Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/001

11 July 2009

CASE STUDY

INTRODUCTION

The compound levy scheme is a scheme under which an assessee can pay duty at a fixed rate on the basis of no. of machines installed which are producing final products. Under the compound levy scheme, the assessee is not entitled to avail Cenvat credit. However, if the assessee has accumulated Cenvat credit before introduction of the compound levy which has not been utilised, then can he utilise the accumulated Cenvat credit to pay duty under the compound levy scheme. In this case study we are taking up study of case “M/s Shankeshwar Fabrics (P) Ltd v/s Union of India & Othrs” wherein all these issues were involved.

M/s Shankeshwar Fabrics (P) Limited v/s Union of India & Others

BRIEF FACTS OF THE CASE

- M/s Shankeshwar Fabrics (P) Ltd are manufacturer and processor of textile fabric falling under heading 52.07, 52.08, 52.09, 54.06, 54.07, 55.11, 55.12, 55.13 & 55.14 of the Central Excise Tariff Act, 1985.

- The Government vide Notification No. 36/98-CE dated 10.12.98 introduced compulsory compound levy scheme in relation to manufacture and processing of textile fabrics. One of the conditions in the said Notification was that the assessee could not avail Cenvat credit of duty paid on inputs and capital goods.

-The assessee had accumulated Cenvat credit which was unutilised as on 16.12.98 when the Notification No. 36/98 was issued. Now the condition stipulated in the said notification was preventing the assessee from utilizing the Cenvat credit earned by him before it had come into force on 16.12.98.

- Aggrieved by this condition, assessee approached the High Court by filing writ petition. The hon’ble High Court passed the judgment in favour of the assessee on 22.08.01 by relying upon the judgment of Hon’ble Apex Court in the case of Eicher Motors Ltd. v/s Union of India [(1999) 2 SCC 361]. In the judgment, it was held that:-

· Under the Cenvat scheme, the right to credit will become absolute where the input is used in the manufacturing of the final product. The said right accrued to the assessee on the date he paid tax on inputs and the said right will continue until the facility available thereto gets worked out or until those goods exist.

· Once capital goods have been utilised and Cenvat credit has been received against such utilization, then clause 5 of the said Notification cannot apply retrospectively so as to nullify the Cenvat credit. Moreover, the sub-clause (a) of the clause 6 of the said Notification is a non-obstante clause providing that the provisions of the said Notification will not apply any goods manufactured or produced prior to 16.12.98 and cleared on or after that date.

· It was directed to the respondent-department to allow assessee to avail Modvat credit earned by them as on 16.12.08.

- The department permitted the assessee to avail the Modvat credit balance in pursuance of the judgment of the High Court vide its letter dated 27.02.02.

- During the pendency of petition before the High Court, the compound levy scheme under Notification No. 36/98 had come to an end. And a new compound levy scheme was introduced vide Notification No. 32/01 dated 28.06.01. But the new compound levy scheme was an optional scheme. The assessee had opted for the new scheme.

-Assessee on the basis of judgment of High Court and the letter dated 27.02.02 issued by the department utilised the Modvat credit balance accumulated as on 16.12.08 to pay duty although he was under the optional compound levy scheme.

- The department issued show cause notice for demand of duty paid from Cenvat credit account in the month of February, 2002 on the ground that the assessee was required to pay the said duty from Account Current (PLA) and not from Cenvat credit. It was contended that under the new optional scheme the assessee was not eligible to avail any credit of duty on inputs or capital goods in the Cenvat Credit Rules, 2001.

- The Joint Commissioner passed an order imposing demand and interest vide its order dated 24.12.03. It was held that the High Court had said that the credit may be availed by the assessee but the High Court never said that the said credit may be utilised for payment of central excise duty under the compound levy scheme. And it was also held that when Notification No. 32/01 has specifically provided that the duty is to be debited from PLA, then the assessee was wrong in paying duty under compound levy scheme from Cenvat credit account.

- The assessee filed appeal before the Commissioner (Appeal) who upheld the order of the joint commissioner vide its order dated 16.07.04. The learned Commissioner held that the compound levy scheme introduced second time vide Notification No. 32/01 was an optional scheme and when the assessee has opted for the said scheme, then it was not open for him to utilise the Modvat credit available with him for payment of duty. By such action the assessee was availing the benefit of both the schemes i.e. Compound levy and advalorem scheme. It was also held that the High Court had only allowed the appellant’s to “avail” the credit and not “utilise” the same. It was also held that the assessee had not informed the High Court that the earlier scheme had come to an end and that he was intending to avail the benefit of optional scheme introduced thereafter. If the High Court has known about the said factual position, the said judgment would not have been passed.

-The assessee then filed appeal before the CESTAT. CESTAT also rejected the appeal and upheld the order of the lower authorities.

- The matter again reached the High Court.

QUESTION FOR CONSIDERATION

Now the questions for consideration before the High Court were as follows:

Whether the right of assessee to utilise modvat credit availed on the basis of goods manufactured prior to 10.12.98, can be nullified by giving retrospective effect to Notification No. 32/2001 dated 28.06.01?

1. What will be the interpretation of the word “avail”? Whether it means to only “take” and not to “use/utilise”?

2. Can the right of assessee to avail the benefit of modvat credit accrued to him prior to 16.12.98, can be taken away due to introduction of compound levy scheme in 2001?

3. Whether option of the assessee to avail benefit of Compound levy scheme introduced vide Notification No. 32/01 dated 01.07.01 has any relevance with regard to the accrued modvat credit on the goods manufactured prior to 16.12.98 under Notification No. 36/1998.

JUDGMENT OF HIGH COURT

v High Court held that the fact that the factual position of the assessee adopting for optional compound levy scheme under Notification No. 32/01 dated 01.07.01, was not brought forward to the High Court by him cannot be used to take away the rights of the assessee. He alone was not to be blamed for not making the factual position clear to the High Court. The Department has also not brought the said factual position to the notice of the High Court eventhough they had knowledge about it.

v High Court held that a proper reading of sub paras (5) (6) and (7) of the Notification No. 32/01 makes it clear that provisions of this Notification will apply to the said goods which are manufactured or produced on or after the 1^st day of May, 2001 and nothing is contained in this Notification shall apply to the said goods which are manufactured or produced prior to the 1st day of May, 2001 and cleared on or after that date.

v High Court further held that the Notification No. 32/01 did not contemplate forfeiture of right of assessee to claim Modvat credit on goods manufactured prior to 01.05.01. The said right of the assessee had accrued way before 01.07.01 and the said right was recognized by the High Court in its earlier judgment dated 22.08.01. The right acquired by the assessee to avail Cenvat credit cannot be put at a lower pedestal, than the right flowing to the assessee, who had manufactured goods before 01.05.01 and is entitled by virtue of sub-para (7) (a) of the Notification No. 32/01.

v High Court further held that even after the assessee had opted to pay duty under the Compound Levy Scheme introduced vide Notification No. 32/01, he was entitled to avail/utilise the Modvat credit on the goods manufactured prior to 10.12.98 under Notification No. 36/98 on the basis of analogy flowing from sub-para (7) (a) of the Notification No. 32/01.

DECISION OF HIGH COURT: - The appeal filed by the assessee was accepted and the impugned orders passed against assessee were quashed.

COMMENTS & CONCLUSION

The issue involved was that the right of an assessee to avail/utilise Cenvat credit which he had obtained before introduction of compound levy scheme would be forfeited when the said scheme clearly specified that duty is to be paid from current account and not from Credit account. High Court held that when the right of an assessee to utilise credit has been recognized and that such right had accrued before the Notification introducing compound levy scheme had come into force, such right could not be forfeited by giving retrospective effect to the said Notification.

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PJ/CASE STUDY/2009-10/001
11 July 2009

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