Legality of carry forward of unutilized deemed credit available to the textile sector.

PJ/Case Study/2013-14/85

Prepared by: CA Neetu Sukhwani &
Prayushi Jain

Case study

Introduction:- M/s Shah D.M. Textile (P) Ltd. , hereinafter referred to as the assessee here were availing the benefit of deemed credit on specific inputs in terms of Notification no. 6/2002-CE9(NT) dated 01.03.2002 for manufacture of Processed Cotton Fabrics. This notification was valid till 31^st March 2003 and new procedure of Cenvat Credit was introduced in the textile sector. However, no notification by Central Government or board circular were issued as to what should be done with the balance of the unutilized deemed credit balance available with the assessee. The assessee in the present case carried forward the unutilized balance of deemed credit which was objected by the revenue authorities. As a result, revenue issued a SCN to the assessee and proposed to recover the irregularly availed and utilised deemed credit amount after 31.03.2003. The outcome of the adjudication proceedings with respect to the above cited show cause notice is the subject matter of the present case study.

M/ S Shah D.M. Textile (P) Ltd. [OIO 155-161/CE/JP-II/2013 Dated 19.12.2013

Relevant legal provisions

Notification no. 6/2002-CE (NT) Dated 01.03.2002

Notification no. 8/2003-CE (NT) dated 01.03.2003

Notification no. 35/2003-CE (NT) Dated 10.04.2003

Rule 3 of Cenvat Credit Rules, 2002

Rule 9A of Cenvat Credit Rules, 2002

Rule 57A and 57J of Central Excise Rules, 1994

Issue Involved:

Legality of carry forward of unutilized deemed credit available to the textile sector.

Brief facts:-

The assessee Shah D.M Textile (P) ltd. are engaged in manufacture of Processed Cotton Fabric falling under Chapter 52 of the Schedule to the Central Excise Tariff Act, 1985, for which they have got themselves registered with Central Excise Department. The assessee as alleged by revenue had irregularly utilized deemed credit amount Rs 5,93,548/- Prior to 01.04.2003, the assessee were availing benefit of deemed credit on specific inputs in terms of Notification No. 6/2002-CE9(NT) dated 01.03.2002 for manufacture of specified processed fabrics. The said Notification NO. 6/2002-CE9 (NT) dated 01.03.2002 as amended by the Government of India vide Notification No. 8/2003-CE(NT) dated 01.03.2003 was effective and remained in force on upto 31st day of March 2003. As such this facility of deemed credit for the specified inputs/finished goods stood withdrawn with effect from 01.04.2003. Further, in order to complete the Cenvat Chain the textile & textile articles, as a transactional provision, the Government of India vide Notification No. 35/2003-CE(NT) dated 10.04.2003 issued under the then Rule 9A of the CENVAT Credit Rules, 2002 prescribed the manner of calculation of one time credit on inputs, semi finished/finished goods lying in the stock as on 01.04.2003. Neither the then Rule 11 nor the then Rule 9A of the CENVAT Credit Rules 2002 and the Notifications issued there under provided for utilization/carry forward of the unutilized credit balance of deemed credit after 31.03.2003. As such, the unutilized closing balance of deemed credit as on 31.03.2003 was not permitted to be carried forward or utilized with effect from 01.04.2003. Further as per the amended the Rule 3 of the CENVAT Credit Rules, 2002 read with the then Rule 7 ibid., a manufacturer of the final product is allowed to take credit of the specified duties paid on any input received for use in or in relation to manufacture of final product on the strength of specified documents only.

In view of the above, it appeared that the carry forward of unutilized balance of deemed credit as on 31.03.2003 was not permissible on or after 01.04.2003, as the deemed credit facility had been withdrawn with effect from 01.04.2003 and new procedure of CENVAT Credit has been introduced in respect of textile sector.
During the course of scrutiny of ER-1 filed by the assessee for the month of Apri1,2003 it was noticed that the assessee had carried forward the amount of Rs. 5,93,548/- as mentioned above being unutilized closing balance of deemed credit as on 31.03.2003 availed under deemed credit scheme.

Further, during the months of Apri1, 2003 to July, 2003 they have utilized this balance of deemed credit for

payment of duty against clearances. There is no provision regarding transfer/carry forward the balance of credit lying under any other scheme under the CENVAT Credit Rules, 2002.

It was alleged that the assessee had contravened the provisions of the then Rule 3 of the CENVAT Credit Rules, 2002 read with the then Rule 7 ibid., and willfully transferred and utilized the balance of deemed credit amount towards payment of duty in respect of goods cleared on or after 01.04.2003, thus intentionally evaded payment of duty.

Assessee’s contention:- The assessee made the following contentions before the adjudicating authority:-
The assessee contested that The deemed credit was allowed under Cenvat Scheme only under erstwhile Rule 57A(2) or Rule 9A of new Cenvat Credit Rules, 2002. This is not credit under any other set of rules. Hence, it is allowable to them. The interpretation that there are no rules for carry forward the same is not understandable.
Further the actual credit is also allowed under Cenvat credit Rules. Hence, the balance of deemed Cenvat credit is to be carried forward. It cannot be said that it is lapsed.
There is no specific provision for lapsing of the cenvat credit earned by them. In absence of same it cannot be said that the deemed cenvat credit earned by them is lapsed. It cannot be carried forwarded.

In respect of the contention of Show Cause Notice that one time credit is allowed on stock lying with them and thus, the deemed Cenvat Credit cannot be carried forward by them it was submitted that they have exported the fabrics and deemed credit was allowed to them on fabrics cleared from factory. It has got no correlation with the stock lying with them. Thus, one-time credit allowed on stock has no correlation with deemed cenvat credit earned by them.

Furthermore, the Apex Court has held in EICHER MOTORS [1996(106) ELT-3] that Cenvat credit earned cannot be lapsed. There was a specific provision for lapsing of Cenvat Credit in this case but Apex Court held that it cannot be reversed. But there is no such provision case of new set of actual Cenvat Credit Rules.

The deemed credit earned by exporter are refundable to them as unutilized credit and as such it cannot be lapsed. Such an interpretation leads to huge loss to them. Even this credit can be refunded to them as unutilized credit. Hence, it cannot be lapsed. The withdrawal of notification of deemed credit means that they cannot take credit on deemed basis henceforth. They have to take credit on the basic of new set of rules on actual basis. But it no where says that the deemed credit earned will be lapsed. Whenever the credit is lapsed there is a specific provision for the same from Govt, of India. But it has not been done in this case. Hence, cenvat credit lying with them as on 31.0-3.2004 will automatically to be earned forward. Further as per EICHER MOTOR [1996(106) ELT-3] wherein it was found that Cenvat credit already earned cannot be lapsed, the honourable apex court held that:-

"MODVAT SCHEME-An overview-Rule 57 and 57J of Central Excise Rule, 1944-It is clear from the Modvat Rules, 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. There is no provision in the Rules which provided for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stand cancelled or, if utilized, has to be paid for. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material an 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. It is therefore, that in the case of Eicher Motors Ltd. V/s. Union of India [1999(106) ELT 3] Supreme Court said that a credit under the Modvat Scheme was as good as tax paid."
The same rule has been followed in Shankeshwar Fabrics by Rajasthan High Court. There was specific provision for lapsing the cenvat credit, when compounded levy was introduced under Section 3A of Central Excise Rules. The Hon'ble High Court held the tax paid is tax earned. Hence, the Modvat credit earned by them cannot be lapsed retrospectively.

Reasoning of the judgment:-The issue for decision in these show cause notices is whether the assessee were entitled to carried forward the unutilized deemed cenvat credit lying as on 01.04.2003 in respect of processed fabrics being manufactured and cleared by them for the months of April 2003 to July 2003. The Government of India had issued different Notifications from time to time declaring inputs and final products and quantum of deemed credit for the purpose of admissibility of credit on deemed basis without production of duty paying documents in respect of processed grey cotton or man- made fabrics falling under CH.H. No. 5207.20, 5208.20, 5209.10,5511.10, 5512.10 & 5513.10 of the Central Excise Tariff Act, 1985.

It was found that the grey cotton/Man Made Fabrics falling under CH.H. No. 5207.20, 5208.20, 5209.10, 5511.10, 5512.10 & 5513.10 of Central Excise Tariff Act, 1985 had not been declared as eligible inputs in the aforesaid notifications which were used by the assessees for manufacture of Processed Cotton Fabric. Whereas the dyes, chemicals, consumable, packaging materials falling within the First Schedule to Central Excise Tariff Act, 1985 were declared as eligible inputs for the 'purpose of deemed credit.
It was also found that the grey fabrics falling under CH.S.H. No.. 5207.20, 5208.20, 5209.10,5511.10, 5512.10 & 5513.10 were enjoying full exemption from basic excise duty and the same was chargeable to NIL rate of Addl. Duties of excise (Goods of Special Importance Act; 1857).

It was also found that the assessee did not maintain separate accounts of other inputs viz, Dyes, Chemicals, consumables, packing materials etc and accordingly they failed to supply the separate records of credit admissible on the said inputs.

The Additional Commissioner found that the impugned show cause notices were issued as the protective demands on the basis of para 2 raised by the A.G.(Audit) vide LAR No. 53/2003-04 which had not been accepted by the department on the ground that Rules 57A(5) of the erstwhile Central Excise Rules provided admissibility of deemed credit to the manufacturer of the final products even if the declared inputs were not used directly by such manufacturer. The said para 2 of LAR No. 53/2003-04 had finally been converted into DAP No. 170/2003-04. Now, I observe that the AG (Audit) had closed the issue by intimating the department vide letter RAINDTIII/1-13012/FS/11/DP-12/03-04 dated 17-04-.2012. Since the issue had been closed by the AG (Audit) so the issue involved in the impugned show causes notices has attained finality and thus the Show Cause Notices mentioned in the table of the brief facts are not sustainable under Section 11A of Central Excise Act, 1944. Since the demand has not been held sustainable , therefore, the question of imposing any interest and penalty in view of the decision of the Hon'ble Supreme Court of India in the case of M/s HMM Ltd 1995(76) ELT-497(SC) do not attract.

In view of the above, the entire proceedings initiated vide show cause notice was dropped.

Decision:-SCN proceedings discharged.

Conclusion:-The substance of this case is that in the earlier period when the deemed credit facility was introduced, there was a lot of litigation as regards admissibility of deemed credit on grey fabrics as it was not specifically mentioned in the list of eligible inputs. Moreover, it was even contended that as the deemed credit facility expired on 31.3.2003, the unutilised deemed credit balance would lapse and assessee could not carry forward the same after 31.3.2003. Both the above allegations were also part of the audit objection that were being referred to the CAG wing. However, as the above audit objections were settled by the CAG wing in favour of the assessee, all the demands proposed to be raised vide various show cause notices were dropped.

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02 January 2014

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PJ/Case Study/2013-14/85
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