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PJ/Case Law/2014-15/2161

Whether entire common input credit was required to be reversed when only exempted goods were manufactured during particular period or 8% reversal was sufficient ?

Case:- M/s KISAN SAHKARI CHINNI MILLS LTD Vs COMMISSIONER OF CENTRAL EXCISE, LUCKNOW

Citation:- 2014-TIOL-665-CESTAT-DEL

Brief facts:- The appellant was engaged in the manufacture of Ethyl Alcohol-rectified and denatured falling under Tariff Heading 22.04 of the schedule to the Central Excise Tariff Act, 1985 besides V.P. Sugar and molasses falling under Chapter 17. During the month of March, 2000 the appellants availed Modvat credit facility of the duty paid on molasses being raw material for manufacture of Ethyl Alcohol (rectified alcohol) and on clearances of it they paid 8% of its price in terms of rule 57 CC of Central Excise Rules, 1944. From their monthly returns it was observed by the department that during the last 12 months the appellants manufactured and cleared only exempted goods i.e. rectified alcohol out of molasses on which Modvat credit facility was availed and did not manufacture and clear Ethyl Alcohol denatured for which Modvat credit on the input molasses was admissible. The appellants took modvat credit of Rs. 6,52,582/- on molasses during March, 2000 and reversed Rs. 3,26,928/- on clearances of exempted goods being 8% of the value of exempted goods as required under Rule 57 CC of Central Excise Rules, 1944. Show cause notice dated 04.10.2000 was issued to the appellants proposing recovery of balance Modvat credit of Rs. 3,25,654/- (Rs. 6,52,582/- - Rs. 3,26,928/-) for contravention of provisions of Rule 57 CC(9) read with Rule 57 AD of Central Excise Rules, 1944. Observing the principles of natural justice the impugned Order-in-Original dated 08.10.2001 was issued confirming the demand of Rs. 3,25,654/- along with interest and imposing equal penalty under Rule 173-Q of Central Excise Rules, 1944/ Aggrieved with the order this appeal was filed.
 
Appellant’s contentions:- On appeal against the said order the appellants had contended that for manufacture of Denatured Ethyl Alcohol it was necessary to manufacture Ethyl Alcohol, which was sold as such also and the quantity of Denatured Ethyl Alcohol was manufactured keeping in view its demand in the market.
 
Respondent’s contentions:- On appeal against the said order, Commissioner (Appeals) rejected the same by observing as under that in the instant case the common raw material i.e. molasses was used for manufacture of Ethyl Alcohol or rectified spirit an exempted excisable product which was cleared at nil rate of duty. As per records of the appellants for March, 2000, they cleared 2,78,000 BL of Ethyl Alcohol valued at Rs. 40,86,600/- and paid duty of Rs. 3,26,928/- @ 8% of value of exempted goods) for which 13,051,64 Qtls of molasses was used involving duty of Rs. 6,52,582/-. There was absolutely no manufacture/clearance of Denatured Ethyl Alcohol, a dutiable product during this period on which input credit on molasses was admissible. From above it was clear that during the relevant period the appellants only manufactured and cleared exempted final product i.e. Ethyl Alcohol for which they were not entitled for the credit of duty of input molasses in contravention of provisions of erstwhile Rule 57 C(1) of Central Excise Rules, 1944.
 
Reasoning of judgment:- The short question required to be decided was as to whether during the month of March 2000 when the appellant only manufactured exempted product, whether they were liable to reverse the entire Cenvat credit or payment of 8% of the value of exempted product in terms of provision of 5 under Rule 57 CC would be sufficient. There was no dispute above the fact that the appellant was actually manufacturing dutiable as also exempted final product and was maintaining a common record in respect of the credit availed on the raw materials used in the manufacture of both the products. They were also paying 8% of the value of exempted final product. However, it so happened that in March 2000, they only manufactured exempted product.
Accordingly revenue directed them to reverse the entire Cenvat credit.
The revenue entire case was based upon the scrutiny of the fact as to during which period the exempted product were manufactured. It may happen that on one day the appellant may manufacture only dutiable product and on the other they may only manufacture exempted product. Whether in such a scenario, the duty liability of the assessee was required to be assessed based upon day to day basis? The answer would be an emphatic NO. The periods could not be segregated in that manner so as to finalize the assessee liability. Accordingly, there was no warrant to do so in terms of the Cenvat credit Rules. It seems that in the present case the amount of 8% was much lower than the amount of credit so availed, thus prompting the revenue to take a reverse stand than the one taken by them in routine i.e. to in 8% of the value of the final product, which in most of the cases was higher than the credit involved.
The Tribunal in the case of Rochi Ram and Sons Vs. CCE, Jaipur 2003 (155) ELT 96 (Tri.- Del.) = 2003-TIOL-296-CESTAT-DEL had dealt with a more or less identical issue and held that Cenvat credit could not be disallowed if an assessee manufactures only exempted goods for a part of the year and for the balance year manufactures both exempted and dutiable goods.
In view of the above findings, the impugned order was set aside and the appeal was allowed with consequential relief to the appellant.

Decision:- Appeal allowed.

Comment:- The analogy drawn from the case is that if an assessee avails common credit pertaining to manufacture of both dutiable and exempted final products and avails the option of credit reversal of 8% of the value of exempted goods, department cannot ask assessee to reverse the entire credit in a particular period wherein only exempted products were manufactured. This is for the reason that the law nowhere stipulates such a direction. Moreover, in the case of Rochi Ram and Sons Vs. CCE, Jaipur 2003 (155) ELT 96 (Tri.- Del.) = 2003-TIOL-296-CESTAT-DEL, it was held that Cenvat credit could not be disallowed if an assessee manufactures only exempted goods for a part of the year and for the balance year manufactures both exempted and dutiable goods. Accordingly, the appeal was allowed. 

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