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PJ/CASE LAW/2015-16/2726

Whether valuation of process rejection materials at lower than purchase price amounts to writing off?

Case:-AUTOLINE VERSUSCOMMISSIONER OF CENTRAL EXCISE, KOLHAPUR

Citation:- 2015 (315) E.L.T. 610 (Tri. - Mumbai)

Brief Facts:-The brief facts of the case are that the appellant is a manufacturer of automobilecomponents for two, three and four wheelers and is registered with Central Excise Department under the Central Excise Act, 1944. The appellant availed Cenvat credit paid on inputs, input services and capital goods. During the manufacturing process, some inputs get rejected due to deviations, etc. On receipt of the goods in stock, the defective inputs are segregated and returned to the suppliers of the inputs, but some inputs which have been issued for processing are rejected in machining process during the course of manufacture. Such rejected inputs in the course of manufacture, are kept separately, and for the purpose of valuation are valued at a lower rate being rejected goods and not scrap. A show cause notice relating to the period 2010-11 was issuedstating that inthe course of scrutiny of records, it was observed in Audit report for the accounting year 2010-11, that the assessee have shown certain quantity-wise details of input/raw material as ‘Process Rejection’ and kept in stock as process rejection and it appears that the valuation of these inputs in books of account, such as audited financial statements and tax audit report is done on the basis of the rate applicable for scrap and not at the actual purchase price of such inputs. It was also observed in the show cause notice that during earlier financial year, the appellant was showing the closing stock of inputs under three different heading namely, ‘Raw material’, ‘in process’ and ‘scrap’ in their balance-sheet/Form-3CD reports. However, it was observed that for the financial year 2010-11, the appellant have changed the practice of showing the scrap inputs in the stated category i.e. ‘scrap’ and have shown such scrap inputs under the category of ‘process rejection’. The appellant was asked to show cause vide notice dated 30-3-2012 as to why under provisions of Rule 3(5B) of Cenvat Credit Rules, 2004, for not reversing the Cenvat credit availed on such process rejection, the amount of Cenvat credit availed should not be demanded and recovered along with interest and also proposing to impose penalty under Rule 15 of Cenvat Credit Rules, 2000. By Order-in-Original dated 3-10-2012, the show cause notice was adjudicated confirming the proposed demand of Rs. 1,82,750/- with interest and also penalty was imposed under Rule 15 of Cenvat Credit Rules, 2004. Being aggrieved, the appellant had carried the matter before the Commissioner (Appeals), who vide the impugned order dated 13-6-2013 was pleased to reject the appeal, observing that, since the impugned goods (on such rejection) cannot be used in the manufacture of final products, the same cannot be considered as inputs under Rule 3(5B) of Cenvat Credit Rules.
 
Appellants Contention:-Being aggrieved the appellant have filed the present appeal before this Tribunal on the ground that it is not a case of rejection of input as such. Further, the inputs after being issued to machine room and subjected to production, found defective during the process of manufacture, were segregated, which are called as ‘process rejection’ and were valued at lower rate for the purpose of valuation of stock. There is no entry made in the books of account, writing off such process rejection inputs either partially or fully. Further ground taken is that Rule 3(5B) of Cenvat Credit Rules, 2004, which was introduced w.e.f. 11-5-2007 provides for payment of amount equivalent to Cenvat credit on inputs on which Cenvat credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the Cenvat credit taken in respect of the said inputs or capital goods. Accordingly, there being no case, nor the finding that the appellant have written off partially or fully, the impugned order is fit to be set aside and the appeal be allowed.

Respondents Contention:-The learned AR relies on the impugned order and states that the valuation of inputs in the given facts and circumstances at a lower rate than the purchase value, amounts to writing off partially and accordingly, the impugned order is correct and the same be upheld. He further states that Cenvat Credit Rules defined the inputs and the input means all goods used in the factory for manufacture of final products and where the goods have been rejected in the course of manufacture, such goods cannot be treated as inputs.
 
Reasoning of Judgement:-Having considered the rival contentions, tribunal find that it is necessary to take notice of the provisions of Rule 3(5B), which reads, for ready reference :-
Rule 3(5B) as amended by Notification No. 16/2009
“(5B)If the value of any,
(i)         Input, or
(ii)        Capital goods before being put to use,
on which Cenvat credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the Cenvat credit taken in respect of the said input or capital goods :
Provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of taxable services, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the Cenvat credit paid earlier subject to the other provisions of these rules.”
The aforesaid rule clearly provides that subsequent to taking of credit, if any amount is written off fully or where provision is made to write off fully in the books of account, then the manufacturer shall pay an amount equivalent to the Cenvat credit taken in respect of the said input.
In the present appeal, there is no such finding that the appellant have written off the ‘process rejection inputs’. The only finding is that the appellant have valued the process rejection materials at the lower value than the purchase price for the purpose of finalization of account.
Valuing at lower rate is not equivalent to writing of the value of inputs in the books of account. Thus on the finding, tribunal hold that the proceedings initiated is due to mis-interpretation of the Rules. Thus, the appeal is allowed in favour of the appellant and the impugned order is set aside. The appellant will be entitled to consequential relief, if any, in accordance with law.
 
Decision:- Appeal allowed.

Comment:- The analogy in the case is that according to Rule 3(5B) of Cenvat Credit Rules, 2004 if the value of any inputs or capital goods before being put to use is write off fully or provision is made in books of accounts then only the manufacturer is required to pay an amount equivalent to the cenvat credit taken and after being put to use credit can be taken back. Therefore, if the assessee values the process rejection inputs (segregation of inputs after being issued to machine room) at lower than purchase price for the purpose of finalization of accounts then it is not treated as equivalent to writing off. Hence the provisions of Rule 3(5B) are not applicable.

Prepared By:- Neelam Jain
 
 

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