Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/028

25 January 2010

Case Study

Prepared By:

CA Pradeep Jain

Sukhvinder Kaur

And Megha Jain

Introduction: -

Under the Cenvat Credit Scheme, the assessee takes credit of duty paid on the inputs purchased by him which are utilised by him in manufacture of his finished goods. The assessee uses the cenvat credit for payment of duty on clearance of his finished goods. However, if the finished goods become exempt or the assessee opts for exemption under some notification, then what will happen to the cenvat credit taken on inputs lying in his factory premises or inputs which are in process or are contained in the final products? Is the assessee required to reverse the credit taken on the said inputs? These questions were referred to the Hon’ble High Court by the Revenue in the case under study.

Relevant Legal Provisions: -

Rule 9 (2) of Cenvat Credit Rules, 2002

(2) 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 taking CENVAT credit on inputs before such option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export.

Rule 57H (5) of Central Excise Rules, 1944

(5) Where 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 duty paid on inputs before such option is exercised, he 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 and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remains shall lapse and shall not be allowed to be utilized for payment of duty on excisable goods, whether cleared for home consumption or for export.

CCE, Chandigarh v/s M/s Saboo Alloys Pvt. Ltd.

[2010-TIOL-13-HC-HP-CX]

Brief Facts of the Case: -

- Respondent-assessee is engaged in the manufacture of S.S. Ingots/Flats. They were obtaining Cenvat Credit on the inputs used the manufacture of Final Product.

- On 11.04.2005, the respondent opted for benefit of the exemption Notification No. 50/2003–CE dated 10.06.2003 and thereafter the final product was exempted from Excise. An amount of Rs. 2,95,892/- which was lying as modvat credit in the accounts of the respondent was reversed.

- The respondent filed claim for refund of the said amount on the ground that they were not required to reverse the benefit of modvat credit by them on the inputs purchased prior to their opting to take benefit of the exemption Notification. The Assessing officer rejected the contention of the respondent.

- Respondent filed an appeal and same was accepted. It was held in appeal that modvat credit obtained by the respondent was not required be reversed.

- Against the appellate order, Revenue approached the Tribunal. Revenue’s appeal was dismissed in view of the law laid down by a Five member bench in CCE, Rajkot v/s Ashok Iron & Steel Fabricators [2002 (48) RLT 789].

- The Revenue has now approached the High Court.

Question for Consideration: -

The question for consideration before the High Court was: -

Whether a manufacturer who has obtained credit of the Central Value Added Tax paid by him in respect of the raw material and inputs lying in stock or in process or contained in the final product lying in stock is required to refund/ repay the credit when the final product is exempted from Excise?

Appellant’s Contention: -

Revenue contended that in the case of Ashok Iron & Steel Fabricators case, the Tribunal had held that there was no rule which permitted the department to seek reversal of the Modvat credit. For supporting his case, reliance has been placed on Rule 9 (2) of the Cenvat Credit Rules.

Reasoning of the Judgement: -

The Hon’ble High Court held as under: -

v The High Court placed reliance on the judgment of the Apex Court in Collector of Central Excise, Pune and others v/s Dai Karkaria Ltd [1999 (7) SCC 448], where the similar question relating to the reversal of Modvat Credit was considered. Based on Rule 57H(5) of the Central Excise Rules, 1944, the Apex Court has held that there is no provisions in this rules which provides for a reversal of the credit by the Excise Authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilized, has to be paid for. We are here really concerned with credit that 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. It is also highlighted in this judgment that there is no co-relation of the raw material and 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 date that it becomes available.

v The High Court also relied upon the judgment given by the High Court of Kerala in Collector of Central Excise and Customs, Cochin v/s Premier Tyres Ltd. [2001 (130) ELT 417] has also followed the judgment of the Apex Court to answer a similar question in favour of the assessee and against the Department.

v The High Court also noted that judgment of the Tribunal given in Ashok Iron and Steel Fabricator’s case was upheld by the High Court of Rajasthan in Hindustan Zinc Ltd v/s Union of India [2008 (223) ELT 149]. The High Court had held that this can be seen from another angle. In case the inputs are received in factory and used in manufacture of final product. If that final product is destroyed by fire, in this case no Excise duty becomes payable on the product. Yet Modvat credit availed on the inputs used in destroyed goods is not to be recalled. This is also suggestive of the fact that the relevant date for considering exemption from duty of the end product in or in relation to which inputs are used is the date of its receipt in factory and condition is its actual use in or in relation to manufacture of end product by the manufacturer. The chargeability to duty or non-chargeability due to exemption or notified nil rate is to be considered at the stage before goods are actually produced, but on receipt of inputs intended to be used in manufacture of such goods. That being so ultimate clearance of goods at nil rate due to contingency existing at the time of removal does not affect the entitlement that legally arises long before that date.

v The High Court agrees with the judgments passed by the Kerala and Rajasthan High Court. The High Court further held that since the language of Rule 9(2) of the Cenvat Credit Rules is identical to that of Rule 57H (5) of the Central Excise Rules. The High Court feels that interpretation given by the Apex court has to apply in this case also. Therefore, even though the final product may be exempt from the payment of excise, the respondent can not be asked to reverse the Modvat Credit already taken by it.

Decision of the High Court: -

The question answered in favour of the assessee (respondent) and against the revenue (appellant). Appeal is dismissed accordingly.

Comments & Conclusion: -

This is a good decision as the assessee who has taken credit on the inputs lying in stock or in process or contained in the final product is not required to reverse the said credit when he opts to avail benefit of exemption notification. The assessee had taken the said credit validly which he is entitled to use. We hope that the department will put an end to this dispute. But we have seen that the department is not agreeing to the same and time and again, the demand is being issued by the department. Recently, a demand is issued to an assessee who has opted for special procedure under Notification 17/2007 dated 01.03.2007 from normal Cenvat credit scheme. He has not opted for the exemption but from one mode of duty payment to other system of duty payment. There can not be any question in this case. But the department is still insisting for the duty payment.

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PJ/CASE STUDY/2009-10/028
25 January 2010

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