Whether input credit availed on semi-finished goods prior to opting for Compounded Levy Scheme deniable?

PJ/Case Study/2013-14/54

CASE STUDY

Prepared by:-CA Neetu Sukhwani &
Bharat Rathore

Introduction:-

The assessee was issued with a Show cause notice alleging that they have not reversed Cenvat Credit availed on semi finished goods acquired prior to 31.07.2011 while opting for Compound Levy Scheme. It was proposed to deny the Cenvat credit to the tune of Rs. 5,73,111/- attributable to inputs contained in the semi finished goods in stock as on 31.07.2011 alongwith interest. It was also proposed to impose penalty under Rule 15(1) of Cenvat Credit Rules, 2004 and penalty under Rule 25 of Central Excise Rules, 2002 read with Para 9 of Notification no. 17/2007-CE dated 01.03.2007. The adjudicating authority confirmed the demand of Cenvat credit with interest and imposed penalty of Rs. 5000/- under para 9 of Notification no. 17/2007-CE read with Rule 25 of the Central Excise Rules, 2002. However, the adjudicating authority dropped the penalty under Rule 15 (1) of Cenvat Credit Rules, 2004. It is against the said order passed by the adjudicating authority that the assessee filed appeals to the Commissioner Appeals.

M/s. Shri Laxmi Metal Rolling Mill. v/s Additional Commissioner (Ahd-II),
Ahmedabad

[Order-In-Appeal no. 101/2013(Ahd-II)CE/AK/Commr(A)/Ahd dated: 30/04/2013]

Relevant Legal Provisions:-

RULE 15. Special procedure for payment of duty. — (1) The Central Government may, by notification, specify the goods in respect of which an assessee shall have the option to pay the duty of excise on the basis of such factors as may be relevant to production of such goods and at such rate as may be specified in the said notification, subject to such limitations and conditions, including those relating to interest or penalty, as may be specified in such notification.

(2) The Central Government may also specify by notification the manner of making an application for availing of the special procedure for payment of duty, the abatement, if any, that may be allowed on account of closure of a factory during any period, and any other matter incidental thereto.

Notification No. 17/2007-CE

9. Confiscation and penalty.- If any manufacturer contravenes any provision of this notification in respect of any excisable goods, then all such goods shall be liable to confiscationand the manufacturer shall be liable to penalty under rule 25 of the Central Excise Rules, 2002.

Rule 25 of Central Excise Rules, 2002

RULE 25. Confiscation and penalty. —

(1) Subject to the provisions of section 11AC of the Act, if any producer, manufacturer, registered person of a warehouse or a registered dealer, -

(a) removes any excisable goods in contravention of any of the provisions of these rules or the notification issued under these rules; or

(b) does not account for any excisable goods produced or manufactured or stored by him; or

(c) engages in the manufacture, production or storage of any excisable goods without having applied for the registration certificate required under section 6 of the Act; or

(d) contravenes any of the provisions of these rules or the notifications issued under these rules with intent to evade payment of duty,

then, all such goods shall be liable to confiscation and the producer or manufacturer or registered person of the warehouse or a registered dealer, as the case may be, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention of the nature referred to in clause (a) or clause (b) or clause (c) or clause (d) has been committed, or [rupees two thousand], whichever is greater.

Issue: - Whether input credit availed on semi-finished goods prior to opting for Compounded Levy Scheme deniable?

Brief Facts:-

The appellant, M/s Shri Laxmi Metal Rolling Mill is manufacturer of SS Cold Rolled Patta/ Patti. The appellant is paying excise duty under the Cenvat credit Scheme upto 31.07.2011 but after that the appellant have opted to pay duty under Compounded Levy Scheme introduced vide Notification no. 17/2007-CE issued under Rule 15 of the Central Excise Rules, 2002. On verification by the jurisdictional Range Superintendent at the time when appellant had opted to avail special procedure in terms of Notification 17/2007-CE, it was noticed that the appellant did not have any stock of finished goods or input as such but they were having some goods in process which contained duty paid inputs on which the appellant had availed Cenvat Credit prior to 31.07.2011. Therefore, the Department issued Show Cause Notice alleging that they have not reversed Cenvat credit availed on semi-finished goods acquired prior to 31.07.2011 while opting for Compounded Levy Scheme. It was proposed to deny the Cenvat Credit attributable to inputs contained in the semi finished goods in stock as on 31.07.2011 along with interest. It was also proposed to impose penalty under rule 15 (1) of Cenvat Credit Rules, 2004 and penalty under rule 25 of Central Excise Rules, 2002 read with Para 9 of Notification No. 17/2007-CE dated 01.03.2007. The adjudicating authority confirmed the demand of Cenvat Credit along with Interest and imposed penalty of Rs. 5000/- under Para 9 of Notification no. 17/2007 read with Rule 25 of the Central Excise Rules, 2002. Adjudicating authority dropped the penalty under Rule 15 (1) of Cenvat Credit Rules, 2004. Aggrieved with the impugned order, the appellant preferred appeal along with stay application before Commissioner (Appeals).

Appellant’s Contentions:- The appellant made following submissions before the Commissioner (Appeals):-

The appellant submit that the Cenvat credit was rightfully availed by them on the duty paid inputs procured by them. The said duty paid inputs were procured by them before they have opted for compound levy scheme. Therefore, once the credit is rightfully earned, it cannot be reversed unless there is any specific provision for the same. In this regard, reliance is placed on the following judgments:

Ø EICHER MOTORS LTD. V. UNION OF INDIA [1999 (106) E.L.T. 3 (S.C.)]
Ø SHANKESHWAR FABRICS PRIVATE LTD. Versus UNION OF INDIA [2002 (142) E.L.T. 42 (Raj.)]
Ø SUPREME STEELS & GENERAL MILLS Versus UNION OF INDIA [1997 (96) E.L.T. 232 (Del.)]
Ø CCE, Bangalore Vs M/s Tafe Limited [2011-TIOL-242-HC-KAR-CX]:

The appellant submit that 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 their case, they have 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 these decisions, the credit need not be reversed.

The appellant further submit that 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. The reversal of duty paid on inputs is only required if the assessee avails exemption. Thus, the provision of reversal of duty paid on inputs contained in the semi-finished and finished goods stock is not applicable here. In this regard, reliance was also placed on following decisions wherein same decision 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 was given: -

Ø Savitri Concast Pvt. Ltd. vs. Commissioner of Central Excise, Jaipur [2001 (138) ELT 296 (Tri.-Del.)]

Ø Kakda Rolling Mills vs. Commissioner of Central Excise, Bhopal [2005 (179) ELT 457 (Tri.-Del.)]

Ø Jagannath Steel (P) Ltd. vs. Commissioner of Central Excise, Allahabad [2006 (205) ELT 525 (Tri.-Del.)]

Ø Nakoda Steels P. Ltd. vs. CCE, Jaipur [2002 (51) RLT 1059 (CEGAT-DEL.)]The facts of this case were particularly relating to S.S patta patti which is the finished goods of the noticee.

The appellant also pleaded 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.

In this regard, reliance is placed on the following cases: -

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

Ø COMMISSIONER OF C. EX., RAJKOT Versus ASHOK IRON & STEEL FABRICATORS [2002 (140) E.L.T. 277 (Tri. – LB]

The appellant further submit that there is no contravention of any provisions of the Cenvat Credit Rules, 2004 by them which is mentioned in order of adjudicating authority that alleged that by not reversing the cenvat credit involved in semi-finished goods in stock as on 31.07.2011, they have contravened the provisions of Cenvat Credit Rules, 2004 as they have wrongly taken cenvat credit which is not available to them as per condition in Notification No. 17/2007-CE, dated 01.03.2007, wherein it is mentioned that

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 appellant submitted that the above-mentioned condition in Notification No. 17/2007-CE, dated 01.03.2007 was applicable only after the assessee had opted for compounded levy scheme and not before. Therefore, there is no violation of either Cenvat Credit Rules, 2004 nor of Notification No. 17/2007-CE. 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.

Therefore, in light of the above case laws, it is crystal clear that demand duty and imposition of penalty under Rule 25 of Central Excise Rules, 2002 read with Para 9 of Notification No. 17/2007-CE dated 01.03.2007 is not warranted.

Respondent’s Contention:- The responded pleaded that the appellant has not reversed Cenvat credit availed on semi-finished goods acquired prior to 31.07.2011 while opting for Compounded Levy Scheme. It was proposed to deny the Cenvat Credit attributable to inputs contained in the semi finished goods in stock as on 31.07.2011 along with interest and penalty under rule 25 of Central Excise Rules, 2002 read with Para 9 of Notification No. 17/2007-CE dated 01.03.2007.

Reasoning of the Commissioner (Appeals):-

The Commissioner (Appeals) held that the appellant submitted a copy of challan and also stated that though they were directed to pre-deposit 25% of the amount of duty as pre-deposit but due to pressure from department, they have paid under protest 100% of duty demand. Since Rs. 5,78,111/- has been paid against demand of duty of Rs. 5,73,111/- and penalty of Rs. 5000/-, which is more than adequate deposit they have made and therefore the Commissioner Appeals decided to take up their appeal for final decision.

The case of revenue is that duty which is contained in semi finished goods acquired prior to 31.07.2011 and lying in the stock as on 01.08.2011 is required to be reversed as per provision of notification no. 17/2007-CE dated 01.03.2007 while opting for Compounded Levy Scheme.

The Commissioner (Appeals) find that appellant has opted for special procedure with effect from 01.08.2011 and started paying duty at the fixed rate per rolling machine per month. The Commissioner (Appeals) also observed that after opting to work under Notification no. 17/2007-C.E. dated 01.03.2007, the appellant has neither taken credit nor utilized the same. The proviso to Notification No. 17/2007-C.E. dated 01.03.2007, stipulates 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 circle under Cenvat credit rules, 2004 shall be taken. The products which had been manufactured out of raw materials in stock as on -1.08.2011, were not exempted but duty has been discharged in full terms of Notification No. 17/2007-C.E. dated 01.03.2007. It was observed that appellant has contested that there is no specific provision neither in the Cenvat Credit Rules nor in the notification no. 17/2007-CE which says that the credit involved in the inputs contained in the semi finished goods is required to be reversed while availing for the compounded levy scheme.

The Commissioner (Appeals) further finds that appellant had relied upon the decision of M/s Nakoda Steels Pvt. Ltd. Vs. CCE, Jaipur [2002 (51) RLT 1059 (CEGAT-Del.)], a similar case decided in favour of the assessee wherein the Hon’ble Tribunal has held that no reversal is required while switching from normal Cenvat scheme to compounded levy. In the case of M/s Nakoda steels P. Ltd., was held that appellant were not liable to pay duty in respect of inputs lying in stock as on date when they had opted for compound levy scheme and the provisions of Rule 57H(7) were not applicable to their case. This case was of second stage appeal filed by the party. The Hon’ble CEGAT in support of the said case had relied upon the decision in the case of M/s. Savitri Concast Pvt. Ltd. Vs. CCE, Jaipur-2001 (46) RLT 900 (CEGAT-Delhi) which also has been relied upon by the appellant in the present case. For appreciating the issue relevant portion of this case is reproduced as under:-

“3 it is observed that on similar grounds, the same Commissioner (Appeals) are not applicable to such type of case. Accordingly the order of the Commissioner (Appeals) was set aside and the appeal of the party was allowed in the following terms. It is observed that the Department in their appeal before Commissioner (Appeals) relied on the provisions of Rule 57H(7) read with Rule 57F(17)(C). The former sub-rule provides that a manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year and who has been availing of the credit of the duty paid on inputs before such option is exercised, shall be required to pay an amount equivalent to the credit, if any, allowed to him in respect of inputs lying in stock or used in any finished excisable goods lying in stock on the date when such option is exercised. The latter sub-rule provides that on 01.08.1997, the Modvat credit lying in balance with the manufacturers of the type under consideration who opt for paying duty under Section 3 A shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods. It is observed that in the present case both of these provisions do not adversely affect the case of the appellants. Here, the appellants on 01.08.1997 started paying duty on the compounded levy rates under Section 3A and as such it is a switch over of payment of duty from one mode to another and not opting for exemption from payment of Central Excise duty as stipulated under Rule 57H(7). Further they had also not utilized any Modvat credit lying in balances in their account after this date since the same had lapsed in terms of rule 57F(17). Therefore, there is no ground for asking them to pay any duty, as there is no such provision. The reading by the lower appellate authority of the judgment of the Hon’ble Allahabad high court in the case of Super Cassettes Industries Ltd. (Supra) is misconceived, as the observations of the High Court in that case that there can be no finalized credit unless the input are used in accordance with Rules 57A and 57 F and either excise duty is paid on final product or the input are otherwise disposed off for home consumption or exported, are made in respect of the final products which are cleared without payment of duty. In the present case, the final products are cleared on payment of duty and the Modvat credit lying in credit of the appellants had immediately lapsed on the appointed date and was not used thereafter. Therefore, the conduct of the appellants is perfectly within the ratio of the judgment of the Hon’ble Allahabad High Court”

The Commissioner (Appeals) finds that the case of appellant is fully covered by the ratio of the above decision. That as per provisions of notification no. 17/2007-CE dated 01.03.2007, no Cenvat credit of duty paid on any inputs/ capital goods/ input services can be taken for manufacture of the goods by the unit operating under compounded levy scheme and 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. Accordingly, following the settled legal position as per precedents quoted supra, the Commissioner (Appeals) set aside the order appealed against and allowed the appeal with consequential relief, if any.

Decision:- The appeal was allowed with consequential relief.

Conclusion:- The substance of this case is that no reversal of input credit is required on inputs contained in semi-finished goods prior to opting for compound levy scheme and if the goods manufactured out of such inputs are cleared after opting to avail special procedure in terms of Notification no. 17/2007-CE dated 1^st March, 2007. Hence, 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. The reversal of duty paid on inputs is only required if the assessee avails exemption.

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11 May 2013

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PJ/Case STUDY/2013-14/54
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