Commissioner of Central Excise vs Drish Shoes Ltd.

Surjit Singh, J.—The present appeal by the Commissioner of Central Excise, Chandigarh, against the final order No. 843/2008, dated 3.10.2008, passed by the Customs, Excise and Service Tax Appellate Tribunal was admitted on the following questions of law:

Whether an assessee exclusively manufacturing wholly exempted goods (chargeable to NIL tariff rate of duty) is eligible to avail CENVAT credit of duty paid on the said inputs and input services under Rule 6(1) of the CENVAT Credit Rules, 2002/CENVAT Credit Rules, 2004, used in the manufacture of such exempted goods, even if such goods are exported.

Even if such credit is presumed to be available such manufacturer of wholly exempted goods can claim refund of CENVAT credit of duty paid in respect of inputs and input services used in the manufacture and export of the said wholly exempted final products under the provisions of Rule 5 of the CENVAT Credit Rules, 2004.

Facts, relevant for disposal of the appeal may be stated. Respondent, M/S Drish Shoes Ltd., are manufacturer of finished leather. Finished leather, manufactured by them, is exported. During the period from August, 2004 to March, 2005, respondent exported some leather. After the export, it claimed refund of Rs. 92,71,456/-, on account of CENVAT paid on inputs, like chemicals etc., purchased for finishing the exported leather. Refund was sought under the provisions of Rules 5 and 6 of CENVAT Credit Rules, 2002.

Claim was scrutinized by Assistant Commissioner, Customs and Central Excise Division, Panthaghati, Shimla, who found that the same was not permissible. Consequently, a show cause notice was issued to the respondent, why claim be not rejected. Grounds stated in the show cause notice were as follows:

that, Rule 5 of the Cenvat Credit Rules, 2002 (hereinafter referred to as the Rules) refers to �final products� which are cleared for export under bond. Notification No. 11/2002 dated 1.3.2002 issued under the said Rule prescribing certain conditions and limitations while granting the refund of CENVAT Credit used in the final products also uses expression �final products� which are cleared under bond. The noticee has claimed refund on the ground that their case falls under Sub Rule 5(vi) of Rule 6, i.e. �goods cleared under bond�. As per the plain reading of said Sub Rule 5(vi) of Rule 6 of the Rules read with Notification No. 11/02 dated 1.3.2002 the bond/LUT is only required to be furnished with the department where there is duty liability on the exported goods. In the instant case the goods i.e. finished leather falling under Ch. 41 are chargeable to nil rate of duty, hence there was no need to export the goods under bond/LUT as the bond/LUT is only required to safeguard the duty involved on export goods. In case the goods meant for export are not exported out of India or not exported within the stipulated period, the bond equivalent of duty amount is necessary to be furnished in order to safe guard the govt. revenue involved on the goods intended for export.

that, Rule 6(1) of the rules, states that �The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or exempted services, except in the circumstances mentioned in Sub-rule (2)�. In this case sub Rule (2) of the Rule 6 of the rules is not applicable in the instant case as the noticee is not manufacturing dutiable as well as exempted goods, as such, there is no question of claiming of Cenvat credit in this case as the final product is fully exempt from duty.

Reply to the show cause notice was filed, in which it was stated that the respondent was entitled to refund, under Rules 5 and 6(6) (v) of CENVAT Credit Rules, 2004, read with Section 11B of the Central Excise Act, 1944 and Rule 19 of the Central Excise Rules, 2002. It was stated that, admittedly, finished leather had been exported and, therefore, the respondent was entitled to CENVAT refund/credit, in view of the provisions of Rule 6 (6) (v) of the CENVAT Creidit Rules, 2004.

Assistant Commissioner, vide order dated 30.8.2005, dismissed the claim.

Appeal was filed to the Commissioner (Appeals), Customs and Central Excise, Chandigarh, who, vide order dated 14.9.2005, allowed the appeal of the respondent and directed refund of CENVAT paid on inputs, utilized by the respondent for manufacturing finished leather. Department filed appeal against the aforesaid order of the Commissioner (Appeals), which has been dismissed by the Tribunal, by the impugned order.

We have heard the counsel for the parties and gone through the record and the relevant rules.

It is not in dispute that the respondent is engaged in the manufacture of finished leather and that it had exported manufactured leather as claimed by it. The only question is whether under the CENVAT Credit Rules of 2002 or 2004, it is entitled to the credit/refund of CENVAT paid on inputs, like chemicals etc. purchased by it, to convert raw leather into finished leather.

Rule 3 of the CENVAT Credit Rules, 2004, as also Rule 3 of CENVAT Credit Rules, 2002, which have been repealed by the Rules of 2004, provide for credit of CENVAT paid by a manufacture on any inputs or capital goods received in a factory for use in or in relation to the manufacture of final products. Rule 6(1) of the extant Rules as also the repealed Rules, says that CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods. Sub-rule (5) of Rule 6 of the repealed Rules, 2002 and Sub-rule (6) of Rule 6 of the extant Rules of 2004 are an exception to Rule 6(1). Sub-rule (5) (vi) of the repealed Rules, provided that Sub-rules (1), (2), (3) and (4) shall not be applicable, in case of exempted goods, which are:

(i) xxxxxx

(ii) xxxxxx

(iii) xxxxxx

(iv) xxxxxx

(v) cleared for export under bond, in terms of provisions of the Central Excise Rules, 2002.

Rule 6 (6) (v) of the 2004 Rules provides that the provisions of Sub-rules (1), (2), (3) and (4) of Rule 6, shall not be applicable in case the excisable goods removed without payment of duty are:

(i) xxxxxx

(ii) xxxxxx

(iii) xxxxxx

(iv) xxxxxx

(v) cleared for export under bond in terms of provisions of the Central Excise Rules, 2002.

The only difference between the Rules of 2002 and 2004 is that while in case of 2002 rules, exception clause contained in Sub-rule (5) of Rule 6 was applicable in case of only exempted goods, while exception clause contained in Sub-rule (6) of Rule 6 of 2004 rules, applies both to exempted goods, as also goods subject to duty, because the term used in Sub-rule (6) is �excisable goods� and not �exempted goods�, as was the case in Rules of 2002.

Reference has been made hereinabove to the Rules of 2002, as also 2004, because from the record, it cannot be made out which rules should be applicable. Rules of 2002 were applicable in respect of inputs or capital goods received in the factory after 1st day of March, 2002. They remained in force till the Rules of 2004 came into force. Rules of 2004 are applicable in respect of inputs received by the manufacturer after 10th day of September, 2004. Since finished leather was exported between August, 2004 and March, 2005 and it was not clear as to when the inputs were received, so reference has been made to both the sets of rules. As already noticed, the provisions of both the rules are similar, except that under the Rules of 2002, exception contained in Sub-rule (5) of Rule 6 was applicable only to the exempted goods, while under the Rules of 2002, exception applies to all excisable goods, irrespective of the fact whether they are exempted or subject to levy of duty.

Assistant Commissioner file, rejecting the claim of the respondent, held that since the finished leather exported by the respondent was exempt from duty, no bond or Letter of Undertaking was required to be furnished and the furnishing of bond by the respondent was only a device to claim CENVAT credit under the CENVAT Credit Rules. He took the view that Rule 6(1) clearly stated that CENVAT credit was not permissible in respect of exempted goods.

The Commissioner (Appeals), while accepting the appeal and reversing the order of Assistant Commissioner, held that Assistant Commissioner had not taken holistic view of the matter and allowed himself to be misled by reading only a few provisions. He held that the object of exception clause contained in Rule 6, as noticed hereinabove, was to promote the export of goods manufactured in India. He observed that in any case, exception clause of Rule 6 allowed the credit/refund of CENVAT paid on inputs in the manufacture of excisable products, exported under a bond.

The Tribunal has upheld the order of the Commissioner (Appeals).

The Scheme of CENVAT Credit Rules, 2002, as also 2004, reference to the relevant provisions of which has been made hreinabove, shows that CENVAT credit/refund is allowed on the inputs of all manufactured goods which are not exempt from duty, as is clear from a combined reading of Rule 3 and Sub-rule (1) of Rule 6 of the CENVAT Credit Rules, 2002, as also the Rules of 2004, so as to avoid indirect double taxation on inputs. However, this rule is not absolute. It is subject to exception clause, contained in Rule 6(5) of the Rules of 2002 and 6(6) of the Rules of 2004, and one of the exceptions is in respect of excisable goods, which are cleared for export under bond in terms of the provisions of Central Excise Rules, 2002.

Sub-rule (5) of Rule 6 of the Rules of 2002 was applicable only in case of exempted goods. That meant that the exception was not applicable in case of dutiable goods. It appears that this led to anomalous situations. For example, if the goods were dutiable and were exported, credit for CENVAT could not be claimed in respect of input of those goods, at least under the aforesaid exception clause. To overcome this kind of anomalous situations, exception clause contained in Sub-rule (6) of Rule 6 of CENVAT Credit Rules, 2004 has been made applicable to all excisable goods.

Learned Counsel for the appellant argued that term �excisable goods� used in Sub-rule (6) of Rule 6 of 2004 Rules, meant only dutiable goods. Submission has been noticed only to be rejected.

A Division Bench of Bombay High Court in 2009 (235) E.L.T. 614, Repro India Ltd. v. Union of India, while dealing with a similar situation and interpreting the provisions of Rule 6(5) of CENVAT Credit Rules 2002 and Rule 6(6) of CENVAT Credit Rules, 2004, has held that expression �excisable goods� is wider than the expression �exempted goods�, as it includes both dutiable as also exempted goods.

In view of the above discussion, we hold that an assessee, manufacturing goods chargeable to nil duty, is eligible to avail CENVAT credit paid on the inputs under the exception clause to Rule 6(1), as contained in Rule 6(5) of CENVAT Credit Rules, 2002 and Rule 6(6) of CENVAT Credit Rules, 2004, used in the manufacture of such goods, if the goods are exported. Question No. 1 is answered accordingly.

As regards question No. 2, it is clear from a bare reading of Rule 5 of CENVAT Credit Rules, 2004 that a manufacturer, who exports the final products which are exempt from duty, can claim refund of CENVAT. So, this question is also answered against the appellant.

In view of the aforesaid answers to the questions of law, appeal is dismissed.