Utilization of credit taken before opting for Compound Levy Scheme

PJ/Case Study/2011-12/09

CASE STUDY

Prepared By:

CA Pradeep Jain and

Sukhvinder Kaur, LLB [FYIC]

And Megha Jain

Introduction: -

Under the compound levy scheme notified vide Notification No. 17/2007-CE, the Stainless steel patta/patti manufacturing units had an option to pay duty on the capacity of the production rather than on the manufacture of goods. Thus, the duty was payable on the basis of number of Cold-rolling machinery installed in the factory of the assessee. A condition has been stipulated that the cenvat credit on inputs, capital goods and input services will not be available under this scheme to the assessee opting to pay duty under the said scheme. However, can the credit be denied to an assessee who has taken credit on inputs procured before he has opted for compound levy scheme. Will the assessee have to forego the cenvat credit so taken and lying in balance with him or can it be utilised for payment of duty after opting for compound levy scheme. These issues were raised in the case under study.

In the matter of M/s Arihant Steels
[Order-in-Original Dated 13.04.2011]

Brief facts of the case: -

Assessee is engaged in the manufacture of Stainless Steel Cold Rolled Patta/ Patti falling under Chapter 72 of the first schedule to the Central Excise Tariff Act, 1985.

Before 31.01.2009, assessee was functioning under the Cenvat credit scheme. Credit of duty paid on inputs, capital goods and input services was being availed and utilised for payment of excise duty on their final product.

Assessee on 31.01.2009 opted for working under special procedure for compounded levy scheme for Stainless Steel Cold Rolled Patta/ Patti prescribed vide Notification no. 17/ 2007-CE, dated 01.03.2007 issued under Rule 15 of the Central Excise Rules, 2002. The assessee started paying excise duty on the basis of number of cold rolling machines installed for cold rolling of Stainless Steel patta/patties in their premises as per rate of duty fixed per cold rolling machine per month. The condition stipulated in the Proviso to the Notification was that no CENVAT credit of duty paid on any input, capital goods or input services used for manufacture of the specified goods shall be taken under the CENVAT credit Rules, 2004 and the full amount of duty payable under this notification would be paid in cash only.

Assessee availed the Cenvat credit taken on inputs under Rule 3 of the CCR, 2004 and cleared their final product on payment of duty availing special procedure under notification no. 17/2007-CE.

Department issued show cause notice to the assessee on the ground that the Cenvat Credit so taken and utilized appeared to be inadmissible and hence the assessee was required to reverse or pay in cash such amount of Cenvat credit attributable to such goods lying in stock on 31.01.2009. whereas the proviso to that notification states that no CENVAT credit of duty paid on any input, capital goods or input services used for manufacture of the specified goods shall be taken under the CENVAT credit Rules, 2004 and the full amount of duty payable under this notification would be paid in cash only. Whereas in the present case the assessee has cleared the SS Patta/patties under compound levy scheme but not reversed or paid in cash the Cenvat credit irregularly taken and utilized amounting to Rs. 5, 14, 067/-. It was alleged that the assessee has irregularly taken and utilized Cenvat credit on items lying in stock as on 31.01.2009. It was also alleged that the assessee has intentionally and willfully contravened the provisions of the notification.

Noticee’s Contentions: -

It was submitted as under:

- That once the credit is rightfully earned, it cannot be reversed unless there is any specific provision for the same. Where the credit has been earned on the inputs judgment of the Hon’ble Supreme Court in EICHER MOTORS LTD. V. UNION OF INDIA REPORTED IN 1999 (106) E.L.T. 3 (S.C.) = (1999) 2 SCC 361, it was found, that once the capital goods which have already been utilised, and the credit has been received against their utilisation, then no demand can be made for recovery of credit already been earned validly. This decision was rendered in context of quashing the validity of a provision that sought reversal of credit after it is earned rightfully This decision says that where there is any non-obstante clause in the notification, then too it cannot be given retrospective effect for demanding the credit earned rightfully. Similar decision is given by hon’ble Rajasthan High Court in the case of SHANKESHWAR FABRICS PRIVATE LTD. Versus UNION OF INDIA [2002 (142) E.L.T. 42 (Raj.)]. The verdicts of hon’ble High Court are reproduced as follows:-

Modvat - Independent processors of processed textile fabrics denied benefit of utilisation of Modvat credit as per Clause 5 of Notification No. 36/98-C.E., dated 10-12-1998 - Right to Modvat credit accrues to assessee on the date he pays tax on raw materials or inputs - Credit having been taken by assessee, Clause 5 of the notification ibid not to be given retrospective effect so as to nullify Modvat credit earned by assessee. - Under the Modvat Scheme, the right to credit becomes absolute where the input is used in manufacturing of the final product. The right is accrued to the assessee on the date he paid the tax on raw materials or inputs and that right would continue until the facility available thereto gets worked out or until these goods existed. Thus, once the capital goods which have already been utilised and the credit has been received against their utilisation, then Clause 5 cannot be given retrospective effect so as to nullify the Modvat credit, which has already been earned by the individual writ petitioner. It is further significant to note that sub clause (a) of Clause (6) of the impugned notification clearly provides a non obstante clause to the effect that nothing contained in the notification shall apply to any goods manufactured or produced prior to 16-12-1998 and cleared on or after that date. [(1999) 2 SCC 361 relied on]. [para 6]

Similar decision has also been given by the hon’ble Delhi High Court in the case of SUPREME STEELS & GENERAL MILLS Versus UNION OF INDIA [1997 (96) E.L.T. 232 (Del.)]. The verdicts of hon’ble High Court are produced as follows:-

“Modvat credit - Lapse of credit - Rule taking away the Modvat credit already earned whether ultra-vires the Act - Provision for lapsing of credit for specified commodities whether whimsical and discriminatory and hit by Article 14 of the Consitution of India - Such provisions confiscatory and retrospective in nature- Amended Rule 57F of Central Excise Rules, 1944 providing for lapsing of Modvat credit from 1-8-1997 for specified goods stayed till the disposal of writ petition and Petitioners entitled to utilise the Modvat credit already earned subject to furnishing of undertaking - Notification Nos. 24/97, 30/97, 31/97, 32/97, 33/97, 47/97, 48/97, 44/97, 45/97, 58/97 and 59/97.”

Thus, the right to avail credit occurs at the time of paying tax on the raw material or inputs. Hence, where the credit is earned validly at the time of procuring the raw material, this right would continue to be with the assessee until these goods existed. In the instant case, the noticee has rightfully taken the credit and at the time of taking the credit, there was no embargo in taking the same. Further, there is no prohibition in the Cenvat Credit Rules, 2004 which says that the credit has to be reversed on the same. Thus, applying the ratio of this decisions, the credit need not be reversed until the goods are in existence. Thus, the contention of the impugned show cause notice that the credit is required to be reversed is not legally sustainable and is liable to be set aside.

That the reversal of duty paid on inputs is only required if the assessee avails exemption. On the other hand, the switching over from normal procedure to compounded levy does not mean opting for exemption. It is merely shifting from one mode of payment to another. Thus, the provision of reversal of duty paid on inputs contained in the semi-finished and finished goods stock is not applicable here. This was held in the case of Savitri Concast Pvt. Ltd. vs. Commissioner of Central Excise, Jaipur [2001 (138) ELT 296 (Tri.-Del.)]. The decision of hon’ble Delhi Tribunal in this case is produced as follows:-

“Modvat - Ingots - Appellants - Switching over to compounded levy option under Section 3A of the Central Excise Act, 1944 and not opting for exemption from payment of Central Excise duty as stipulated under erstwhile Rule 57H(7) of Central Excise Rules, 1944 - Balance credit lying in respect of inputs on the notified date having not been used thereafter and having already lapsed in terms of erstwhile Rule 57F(17)(c) ibid, no further duty in respect of such inputs, leviable - Erstwhile Rule 57-I ibid. [para 3]”

The same decision was given in the cases cited as follows:-

In all the above cases, it was held that switching from one mode of payment to another mode of paying duty cannot be equated with claiming Exemption and thus duty cannot be demanded on the inputs contained in the semi-finished and finished goods in the stock at the time of shifting from normal procedure to compounded levy scheme. The case of Nakoda Steels as cited hereabove was particularly relating to S.S patta patti which is the finished goods of the noticee. Thus, extending the ratio of these decisions, the impugned show cause notice should be set aside.

- That there is no provision, neither in the Cenvat Credit Rules, 2004 or in the compounded levy scheme which says that the accumulated unutilized credit will lapse on adoption of compounded levy scheme. In absence of any specific provision in this regard, the reversal of credit cannot be demanded. This has been held in the following case:-

COMMR. OF C. EX. & CUS., SURAT-I Versus ANNAPURNA INDUSTRIES P.LTD. [2010 (255) E.L.T. 197 (Guj.)] -

Refund of credit - Cenvat/Modvat - Refund of accumulated deemed credit - Appellant not able to show statutory provision or circular to show that accumulated unutilised credit shall lapse on introduction of compounded levy scheme - Impugned Tribunal order holding accumulated credit shall not lapse when provision therefor absent, sustainable - Substantial question of law not arises - Rule 57C of erstwhile Central Excise Rules, 1944 - Rule 5 of Cenvat Credit Rules, 2004. [paras 2, 4, 5]

Similar decision has been given by the larger bench of Delhi Tribunal wherein it is held that no power is vested with the Central Excise authorities which empowers them to sought reversal of credit except where the credit is earned fraudulently or illicitly. This decision has been given in the case of COMMISSIONER OF C. EX., RAJKOT Versus ASHOK IRON & STEEL FABRICATORS [2002 (140) E.L.T. 277 (Tri. – LB]. The relevant part of this decision is reproduced as follows:-

“……… There is no provision in the Rules which provides for a reversal of credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. Here, the credit has been validly taken and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material & final product. [1999 (112) E.L.T. 353 (S.C.); 2001 (130) E.L.T. 417 (Ker.) relied on]. [paras 6, 7]”

Thus, in this decision, larger bench has held that the Central Excise Authorities cannot demand reversal of duty paid on inputs which has been rightfully availed by the assessee. The reversal cannot be demanded unless the credit has been earned illicitly or in case the materials are not used in the manufacture of goods. In the instant case, no doubt has been raised regarding the validity of credit earned. Hence department agrees that the credit has been earned rightfully. Further, the inputs have been used in the manufacture of excisable products. Thus, in the light of above decision, the reversal demanded in the impugned show cause notice is not viable and is liable to be quashed.

- That the Rule 3(1) prescribes that the manufacturer or service provider shall be allowed to take credit of specified inputs/capital goods received in the factory of manufacturer or premises of service provider. The noticee was duly allowed to take the credit at the time of receipt of inputs and no allegation has been raised in this regard in the show cause notice. Rules 2(h) gives definition of final products which says that final products are the excisable goods manufactured or produced form inputs/input services. There is no doubt that the goods manufactured by the noticee, i.e. stainless steel patta/pattis are excisable. Rule 2(k) defines inputs which say that the inputs are goods used in or in relation to manufacture of the final products. Thus, the raw materials used for manufacture of excisable goods, i.e. SS patta/pattis are inputs and there is no doubt regarding this fact. Rule 3(4) states the manner of utilization of Cenvat credit so availed in accordance with rule 3(1). It is alleged in the impugned show cause notice that the noticee has contravened the provisions of rule 3(4) by not utilizing the Cenvat credit so availed for payment of excise duty; as the excise duty under compounded levy is payable in cash. This allegation indicates that the learned adjudicating authority has taken the view that the rule 3(4) of Cenvat Credit Rules, 2004 is mandatory and in case the assessee is not able to utilize at all the credit under rule 3(4); it results into violation of this rule. In this regard, it is submitted that this rule 3(4) is optional one and it laid down the manner in which the credit is to be utilized if the manufacturer intends to utilize the same.

The analysis of this rule makes it clear that this rule starts with the phrase ““(4) The CENVAT credit may be utilizedfor payment of –“. The use of word “may” indicates that this rule is optional. Thus, the provisions of this rule are applicable only where the assessee intends to utilize the Cenvat Credit so availed. Further, this rule contains various provisos which states the restrictions regarding utilization of credit. These provisos give a list of cases where the accumulated credit cannot be utilized. But this list does not contain any case which says that the credit so taken has to be mandatorily utilized unless the provisions of this rule will get violated.

Thus, the contention of the impugned show cause notice that this rule is mandatory and failure to utilize the credit for payment of duty will lead to its violation is not sustainable. Thus, the contention of the impugned show cause notice that the noticee has violated the provisions of rule 3(4) of the Cenvat Credit Rules, 2004 is not tenable and is liable to be quashed.

- That in the view of above submissions it is clear that the impugned show cause notice has not been able to prove the allegation that the provisions of Cenvat Credit Rules, 2004 have been violated. Thus, the impugned show cause notice issued for contravention of provisions of Cenvat Credit rules is not legally sustainable and is liable to be quashed. Further, the show cause notice has proposed to impose the penalty under rule 15(2) of the Cenvat Credit rules, 2004. This rule is produced as follows:-

“(2) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of the Excise Act, or of the rules made thereunder with intent to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of Section 11AC of the Excise Act.”

Thus, this rule says that the penalty shall be imposable where the Cenvat Credit has been taken or utilized wrongly by various reasons specified herein. In other words, penalty will be imposable if the CREDIT HAS BEEN TAKEN OR UTILIZED WRONGLY. In the instant case, the credit is neither taken wrongly nor it is utilized wrongly. The impugned show cause notice has failed to prove the allegation that the credit is taken/utilized wrongly. Thus, the conditions specified in this rule have not been satisfied and thus, the invocation of this rule is not sustainable. Therefore, no penalty is imposable under this rule.

- In continuation to above it is submitted that the penal action proposed in the impugned show cause notice is not sustainable as they had not reversed the credit by relying on the various decisions. Thus, their act was based on bonafide belief depending upon a no. of judgments as listed hereinabove. It has been held in various cases that no penalty is warranted when the assessee has acted on the basis of bona fide belief. Even the highest court of India – Hon’ble Supreme Court has held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)]that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bona fide belief. The verdicts of Apex Court are produced as follows:-

“Penalty - Bona fide belief caused by Tribunal’s decision - Tribunal in a number of cases giving an interpretation as understood by assessee - Penalty not imposable - Rule 173Q of erstwhile Central Excise Rules, 1944 - Rule 25 of Central Excise Rules, 2002. [para 20]”

Therefore, penalty cannot be imposed on them for the charge of suppression of facts. This has also been held in the following cases:-

Star Neon Singh vs. Commissioner of Central Excise, Chandigarh [2002 (141) ELT 770 (Tri.-Del.)]

Straw Products Ltd. vs. Collector of Central Excise, Indore [1996 (87) ELT 115 (Tribunal)]

Johnson & Johnson Ltd. vs. Collector of Central Excise, Bombay [1995 (78) ELT 193 (Tribunal)]

Indian Explosives Ltd. vs. Collector of Customs [1992 (60) E.L.T. 111 (Cal.)]

Tata Engineering & Locomotive Co. Ltd. vs. Collector of Customs [1991 (56) E.L.T. 812 (Tribunal)]

SuratMunicipal Corpn. Vs. Commissioner of C. Ex., Surat [2006 (4) S.T.R. 44 (Tri. - Del.)]

That the impugned show cause notice is alleging that the provisions of notification no. 17/2007-CE dated 01.03.2007 have been contravened. In this regard, it is submitted that the prohibition contained in the notification no. 17/2007-CE regarding non-taking of Cenvat Credit reads as follows:-

“Provided that no credit of duty paid on any raw materials, component part or machinery or finished products used for cold rolling of stainless steel pattis/pattas, or aluminium circles under the CENVAT Credit Rules, 2004 shall be taken:”

The analysis of this proviso makes it clear that where the manufacturer opts for compounded levy scheme, he shall not take the credit of duty paid on inputs/capital goods. Thus, the use of word “shall” indicates the futuristic aspect of the notification. In other words, it is only after the benefit of this notification is availed, the credit cannot be taken. However, where the credit has already been taken and the finished goods have been manufactured and thereafter the benefit of this notification is taken; this prohibition will not be applicable. It is only after the compounded levy is opted, the credit is not required to be taken henceforth. As such, the impugned order demanding the reversal of credit that has already been taken rightfully and goods have also been used in the manufacture of final products; is not sustainable and is liable to be set aside.

In continuation to above it is submitted that even if it is accepted for the sake of argument that the provisions of this notification have been contravened, then why the benefit of Cenvat Credit have been denied when there is no contravention of Cenvat Credit Rules, 2004. Thus, if the department alleges that there was contravention of provisions of this notification, then the benefit of this notification was to be denied rather than demanding the reversal of Cenvat Credit.

Reasoning of Judgment:-The Adjudicating Authority found that after opting for compound levy scheme on 30.01.2009, the assessee had neither availed fresh Cenvat credit on any raw material, component part or machinery or finished products used for rolling of Stainless Steel patta/patties nor utilized the same towards payment of duty on or after 31.01.2009.

The Adjudicating Authority found that the assessee had availed the Cenvat credit on the input raw materials in question before 31.01.2009 when they were working under the Cenvat credit scheme. It was found that the assessees had stock of S. S. Hot rolled patta of work in progress on 31.01.2009 besides SS Scrap, furnace oil & acid. There was credit lying in balance

It was noted that the SCN has not challenged the admissibility of the Cenvat credit in respect of goods received before 31.01.2009. Once the assessee was legally entitled to take credit on the goods in question, the same could have been utilized for payment of specified duties. The assessee utilized Cenvat credit which was contained on the raw material lying in stock on the date of opting for special procedure. Cenvat credit may be utilized for payment of any duty of excise on any final product. Thus there is no one to one correlation between the inputs and the final products meaning thereby Cenvat credit can be utilized immediately against duty payment of goods and such goods not necessarily be manufactured out of such inputs. The department has also not raised any question on the proper utilization of the Cenvat credit for the payment of duty. Reference was made to the provisions of Rule 3 (1) and Rule 3 (4) of the CCR, 2004.

The Adjudicating Authority held that the availment and utilization of Cenvat credit by the assessee upto the period of 30.01.2009 is proper and legal as per provision of the Cenvat Credit Rules, 2004 and moreover there is no allegation made in the SCN on this count.

The Adjudicating Authority held that upto the period of 30.01.2009 the assessee was paying the duty at normal effective rate and they were availing Cenvat credit of duty paid on the eligible goods used in their factory in or in relation to the manufacture of specified final products. The assessee opted for compounded levy scheme w.e.f. 31.01.2009 as envisaged under Notification no. 17/2007-CE, dated 01.03.2007 issued in exercise of the powers conferred by Rule 15 of the CER, 2002.

The Adjudicating Authority found that the assessee had opted for special procedure w.e.f. 31.01.2009 and started paying duty at the fixed rate per rolling machine per month. They never took or utilize any Cenvat credit for payment of duty under this special procedure. The department contended in the SCN that levy of duty under compounded scheme has been fixed by the government after taking care of the fact of non availing of credit on the inputs etc. and therefore, the assessee was required to reverse the Cenvat Credit involved on the stock held by them as on 18.11.2008 or to pay in cash if they did no have sufficient balance in their credit account.

It was held that the department’s contention was not legally tenable to the extent of proposed recovery of Cenvat credit already taken and utilized by the assessee on the inputs well before opting for compounded levy scheme under Notification No. 17/2007-CE dated 01.03.2007 in as much as proviso to Notification No. 17/2007-CE was not applicable to the assessee at the time they availed and utilised the said credit. The proviso came in operation only from the date when they opted for special procedure i.e. w. e. f. 31.01.2009. It was held hat as the assessee had availed/utilised the credit properly and legally on the inputs in question upto 30.01.2009 and thereafter when they opted to work under Notification No. 17/2007-CE, they have neither taken credit nor utilised thereby making complete compliance of the condition stipulated under proviso to said Notification.

It was held that the words ‘shall be taken’ in the proviso to Notification No. 17/2007-CE denotes the future transaction taking place on or after opting for the compound levy scheme under Notification No. 17/2007-CE. It was held that had it been the intention of the law to restrict the used of such raw materials in or in relation to the goods manufactured under compound levy there would have specific provision in the rules or the said Notification. In that event the word ‘should have been taken’ may have been used in the proviso in place of ‘shall be taken’ but in fact it is not so. It is precept of the law that the right of legal and valid entitlement cannot be taken away unless there is specific provision in the law itself. As the assessee had taken and utilised the cenvat credit in question properly before 31.01.2009, there is no reason to disallow such credit simply on the ground that the assessee had subsequently opted for compound levy scheme.

It was held that in assessee’s case, the final products which had been manufactured out of raw material in stock as on 31.01.2009 were not exempted but duty has been discharged in full in terms of notification no. 17/2007-CE. The Adjudicating Authority agreed with the contention of the assessee that it is not a case of wrongly taken and wrongly utilisation of cenvat credit. The cenvat credit was legally taken at the time of receipt of inputs in their factory.

The Adjudicating Authority relied upon the decision in Collector v/s Dai Ichi Karkaria Ltd [1999 (112) ELT (SC)], CCE Vs. Bhushan Industries Ltd [2003 (162) ELT 356 (Tri.)], Final Order No. A-29-NB/BM dated 06.03.2002 passed in the case of M/s Stainless Steel India Ltd., Jodhpur and on Order in Appeal No. 213/KDT/CE/JPR-II/85 dated 20.03.2002 in the case of M/s Shivam Metals, Jodhpur in which consequential refund was also granted.

In the end it was held that the assessee has not contravened the provisions of the Notification No. 17/2007-CE dated 01.03.2007. The credit taken and utilised by the assessee upto 30.01.2009 was not recoverable from the assessee under Rule 14 of CCR, 2004 readwith Section 11A of CEA, 1944 even though such cenvat credit is attributable to the raw materials lying in the stock of the assessee on 31.01.2009 and used subsequently in or in relation to the manufacture of goods under compound scheme on which duty has been discharged at the fixed rate applicable to compound levy scheme.

It was further held that when no duty/Cenvat credit has been held recoverable the question of recovery of interest under Rule 14 of CCR, 2004 r/w Section 11AB of CEA, 1944 does not arise.

Similarly it was held that on the point of imposition of penalty upon the assessee under Rule 15(2) of CCR r/w Section 11AC of CEA, 1944 and under Rule 25 of CER, 2004 for willful contravention of the provisions, the Adjudicating Authority agreed with the contention of the assessee that it is not a case of interpretation of law. It was found that the assessee desired to opt for compounded levy scheme is required to submit the application with the jurisdictional excise office and only after compliance of prescribed procedure, assessee is allowed to pay duty under compound levy scheme. Therefore, allegation of willful contravention was not sustainable. It was held that the assessee has not contravened the provisions of Notification No. 17/2007-CE and therefore no penalty is imposable on them.

Decision:-

The Adjudicating Authority dropped the recovery of Cenvat credit and did not impose any penalty.

Conclusion:-

The Adjudicating Authority rightly held that the credit taken on inputs procured before opting of compound levy scheme and used for discharge of duty after opting for payment of duty under compound levy scheme did not amount to irregular utilisation of such credit. The credit once taken lawfully cannot be denied to be used by the assessee.

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