Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2010-11/03

20 April 2010

PJ/CASE STUDY/2010-11/03

Case Study

Introduction:

There is a great confusion in interpreting the Notification No.35/2003-CE(NT) dated 10.4.2003 issued by the Central Government after the introduction of new set of Cenvat Credit Rules,2004. The deemed credit that was available in the old set of Cenvat Credit Rules, 2002 according to the revenue is not entitled to the assessee or should lapse. But nothing accumulated in the books of accounts can be removed like that just because Govt. has done something new in place of the old one. The notification just prescribes the method of calculation and says nothing about the deemed credit will lapse. Without the provisions of the Act specifically providing revenue cannot take their own decisions. After the introduction of new rules of Cenvat Credit the Department has issued SCNs to various assessee’s alleging that not to utilise their deemed Cenvat credit balance as by introduction of new scheme, the old balance will lapse.

We are also having many assessees who have received such SCN. One of the case with its decision is brought to your notice through this case study.

M/s .D.K.PROCESS Pvt. Ltd.

Relevant Provisions:-

Rule 11 of the Cenvat Credit Rules, 2002

Notwithstanding anything contained in rule 3, the Central Government may, by notification declare the inputs on which the duties of excise, or additional duty of customs paid, shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification and allow CENVAT credit of such duty deemed to have been paid in such manner and subject to such conditions as may be specified in the said notification even if the declared inputs are not used directly by the manufacturer of final products declared in the said notification, but are contained in the said final products.

Rule 12 of the Cenvat Credit Rules, 2002

Where the CENVAT credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of sections 11A and 11AB of the Act shall apply mutatis mutandis for effecting such recoveries.

Brief Facts of the Case: -

§ The assessee is a manufacturer of the grey MM Fabrics falling under CH. SH. No. 54.02 of the Central Excise Tariff,1985

§ The assessee were availing deemed credit under Rule 11 of Cenvat Credit Rules, 2002 on processed fabrics.

§ New procedure of Cenvat Credit was introduced and the deemed credit facility was withdrawn on or after 1.4.2003.

§ So the assessee was having a carried forward balance of deemed credit. The department said that the balance was not admissible and it will lapse on introduction of new scheme. This issue was raised by AG audit. The textile manufacturers have utilised the same. The department issued show cause notice to recover the same along with interest under Rule 12 of Cenvat Credit Rules, 2002 read with Sec 11 &Sec 11AB of the Central Excise Act, 1944.

§ Show Cause Notice was issued to the assessee on the above basis and penalty was imposed under Rule 13 of the Cenvat Credit rules, 2002.

§ The issue was not decided and case was transferred to call book.

Reasoning of the Order: -

The learned Appellate Authority held as under:

· Recently there was a same issue before Gujarat High Court i.e. grant of deemed credit on grey fabrics used in the manufacture of processed fabrics where the CEGAT vide its order no. 292-293/2002-D has passed the decision in favour of the assessee by saying that the assessee was entitled to deemed credit on the inputs. Reliance was also placed on the Board’s Circular No. 243/77/96 dated 3.9.96.

· Further it was proceeded taking in consideration the matter in Mangal Textile Mills (I) Pvt. Ltd.[2003 (159) E.L.T. 464 (Tri. –Del.)]. Here the assessee’s contention that the input referred to as item no. 2 in Col. 2 of the Notification have gone in to the manufacture of Grey Fabrics and it was agreed upon that the assessee was entitled to deemed Cenvat Credit. The Gujarat High Court rejected the application of the department in the above case, as there was no substantial question of law involved.

· In CCE, Ahmedabad V/s Suzuki Synthetics [2008 (222) E.L.T 279 (Tri.-Ahmd.)] also deemed credit was allowed for grey fabrics.

· Delhi High Court has also said that though inputs are not directly being used by the manufacturers of the final product declared in the notification but are contained in the final product. They are also not mentioned in the table of inputs referred in the notification, comprised of yarn/fibre which are the Inputs in respect of grey fabrics. The rule 11 requirement is satisfied as the processed fabrics are the final products containing the yarn/fibre. This decision was given in the case of CCE v/s. MB Dyers [2010-TIOL-160-HC-DEL-CX]

· The same goes with CCE, Surat-I v/s Shrinath Tex Prints P. Ltd. [2008 (223) E.L.T 486 (Tri.-Ahmd.)] where it was said that deemed credit utilisation is an additional stipulation of deemed credit upto that extent, that credit is available at the time of clearance of final product and on that credit which is deemed not to be taken when the raw material are received. So according to rule 14 and Notification No. 29/96 –C.E (N.T) deemed credit cannot be taken earlier to the date of clearance of the final product, demand for delayed availment of credit is not sustainable.

· The unutilised credit earned by the assessee needs to be carried forward till there is some provision in the act describing its utilisation or its setting aside on the fact that new law has been enacted.

· The deemed credit was allowed under Rule 9A of the Cenvat Credit Rules, 2002. The notification issued thereafter cannot be interpreted as it is not sustainable to carry forward or utilise the unutilised credit balance of deemed credit after 31.3.2003.

· The Notification No.35/2003-CE(NT) dated 10.4.2003 which was issued under Rule 9A of Cenvat Credit Rules, 2002 prescribes a method of calculating one time credit on inputs lying as on 1.4.03. The above is a calculation on stock which has no correlation with deemed credit earned. So the credit on 31.3.2003 in balance will automatically be carried forward and now credit can be taken following the new rules.

· If the goods already has come into existence because of some earlier scheme applicable on the assessee’s then new scheme cannot be applied on them retrospectively till some provision in law is made for the same .Cases referred were the decisions by the Supreme Court

Ø Eicher motors [1996 (106) ELT-3]

Ø CCE, Pune V/s Dai-Ichi Karkaria Limited [1999 (112) ELT 353]

The same was followed in M/s Shankeshwar Fabrics P. Ltd. V/s. Union of India &Ors wherein the Rajasthan High Court has decided on appeal of Central Excise that mere introduction of Compound Levy Scheme won’t lapse the credit balance.

· Any order of the Government would not prohibit the balances in the books to be utilised by the assessee but it is only withdrawal of the facility. It was said in the case of Commissioner of Central Excise, Panchkula v/s Shiv Rolling Mills [2004 (175) ELT -484 (Tri. Del)

· Further there are many cases which do not stop the assessee to utilise its Cenvat credit balance or say that the balance available may lapse are-

i. Dhar Cement Ltd. v/s. CCE, Indore [1996 (86) ELT 515(T)]

ii. Rasoi Limited v/s. UOI [2004 (176) ELT101(Cal.)]

iii. Dewan Textile Industries P. Ltd. v/s. CCE, Jaipur [2005(192) ELT 371 (T)]

iv. Amrit Banaspati Co. Ltd. v/s UOI [2004(163) ELT 310 (DEL.)]

v. Bell Ceramics Ltd. v/s. CCE, Vadodra [2003(153) ELT 333(T)]

vi. CCE v/s S.V Business P. Ltd. [2008(229) ELTA95 (Bom.)]

Decision of the Adjudication authority:-

The proceedings initiated in the SCN are to be set aside admitting the assessee to carry forward the balance of deemed credit. The demand was dropped and manufacturer action of utilising the balance was ratified.

Comments: - This is very good decision where the long pending demand has come to an end. There were number of decision in favour of assesseee. But the department has transferred in the call book. The auditor general has raised many such issues which are clearly against the provisions of law. But the department finds it safe to issue show cause notice. Even the policy of giving deemed credit was objected by AG audit team. If the policy decision of Government is challenged then it should be decided with the ministry. But the department has raised the show cause notices. If these SCNs were confirmed then many of textile units have to close their factories. Such show cause notices should be avoided and the policy decisions should be discussed with the Government. But the department function in their own way.

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PJ/CASE STUDY/2010-11/03
20 April 2010

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