Whether credit can be availed by assessee on the basis of own invoice when defective goods are received back under Rule 16?

PJ/Case Study/2012-13/70

Prepared by: CA Neetu Sukhwani &
Prayushi Jain

Case study

Introduction:-

M/s Bhansali Engineering Ltd, are engaged in manufacturing of SAN & ABS falling under chapter 39 0f the Schedule to the Central Excise Tariff Act, 1985. A show cause notice was issued to them alleging that they have wrongly taken the Cenvat credit on the basis of their own invoices under which the goods were initially cleared by them, which do not fall under category of valid document for the purpose of availment and utilization of Cenvat Credit in terms of Rule 9(2) of the Cenvat Credit Rules, 2004. This fact was revealed during the course of scrutiny of record of assessee by departmental audit during the period from 18.06.2012 to 21.06.2012 wherein it was noticed that the assessee has received back the excisable goods from their customer due to defect in quality in terms of Rule 16 of Central Excise Rules, 2002 and availed cenvat credit amounting to Rs 348861/- on the basis of their own invoices under which the goods were initially cleared by them. Accordingly, it was proposed to recover Cenvat Credit of Rs 348861/- with interest at the applicable rates as per section 11 AA of the Central Excise Act, 1944 and penalty under Rule 15 of Cenvat Credit Rules, 2004.

M/S BHANSALI ENGINEERING LTD [OIO 22/2013-CE (DEMAND) Dated 28.08.2013]

Relevant legal provisions:-
·         Rule 9 of Cenvat Credit Rules, 2004
·         Rule 11 of Central Excise Rules, 2002
·         Rule 16 of Central Excise Rules, 2002
·         Rule 7 of Cenvat Credit Rules, 2004

Issue Involved:

The following issue was made before the Adjudicating Authority:-
Whether credit can be availed by assessee on the basis of own invoice when defective goods are received back under Rule 16?

Brief facts:- M/s Bhansali Engineering Ltd, are engaged in manufacturing of SAN & ABS falling under chapter 39 0f the Schedule to the Central Excise Tariff Act, 1985. A show cause notice was issued to them alleging that they have wrongly taken the Cenvat credit on the basis of their own invoices under which the goods were initially cleared by them, which do not fall under category of valid document for the purpose of availment and utilization of Cenvat Credit in terms of Rule 9(2) of the Cenvat Credit Rules, 2004. This fact was revealed during the course of scrutiny of record of assessee by departmental audit during the period from 18.06.2012 to 21.06.2012 wherein it was noticed that the assessee has received back the excisable goods from their customer due to defect in quality in terms of Rule 16 of Central Excise Rules, 2002 and availed cenvat credit amounting to Rs 348861/- on the basis of their own invoices under which the goods were initially cleared by them. Accordingly, it was proposed to recover Cenvat Credit of Rs 348861/- with interest at the applicable rates as per section 11 AA of the Central Excise Act, 1944 and penalty under Rule 15 of Cenvat Credit Rules, 2004.

As per the adjudicating authority, credit is to be allowed only if all the particulars prescribed under the Cenvat Credit Rules, 2002 are contained in the invoice/document. The invoices on the basis of which the Cenvat credit has been taken and utilized in the present case were held to be improper and invalid documents because the customer has to return the rejected excisable goods under cover of their own invoices issued under Rule 11 of the Central Excise Rules, 2002 and only then the assessee could avail the Cenvat credit as per the provisions of Rule 16 but in the instant case, the assessee have availed the Cenvat credit on the basis of their own invoices, which do not appear correct as per Rule 9 of Cenvat Credit Rules, 2004. Therefore, it was contended that the assessee can not avail and utilize the cenvat credit of Rs 348861/- on the basis of such improper document.

Further, the revenue department also contended that assessee never brought to the notice of department the vital fact of availing and utilizing cenvat credit which is not in the name of the assessee and which do not contain the basic requirement of Cenvat Credit Rules, 2004 and Central Excise Rules, 2002. This vital fact came in notice by department on scrutiny during audit. Accordingly, it was held that extended period is invokable and the credit wrongly taken is liable to be recovered along with interest in terms of Rule 14 of Cenvat Credit Rules, 2004 read with section 11AA of the Central Excise Act, 1944. Assessee was also held to be liable to penalty in terms of Rule 15(2) of Cenvat Credit Rules, 2004 read with section 11 A(5) of the Central Excise Act, 1944 for contravention of provisions of Rule 9(1) & 9(2) of the Cenvat Credit Rules, 2004.

Assessee’s contention:-The assessee made following submissions before the adjudicating authority:

1) They submitted that they are engaged in the manufacture of Styrene Acrylonitrile (SAN) Co-polymers and ABS Ter polymers falling under sub-heading no. 3903.20 of the first schedule to the Central Excise Tariff Act, 1985 and are registered with Central Excise office having central excise registration no. AAACB3368HXM003. They submitted that the impugned show cause notice issued to them is wholly erroneous and is liable to be set aside.

2) They submitted that denial of cenvat credit merely on the grounds that credit has been taken on the basis of the duplicate for transporter copy of their own invoice is totally unsustainable. It is alleged that the credit can be availed on the basis of the own invoices when the customer to whom goods were sold is not registered under the Central Excise Laws. When the person is not registered under the Central Excise Laws, it is not possible for him to issue invoice under Rule 11 of the Central Excise Rules, 2002 and so the only option available with the assessee in case the goods are returned from such a buyer is to avail the cenvat credit on the basis of the original invoice issued by the manufacturer assessee. It is worth mentioning that Board’s Instruction no. 267144/2009-CX 8 dated 25.11.2009 clarifies the position in this respect as follows:

F.No.267144/2009-CX 8
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs

New Delhi dated 25.11.2009.

To,

The Chief Commissioner of Central Excise,
Bangalore Zone.

Madam,

Subject:- Credit of duty under Rule 16 of Central Excise Rules, 2002 on goods brought into the factory-reg.

Please refer to your reference dated 02.04.09 issued from C.No.IV/16/267/2008 C.C.C.Ex(Bz) on the above referred subject matter.

2.The matter has been examined. The Rule 8(2) of the Central Excise Rules, 2002, provides that “the duty of excise shall be deemed to have been paid for the purposes of these rules on the excisable goods removed in the manner provided under sub rule(1) and the credit of such duty is allowed, as provided by or under any rule”. This provision explains that the invoice of the returned goods, would be a valid document for availing credit and duty is deemed to have been discharged. Regarding availing credit on its own invoice, Rule 16(1) of the Central Excise Rules, 2002, allows the assessee to do so. In any case, the whole procedure is revenue neutral, in the sense as the duty has to be discharged by the 5th of next month.

3.In view of above, it is clarified that credit on rejected/ returned goods, received in the factory before prescribed date for duty payment, can be allowed to be taken under Rule 16(1) of the Central Excise Rules, 2002.

It is clear from the above Board Instruction that invoice pertaining to the returned goods can be treated as a valid document for the purpose of availing the cenvat credit and so the contention of the impugned show cause notice that the credit has been taken on the strength of improper document by us is not sustainable and is liable to be quashed.

Furthermore, the instructions issued by the Board are binding on the departmental authorities and they are bound to follow the same. It has been held in the case of Collector of Central Excise, Bombay v/s Kores (India) Limited [2002-TIOL-414-SC-CX] that the board circulars are binding on the department and the department cannot take a stand contrary to the same. Since the board circulars/instructions are binding on the department, we should be extended the benefit of above instruction and the impugned show cause notice should be set aside.

3) They further submitted that their submission that cenvat credit can also be availed on the basis of their own invoice is strengthened in view of the decision given in the number of cases as cited hereunder:

Ø COMMISSIONER OF C. EX., VADODARA Versus PAB ORGANICS PVT. LTD.[ 2012 (286) E.L.T. 621 (Tri. - Ahmd.)]:-

“Cenvat - Rejected goods received back for reprocessing - Credit denied as being taken on the basis of assessee’s own invoice - HELD : It is not necessary that in all cases an invoice is required to be issued in respect of the inputs - Where the inputs are the goods which are rejected under Rule 16 of Central Excise Rules, 2002, there can be circumstances where the goods come back because the purchaser may not be able to retrieve the documents from bank on payment - Since importer abroad has returned only a portion of goods he would not raise an invoice for this purpose - If no Customs duty paid at the time of re-importation, the assessee would not have any document issued by others but can take credit only on the basis of his own invoice - Appeal by Department rejected. [para 7]”
Ø KINETIC ENGINEERING LTD. Versus COMMISSIONER OF C. EX., PUNE-III [2009 (246) E.L.T. 283 (Tri. - Mumbai)]:-

“Cenvat/Modvat - Duty paying documents - Returned goods - Credit availed by appellants on receipt of goods back into their factory from the consignee as such, accompanied by excise duty paid invoice issued by appellant (manufacturer) evidencing payment of duty on such goods - Department neither questioned receipt of goods nor its duty paid nature - Denial of credit on technical ground of being availed on own invoice, not justified- Rule 7 of Cenvat Credit Rules, 2002 - Rule 9 of Cenvat Credit Rules, 2004. [para 3]”

Ø HITESH PLASTIC PVT. LTD. Versus COMMISSIONER OF C. EX. & CUS., VAPI [2009 (243) E.L.T. 419 (Tri. - Ahmd.)]:-
“Cenvat/Modvat - Returned goods - Documents for availing credit - Goods returned to assessee and they availed credit of duty originally paid by them under their own invoices - Credit under own invoices denied citing Rule 7 of Cenvat Credit Rules, 2002 by Department - No dispute that provisions of Rule 16 of Central Excise Rules, 2002 allow credit of duty paid by themselves as if goods received as inputs - Deemed provisions where final products returned by buyer is deemed as input - Provisions of Rule 7 ibid not applicable to Rule 16 ibid - Rule 16 ibid is special provision enacted for receiving back final product - Invoices originally issued by manufacturer also required to be considered fit for credit availment in such cases - Rule 9 of Cenvat Credit Rules, 2004. [para 3]”

Ø COMMISSIONER OF C. EX. (APPEALS), VAPI Versus VAPI PAPER MILLS LTD. [2009 (234) E.L.T. 538 (Tri. - Ahmd.)]:-

“Demand - Returned goods - Cenvat/Modvat credit availed on self invoices and invoices of customers for returned goods - Demand holding that assessee not maintained prescribed register, did not follow provisions of Rule 16 of Central Excise Rules, 2002 and Trade Notice No. 29/2005, dated 12-12-2005 - Commissioner (Appeals) observed that assessee had given details of rejected goods during month and also removal of rejected goods separately at time of filing returns - Substantive benefits not to be denied for procedural violation of rectifiable nature - Indication in RT-12/ER-1 adequate and extended period not invocable - No case of Revenue both on merits and limitation - Section 11A of Central Excise Act, 1944. [para3]”

On analysing the above cited decisions, it is crystal clear that cenvat credit that is otherwise eligible cannot be denied merely on the grounds that the credit has been taken on the basis of own invoices. It has been held in courts that the substantive benefits should not be denied merely on account of procedural lapses and where it can very well be established that assessee is rightly eligible for the said cenvat credit. In view of the above cited decisions, cenvat credit should be allowed to them by applying the ratio laid down and the impugned show cause notice denying the rightly admissible credit should be quashed.

4) They also submitted that there is no doubt as regards the receipt of returned goods in their factory as the receipt has been properly accounted for and intimated to the department in Annexure-51 as prescribed. Further, no allegation has been made in the impugned show cause notice questioning the duty paid character of the returned goods. Moreover, there is specific provision under Rule 16 of the Central Excise Rules, 2002 regarding the availment of cenvat credit on the goods returned for reconditioning or remaking/reprocessing etc. of an amount equal to the duty paid when the said goods were cleared by the manufacturer to their customer. On perusal of all the above findings, it is clear that cenvat credit on the returned goods is admissible to them as there is no doubt as regards receipt of the said returned goods in their factory and also no doubt as regards duty paid character of the said goods. Therefore, the cenvat credit rightly admissible to them should not be denied to them merely on account of procedural lapses and the impugned show cause notice denying the credit to them should be quashed.

5) It was further submitted that from the above submissions, when they are rightly eligible for availing the credit on the returned goods, the question of paying interest under the provisions of Rule 14 of the Cenvat Credit Rules, 2004 read with section 11 AB of the Central Excise Act, 1944 does not arise.

6) They also submitted that the impugned show cause notice has also proposed to impose penalty on them under section 11 AC of the Central Excise Act, 1944 read with Rule 15(2) of the Cenvat Credit Rules, 2004. In this respect, they submit that penal provisions under section 11AC are attracted only if the conditions prescribed in this section are satisfied. This section reads as follows:-

SECTION 11AC. Penalty for short-levy or non-levy of duty in certain cases. —

(1) The amount of penalty for non-levy or short-levy or non-payment or short payment or erroneous refund shall be as follows :—

(a) where any duty of excise has not been levied or paid or short-levied or short paid or erroneously refunded, by reason of fraud or collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made there under with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (10) of section 11A shall also be liable to pay a penalty equal to the duty so determined;

(b) where details of any transaction available in the specified records, reveal that any duty of excise has not been levied or paid or short-levied or short-paid or erroneously refunded as referred to in sub-section (5) of section 11A, the person who is liable to pay duty as determined under sub-section (10) of section 11A shall also be liable to pay a penalty equal to fifty per cent of the duty so determined;

(c) where any duty as determined under sub-section (10) of section 11A and the interest payable thereon under section 11AA in respect of transactions referred to in clause (b) is paid within thirty days of the date of communication of order of the Central Excise Officer who has determined such duty, the amount of penalty liable to be paid by such person shall be twenty-five per cent of the duty so determined;

(d) where the appellate authority modifies the amount of duty of excise determined by the Central Excise Officer under sub-section (10) of section 11A, then, the amount of penalties and interest payable shall stand modified accordingly and after taking into account the amount of duty of excise so modified, the person who is liable to pay duty as determined under subsection (10) of section 11A shall also be liable to pay such amount of penalty or interest so modified.

Explanation.—For the removal of doubts, it is hereby declared that in a case where a notice has been served under sub-section (4) of section 11A and subsequent to issue of such notice, the Central Excise Officer is of the opinion that the transactions in respect of which notice was issued have been recorded in specified records and the case falls under sub-section (5), penalty equal to fifty per cent of the duty shall be leviable.

(2) Where the amount as modified by the appellate authority is more than the amount determined under sub-section (10) of section 11A by the Central Excise Officer, the time within which the interest or penalty is payable under this Act shall be counted from the date of the order of the appellate authority in respect of such increased amount.”.

The provisions of Rule 15(2) of the Cenvat Credit Rules, 2004 are also similarly worded and read as follows:-

“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 intend 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.”

The analysis of above section and rule makes it clear that the penalty under this section is levied only if there is any short levy/payment or non levy/payment of duty or erroneous refund is there. This section further prescribes the reasons for which the penalty can be levied. These reasons include the fraud, collusion, willful misstatement, etc. On the other hand, no such element was present as the intimation of returned goods with all the relevant details was given to the department in Annexure 51. Thus, all the facts were duly disclosed to the department, as such, there cannot be any scope for suppression. Further, there are no. of decisions available in favour of assessees in such cases, which also shows that there was no contravention of any legal provisions. Therefore, the conditions prescribed in this section are not satisfied; as such, the question of imposing the penalty therein does not arise. The impugned show cause notice is thus liable to be set aside.

7) It is further submitted that there was no malafide intention to evade duty or to suppress facts from the department as already proved hereabove. Thus, penalty is not imposable as held in the case of Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)]. In this case it was held that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. It is further held in the case of Orient Ceramics and Industries [1987 (32) ELT 218 (I)] that words ‘with intent to evade payment of duty’ are very significant and unless and until the intention to evade payment is proved on part of assessee, no penalty can be imposed. Therefore, penal provisions invoked against them are liable to be quashed.

8) Aligning with the above, they also submitted that they place reliance on the above cited cases wherein credit has been allowed on the strength of the own invoices and so they acted under bonafide belief that the credit was admissible to them and so penalty is not imposable on them. 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 bonafide 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]”

The analysis of above decision makes it clear that since they have acted under bonafide, no penalty can be imposed on them. Therefore, the benefit of above decision of Hon’ble Supreme Court should be extended to them and the whole proceedings should be dropped.

9) It is further submitted that the impugned show cause notice has been issued by invoking the extended period of limitation. It is submitted that the extended period is invokable only if there is some fraud, collusion, willful misstatement or suppression of facts with an intention to evade payment of duty. The impugned show cause notice has alleged that they have suppressed the facts of availing the credit on the basis of their own invoice. In this respect, it is submitted that the receipt of these returned goods was intimated to the department in Annexure 51. The details of the goods received, the invoice no. & date, quantity received and all other related information was duly given in this intimation. Thus, the fact of receipt of returned goods was duly intimated to the department and now it cannot be alleged that there was any suppression. Therefore, the very basic allegation required to invoke the extended period, i.e. suppression of facts with an intention to evade payment of duty has not been proved. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Willful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This has also been held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC-CX) wherein hon’ble Supreme Court held as under:-

“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”

Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-

·         Pushpam Pharmaceuticals Company Vs. CCE, Mumbai reported in ( 2002-TIOL-235-SC- CX )-
·         NESTLE INDIA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH [2009 (235) E.L.T. 577 (S.C.)]
·         COMMISSIONER OF C. EX., BANGALORE Versus KARNATAKA AGRO CHEMICALS [2008 (227) E.L.T. 12 (S.C.)]
·         COLLECTOR OF CENTRAL EXCISE Versus H.M.M. LIMITED [1995 (76) E.L.T. 497 (S.C.)];-
COSMIC DYE CHEMICAL Versus COLLECTOR OF CENTRAL EXCISE, BOMBAY [1995 (75) E.L.T. 721 (S.C.)]

The analysis of above cases makes it ample clear that the extended period cannot be invoked unless there is any suppression of facts. In their case also, the extended period has been invoked without proving the suppression of facts, therefore, the impugned show cause notice is wholly and totally erroneous and is liable to be set aside.

Reasoning of Judgment:- After going through the facts of the case, the Deputy commissioner concluded that the assessee have cleared their manufactured goods on payment of duty under the cover 0f central excise invoices to their customers who have rejected the material and have returned the same in original condition. He also agreed with the contention of assessee submitted in their defence that when the customer is not registered under the central excise rules, 2002 and so the only option available with them in case the goods are returned from such a buyer is to avail cenvat credit on the basis of the original invoice issued by them. This fact is also supported by the Board’s instruction no. 267144/2009-CX 8 dated 25.11.2009 which clarifies the position in this respect.

Further in the judgment it was stated that on receipt of materials in their factory, they have submitted D-3 intimation with photocopy of invoice under which the goods were originally cleared by them on payment of duty and photocopy of GR showing receipt of returned goods. It was also found that the returned goods were duly entered in their records and entries of credit were made in RG-23A Part II register. Further they have taken cenvat credit on the basis of their own invoice returned by the customer. After going through the photocopies of such invoices, D-3 intimation and copies of respective GRs, which has been provided by the assessee with their defense reply it is clear that cenvat credit was taken on the basis of central excise invoice issued by them. According to the Deputy Commissioner, there was no doubt as regards receipt of the said returned goods in their factory and also no doubt as regards duty paid character of said goods. Hence, cenvat credit was held to be admissible.

It was also held that the cenvat credit taken on the basis of self invoices on returned goods is admissible as per Rule 16(1) of Central Excise Rules, 2002. Rule 16 of Central Excise Rules, 2002 clearly speaks that “where any goods on which duty has been paid at the time of removal thereof are brought to any factory for being re-made, refined, re-conditioned, or for any other reason, the assessee shall state the particulars of such receipt in his records and shall be entitled to take cenvat credit of the duty paid as is such goods are received as inputs under the Cenvat Credit Rules, 2004 and utilize this credit according to the said rules.”

Further, the decision cited by the assessee and given by the Hon’ble Tribunal in the cases of CCE, Madurai Vs Sri Ramalinga Mills Ltd. reported in 2006 (198) E.L.T. 353 and Rainbow Plastic Industries Vs CCE, Surat, reported in 2011 (274) E.L.T. 577 were also held to be applicable in the present case.

Therefore, finding merit in the contention of assessee that they have taken the cenvat credit correctly on their own invoices, the demand raised vide the impugned show cause notice was held to be not sustainable and so was dropped.

Decision:-Show cause notice was dropped.

Conclusion:- The essence of this case is that procedural lapses should not come in the way of claiming the rightly eligible benefit that is accruing to the assessee as practically, there are instances where the strict compliance of the provisions made is not possible. In such cases, benefit should be extended if the substantial conditions have been fulfilled. In the present case also, credit was taken on the strength of own invoices with respect to defective goods under Rule 16 as some of the customers were not registered under Central Excise Laws and so it was not possible for them to issue invoices under Rules so that the assessee could avail cenvat credit. It was on account of this difficulty that credit was taken by the assessee on the strength of own invoices. However, the other substantial conditions and procedures were duly followed. Therefore, credit was allowed to the assessee.

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PJ/Case Study/2013-14/70
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