by Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad in Appeal No. E/1412/2006 [2014 (300)E.L.T.397 (Tribunal).].

The appeal wasadmitted by this Court on 8-2-2012 for consideration of following substantial questions of law:

(a) “Whether the Tribunal below committed substantial error of law in allowing Cenvat Credit of actual duty paid on the grey fabrics in terms of Rule 3 of the Cenvat Credit Rules, 2001 and simultaneously permitting the assessee to avail of deemed Modvat Credit on the same fabrics under the provisions of Notification No. 7/2001-C.E. (N.T.), dated March 1, 2001 and 53/2001-C.E. (N.T.), dated June 29, 2001, even though it is restricted in terms of paragraph 4 of these Notifications?”

(b) “Whether the Tribunal below committed substantial error of law in holding that double credit on the same inputs can be availed of?”

Therespondent-assessee is engaged in manufacturing of cotton fabrics and man-made fabrics, which are excisable items under the relevant entry and chapter of the Central Excise Tariff Act, 1985. The assessee uses grey fabrics as input for manufacture of above final products. The assessee was availing benefit of Notification No. 7/2001, dated 1-3-2001 for the period from 21-3-2001 to 30-6-2001, as well as the benefit of Notification No. 53 of 2001, dated 29-6-2001 for the period from 1-7-2001 to 28-2-2002.

The assesseefiled a letter before the competent authority of the Excise Department stating that it had been receiving duty-paid unprocessed grey fabrics from 100% Export Oriented Units (EOU) for processing the same; that the EOUs were clearing the same on payment of duty availing the benefit of deemed Modvat credit equivalent to actual duty paid in terms of the above notifications and that it had through inadvertence not taken the actual credit on unprocessed duty paid grey fabrics received from the Export Oriented Units. On such basis and with such claim, the assessee availed CENVAT credit of Rs. 1,18,66,417/- on the inputs received during the period from 1-3-2001 to 27-2-2002.

Similarly inrespect of unprocessed Denim fabrics, the assessee availed Modvat credit of duty actually paid on them at the time of their clearance. The Excise Authority was intimated by the assessee that it had filed to take deemed credit on the said processed denim fabrics in terms of above mentioned notifications. Accordingly, the assessee availed deemed Modvat credit of Rs. 28,43,967/- for those fabrics also.

A show causenotice dated 7-3-2003 was issued proposing to deny the credit so availed by the respondent as aforesaid. It was stated and the assessee was asked to show cause as to why it availed modvat credit of actually duty paid on the fabrics as well as it took the deemed credit in terms of the above Notification which provided such availment of credit at the time of clearance of the processed fabrics. The adjudicating authority confirmed the same and imposed penalty. The assessee appealed against that order. The Commissioner (Appeals) held that as far as deemed credit of Rs. 28,43,967/- availed by the assessee in terms of the Notifications in respect of Denim fabrics is concerned, it cannot be allowed inasmuch as the said notification allowed availment of credit at the time of clearance of final products. The said part of Commissioner order was accepted by the assessee.

In respect ofavailment of CENVAT credit out of actual duty paid on cotton fabrics to the tune of Rs. 1,18,66,416/-, the appeal of the assessee was allowed on the ground that there was no prohibition or embargo under the rule or in the Notification simultaneously availed the deemed credit for the inputs. The appellant Commissioner set aside the demand of duty of Rs. 1,18,66,416/-.

The Departmentpreferred appeal before the Tribunal against the order of the Appellate Commissioner, which was dismissed by the order which is impugned in the present appeal.

It is the case of the department that the action of the assessee resulted into taking double CENVAT credit in respect of same fabrics. Learned advocate for the appellant elaborated the grounds raised in the memo of appeal. He relied on Notification No. 7/2001 and Notification No. 53/2001 and contended that paragraph 4 therein was incorporated for the very purpose to prevent an assessee taking benefit. He submitted that the Tribunal took an erroneous view that said para in the Notifications did not preclude taking of credit on any other input other than the declared inputs. He further submitted that even if, for the sake of argument, the observation of the Tribunal, is to be accepted. The respondent took deemed credit on grey fabrics also took and the actual credit of duty also on the grey fabrics, and therefore, no other output available in respect of which the deemed credit could have been taken, it was submitted that the assessee’s conduct was not inadvertent, but he took deemed credit first deliberately and at a later stage took the actual credit to circumvent the prohibition provided in paragraph 4 in the Notifications. He further submitted that in view of the provisions of the relevant rules, and in view of the fact that at the relevant time for the period from 1-3-2001 to 27-2-2002, the grey fabrics produced or manufactured in India were exempted from whole of the excise duty as per Notification No. 3/2001, dated 1-3-2001, therefore, under Section 3 of the Customs Tariff Act, 1975 no duty was leviable on the grey fabrics. Therefore also, in his submission, the assessee was not entitled to CENVAT credit of Rs. 1,18,66,416/- which was taken by it on 27-2-2002.

Appellant’s contention:- The submissionof learned advocate for the appellant has considerable force. The assessee took the CENVAT Credit twice in respect of same fabrics. In the first place, CENVAT Credit was taken under deeming provision at the time of clearance of final products. At the time of taking the deemed credit, the original duty paying documents were with the assessee and he could be reasonably posted with the knowledge that the credit was already taken, yet by stating in the letter that due to mistake an ignorance of law, the benefit was not taken. At that time, the assessee did not take the actual duty credit and deferred his claim qua that for a later stage. Subsequently, the CENVAT credit was taken on actual basis. The fabrics were sent and there was no other inputs. The taking of CENVAT credit on two occasions was clearly not justified and prohibited as elaborated herein. At the later stage, the credit which was taken which was of actual duty paid, was on the basis of duty paying documents of the very unprocessed fabrics which were received from 100% EOUs during the period from 1-3-2001 to 27-2-2002.

Furthermore, when the assessee received duty paid unprocessed grey fabrics from 100% Export Oriented Units, the same were accompanied by duty paying documents and it was reasonable to presume that the Export Oriented Units must have taken the credit for themselves, therefore the assessee could not have taken the deemed credit. There was no input stage duty credit left so as to avail any deemed credit. If anyhow the assessee had taken the deemed credit at that stage, it was not permissible for the assessee to take actual credit of the duty at subsequent stage. The assessee calculatively did not choose to avail the actual credit but taking of it was postponed at later stage. Instead, he took deemed credit so that he could technically justify. In actuality, however, the assessee got double benefit.

Paragraph 4 ofNotification No. 7/2001, dated 1-3-2001 reads as under :

The “4. Provisions of this notification shall not apply to manufacturer (other than a composite mill) who avails any credit, under Rule 57AB of the Central Excise Rules, 1944, in respect of the said inputs and the said inputs are used in the manufacture of the said final products.

Explanation. -It is clarified that the CENVAT credit in respect of capital goods, under rule 57AB of the Central Excise Rules, 1944, shall be allowed to the said manufacturer (other than a composite mill) subject to the conditions as specified under Rule 57AC of the said Rules.”

Para 4 of Notification No. 53 of 2001, dated 29-6-2001 reads as under:

The “4. Provisions of this notification shall not apply to manufacturer (other than a composite mill) who avails any credit, under Rule 3 of the CENVAT Credit Rules, 2001, in respect of the declared inputs and the declared inputs are used in the manufacture of the said final products.

Explanation. -It is clarified that the CENVAT credit in respect of capital goods, under Rule 3 of the CENVAT Credit Rules, 2001, shall be allowed to the said manufacturer (other than a composite mill) subject to the conditions as specified under Rule 4 of the said rules.”

The assessee appears to be seeking to take CENVAT Credit under Rule 3 of the CENVAT Credit Rules, 2001 as well as under Rule 11 of said rules on the basis of paragraph 4 above. An attentive reading of explanation to paragraph 4 above makes it clear that the only exception to paragraph 4 is in the case of taking of actual credit under Rule 3 on capital goods. In other words, assessee may take deemed credit as well as actual credit on the capital goods only. When it comes to the inputs, it is only one time credit which is permissible. The assessee may take the benefit of deemed credit, in which case the actual credit benefit would not be available on inputs. Both the facilities cannot be availed together. In the instant case, the assessee had already availed deemed credit, therefore subsequently it was not justified in taking actual credit.

Respondent’s contention:- None appeared for the respondent, though served.

Reasoning of judgement:- In view of theabove position emerging, it is evident that the assessee took double benefit of CENVAT credit, which was not permissible. The double benefit was obtained in respect of same goods namely unprocessed fabrics. It was taken at two stages. Once the deemed basis was adopted for claiming credit, and in the next stage the actual credit was taken and enjoyed. The Tribunal misdirected itself in reading and construing two Notifications and more particularly paragraphs 4 thereof. The Tribunal committed error in overlooking that the assessee had taken CENVAT Credit of actual duty paid on the grey fabrics in terms of Rule 3 of CENVAT Credit Rules, 2001. In that view on the same fabrics, deemed credit could not have been availed under the provisions of Notification No. 7/2001, dated 1-3-2001 and Notification No. 53/2001, dated 29-6-2001 and that such double benefit was restricted in terms of paragraph 4 of those notifications.

In light ofabove, the appeal is allowed. It is held that the Tribunal committed substantial error of law in holding that double credit on the same inputs can be availed of. The questions of law are answered in affirmative and in favour of the department.

Decision:-Appeal allowed.

Comment:- The analogy of the case is that on inputs a onetime credit is permissible and on capital goods the assessee may take deemed credit as well as actual credit. On inputs, if the assessee takes benefit of deemed credit, then actual credit cannot be availed. Both the facilities cannot be availed together. In the instant case, the respondent-assessee took Cenvat credit on two occasions in respect of the same goods, i.e., unprocessed fabrics. Once the deemed credit is availed then actual credit cannot be availed on inputs.

Prepared by:- Monika Tak

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