Commissioner, Central Excise vs Saboo Alloys Pvt. Ltd.

Deepak Gupta, J.—This appeal was admitted on the following substantial question of law:

Whether a manufacturer is required to reverse the Cenvat Credit taken by him in respect of inputs which are proved to have been used in the manufacture of goods which are exempted from excise duty in view of the provisions of Rule 6(1) of Cenvat Credit Rules, 2004 which provide that no credit can be taken in respect of inputs which are used in the manufacture of exempted goods.

The short question which arises for decision is 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. The main argument of Sh. Sandeep Sharma, learned Assistant Solicitor General of India is that the authorities below have not taken into consideration Rule 9(2) of the Cenvat Rules.

The brief facts of the case are that the assessee is engaged in the manure of S.S. Ingots/Flats. The assessee was obtaining cenvat credit on the inputs used in the manufacture of final product. On 11.4.2005 the assessee opted for benefit of the exemption notification No. 50/2003-CE dated 10.6.2003 and thereafter the final product was exempt from excise. An amount of Rs. 2,95,892/- which was lying as modvat credit in the accounts of the assessee was reversed. The assessee filed a claim for refund of the amount on the ground that it was not required to reverse the benefit of modvat credit taken by it on the inputs purchased prior to its opting to take benefit of the exemption notification referred to above. The Assessing Officer rejected the contention of the assessee.

The assessee filed an appeal and the same was accepted and it was held that the modvat credit obtained by the assessee was not required to be reversed. Thereafter, the revenue approached the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) which dismissed the appeal in view of the law laid down by a Five Member Bench in CCE, Rajkot v. Ashok Iron & Steel Fabricators reported in 2002 (48) RLT 789.

The main argument of Sh. Sandeep Sharma, learned Assistant Solicitor General of India is that in the case of Ashok Iron & Steel Fabricators, the Tribunal held that there was no rule which permitted the department to seek reversal of the Modvat credit. He relies upon Rule 9(2) of the Cenvat Rules in this behalf.

It is pertinent to mention here that the Apex Court in Collector of Central Excise, Pune Etc. Etc. Vs. Dai Ichi Karkaria Ltd. Etc. Etc., considered a similar question relating to the reversal of Modvat credit under Central Excise Rules, 1944. Rule 57H(5) of the said Rules reads as follows:

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 the 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 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.

After considering the Rule 57, the Apex Court held as follows:

It is clear from these rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the 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. The credit is, therefore, indefeasible. It should also be noted that there is no corelation 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 day that it becomes available.

Rule 9(2) of the Cenvat Rules reads as follows:

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 of cenvat credit on inputs before such option is exercised, he 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 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 not be allowed to be utilized for payment of duty on excisable goods, whether cleared for home consumption or for export.

The language of Rule 57H(5) of the Excise Rules and Rule 9(2) of the Cenvat Rules is identical, therefore, the decision also has to be similar.

It would also be pertinent to mention here that the High Court of Kerala in Collector of C. Ex. and Cus. Vs. Premier Tyres Ltd., following the judgment of the Apex Court answered a similar question in favour of the assessee and against the Department.

It would also be pertinent to mention that the judgment of the Tribunal in Ashok Iron and Steel Fabricators'' case has been upheld by the High Court of Rajasthan in Hindustan Zinc Ltd. v. Union of India 2008 (223) ELT 149. The High Court held as follows:

It can be seen from yet another angle. In case inputs are received in factory and used in manufacture of end product. But the end product is destroyed by fire before stage of its removal from factory premise. In such circumstances, no excise duty becomes payable on end product. Yet Modvat credit availed on inputs used in destroyed goods is not to be recalled. This is also suggestive of the fact 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.

We are in respectful agreement with the judgment of the Kerala and Rajasthan High Courts. Since the language of Rule 9(2) of the Cenvat Rules is identical to that of Rule 57H(5) of the Excise Rules, we feel that the interpretation given by the Apex Court has to apply in the present case also and, therefore, even though the final product may be exempt from payment of excise, the assessee cannot be asked to reverse the Modvat credit already taken by it.

In view of the above discussion, the question is answered in favour of the assessee and against the revenue. The appeal is accordingly dismissed. No order as to costs.