Whether exemption deniable on the ground that credit reversed belatedly ?

Case:- M/s CTM TEXTILE MILLSSHRI PANKAJBHAI L PATELVs COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD

Citation:-2014-TIOL-08-CESTAT-AHM

Brief facts:- The material facts of these cases are whether the appellant was required to pay any duty liability for the period July 2004 to December 2005, on the ground that he had availed simultaneous benefit of Notification No.29/2004 and Notification No.30/2004, both dated 09.07.2004. It also transpires that the main appellant had taken benefit of Notification No.29/2004 on some of the items manufactured and cleared by them and paid concessional rate of duty. It also transpires that the appellant had availed benefit of full exemption of some of the items manufactured and cleared by him under Notification No.30/2004. It is undisputed that the appellant had availed CENVAT Credit of inputs which were utilized for manufacturing of final product. One of the conditions of Notification No.30/2004, dt.09.07.2004 is that the assessee should not avail the benefit of CENVAT of the duty paid on the inputs.

Appellant’s contention:- It is the submission of the ld. Counsel that the main appellant had, in fact, reversed the entire amount of CENVAT Credit on the inputs which were utilized for manufacturing of those finished goods for which benefit of Notification No.30/2004 was availed. It is his submission that undisputedly the appellant had not maintained the separate accounts but had reversed the CENVAT Credit on the inputs at the end of every month by calculating the said reversal amount based upon the clearances made under Notification No.30/2004. It is his submission that Hon'ble High Court of Gujarat in the case of M/s Ashima Dyecot Ltd. - 2008 (232) ELT 580 (Guj.) = (2008-TIOL-659-HC-AHM-CX),considered an identical issue and has upheld the order of the Tribunal which was in favour of the assessee. He would submit that the Apex Court dismissed the SLP filed by the Revenue against the judgment of the Hon'ble. High Court of Gujarat as reported at 2009 (240) ELT A 42. It is his submission that Hon'ble High Court of Gujarat has followed the law as laid down by Hon'ble High Court of Allahabad in the case of Hello Minerals Water (P) Ltd. Vs. UoI - 2004 (174) ELT 422 (All)= (2004-TIOL-57-HC-ALL-CX).

Respondent’s contention:-Ld. Departmental Representative would submit that reversal of CENVAT Credit by the appellant is not disputed but there is a delay in reversing the said credit in some cases upto 6 months, wherein the appellant is required to pay interest.

Reasoning of judgment:- On perusal of the records and considering the submissions made by both sides, it was found that there is no dispute as to the fact that the appellant had availed benefit of Notification No.29/2004 and Notification No.30/2004 simultaneously and were not maintaining separate accounts. It is also undisputed that they were reversing the CENVAT Credit availed on the inputs received and consumed for manufacturing of final product cleared under Notification No.30/2004. The adjudicating authority has correctly narrowed down the dispute as to the fact whether subsequent reversal of proportionate CENVAT Credit at the end of the month in respect of the inputs used in manufacturing of final product cleared under Notification No.30/2004 would amount to a situation as if CENVAT Credit was not availed. Despite narrowing down issue to such a micro level, the adjudicating authority proceeded to come to a conclusion that the appellant is not eligible to avail the same. The adjudicating authority has tried to distinguish the judgment of Hon'ble High Court of Gujarat in the case of Ashima Dyecot on the ground that in that case the reversals were effected by the assessee on the clearances and not at the month end.
According to them this distinguishing factor as has been recorded by the adjudicating authority is incorrect as their lordships in the case of Ashima Dyecot Ltd has only laid down the ratio following the law which has been settled by Apex Court in the case of M/s Chandrapur Magnet Ltd. Their Lordship's judgment in the case of M/s Ashima Dyecot Ltd. is specific to the point which talks about the benefit of Notification No.30/2004 can be availed by the assessee, whenever there is reversal of proportionate CENVAT Credit attributable to the inputs which has been consumed for manufacturing of final product on which benefit of exemption of Notification No.30/2004 is availed. The ratio of their Lordships in the judgment is recorded in Paragraphs 5, 6 & 7, which we respectfully reproduce.

"5. We have considered the submissions made by the learned Standing Counsel appearing for the Department and we have also gone through the orders passed by the authorities below. Though there is not much discussion in the order of the Tribunal, the learned Commissioner of Central Excise, has discussed the entire issue at great length. After discussing about the relevant provisions contained in the notifications, rules and submissions of the assessee's representative, the Commissioner of Central Excise has decided the matter against the assessee only on the ground that manufacturer had not maintained separate books of accounts for the goods availing of the benefit of Notification No. 29 of 2004 and for the goods availing of the benefit of Notification No. 30 of 2004. He has further observed that the circular does not speak of final goods or inputs, but, it refers to the goods only and then, he came to the conclusion that as the subjected two notifications refer to the aspect of credit being taken or otherwise of inputs, maintenance of separate accounts for inputs is of prime importance. Since this condition was not satisfied, he confirmed the levy of duty, penalty, etc. This finding of the learned Commissioner of Central Excise is not in consonance with the observations made and the ratio laid down by the Honourable Supreme Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra).
6. The findings rendered by the Honourable Supreme Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra) are clearly applicable to the present matters. In that case also, the case of the Department was that reversal of credit entries is not permitted by the rules. The assessee is not entitled to remove the copper wires without payment of duty since credit of the duty paid on the inputs used in the manufacture of copper wire had already been taken in accordance with Rule 57A. Once appropriate entries have been made in the register, there is no rule under which the process could be reversed. It is true that the assessee has not maintained separate accounts or segregated the inputs utilised for manufacture of dutiable goods and duty free goods, as should have been done. But, the Court's attention was drawn to the departmental circular according to which in a case where the manufacturer produces dutiable final products and also final goods which are exempt from duty and it is not reasonably possible to segregate inputs utilised in manufacture of the dutiable final products from the final products which are exempt from duty. Based on this, the Court held that the manufacturer may take credit of duty paid on all the inputs used in the manufacture of final products on which duty will have to be paid and in view of this clarification by the Department, the Court saw no reason that why the assessee should not make a debit entry in the credit account before removal of the exempted final product and hence, it cannot be said that the assessee has taken credit for the duty paid on the inputs utilised in the manufacture of the final exempted product under Rule 57A. The Court, therefore, took the view that the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken the credit of the duty paid in the inputs used in manufacture of these goods. The ratio laid down in this decision is squarely applicable to the facts of the present case and maintenance of separate books of accounts at the initial stage cannot be considered to be a condition precedent for the purpose of claiming the benefit of exemption to the respondent-assessee.

Even Rule 6(3) of the Cenvat Credit Rules, 2004 says that notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely :-
(a) if the exempted goods are -
(i) xxx xxx xxx xxx
(ii) xxx xxx xxx xxx
(iii) xxx xxx xxx xxx
(iv) xxx xxx xxx xxx
(v) xxx xxx xxx xxx
(vi) final products falling within Chapter 50 to 63 of the said First Schedule;
XXX XXX XXX XXX XXX XXX XXX XXX
Even otherwise, Rule 3 says that the manufacturer or producer of the final product or provider of output services shall be allowed to take credit on various items enumerated therein.

This issue had come up for consideration before the Allahabad High Court in the case of Hello Minerals Water (P) Ltd. Vs. Union of India, reported in 2004 (174) E.L.T. 422 (All.) = (2004-TIOL-57-HC-ALL-CX), wherein it is held that reversal of Modvat credit amounts to non-taking of credit on the inputs. Hence, the benefit has to be given of the notification granting exemption/rate of duty on the final products since the reversal of credit on the input was done at the Tribunal's stage. While arriving at this conclusion, the Allahabad High Court has referred to various judgments under which such reversal was made subsequently and still the benefit was given to the assessee."

Since the issue on merit is covered in favour of the assessee by the judgment of Hon'ble High Court of Gujarat, no merit was found in the arguments put forth by the Ld. Departmental Representative in defence of the impugned order. To that extent, we allow the appeals filed by the appellant, setting aside the impugned order.
At the same time, the lords also found the merit in the arguments of ld. Departmental Representative that the appellant herein had in some cases reversed the CENVAT Credit attributable to the inputs which are used in the manufacturing of exempted goods, belatedly delaying even to an extent of 6 months. In these cases, since there is reversal of CENVAT Credit, the question of discharge of duty liability does not arise, but the appellant is required to pay interest in accordance with the provisions of law on the amount reversed belatedly. In order to quantify the correct amount of interest liability on the appellant, wherein he has not reversed the CENVAT Credit attributable to the inputs, we remand the matter to the lower authorities for limited purpose of quantifying the amount of interest on the belated reversal of CENVAT Credit by the appellant, wherein they had reversed the CENVAT Credit not at the end of the month when the clearances took place, but subsequently.

Decision:- Appeal allowed on terms.

Comment:- The essence of this case is that the CENVAT credit taken mistakenly but reversed subsequently amounts to credit not taken. Hence in nutshell, subsequent reversal of proportionate CENVAT Credit at the end of the month in respect of the inputs used in manufacturing of final product cleared under Notification No.30/2004 is equivalent to credit never taken. Therefore, the benefit of exemption notification cannot be denied. However, as there was delay in reversal, interest was required to be paid by the assessee.

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