Khurana Woolen Mills (P) Ltd. vs Commissioner of C. Ex.

Ashutosh Mohunta, J.—The Appellant-Assessee has filed present Appeal impugning the Final Order, dated 9-3-2007 (Annexure P-5) whereby the Tribunal has dismissed Appeal of the Appellant. The Appellant has raised following Questions of Law:

I Whether in the absence of one-to-one co-relation Appellant is liable to pay Modvat/Cenvat involved on raw material destroyed in fire?

II Whether the Tribunal has failed to pass a Speaking Order?

The Appellant during 2000-01 was engaged in the manufacture of Acrylic/Polyester Yarn falling under Chapter Heading 55 of First Schedule to Central Excise Tariff Act, 1985. In August 2000 due to fire in the factory of the Appellant, stock lying in the factory burnt. The stock involved raw material such as semi-finished material and finished material. The Appellant filed an Application for remission of duty. The Respondent issued a Show Cause Notice dated 14-8-2001 raising the demand of duty of Rs. 11,60,367/- i.e. equal to Cenvat Credit involved in the material burnt. The Adjudicating Authority confirmed the demand but the Commissioner (Appeals) vide Order dated 14-1-2005 relying upon a letter written by Deputy Commissioner (Technical) allowed remission of Cenvat amounting to Rs. 2,83,835/- i.e. Cenvat involved on finished goods and material in process. The Ld. Commissioner (Appeals) denied the benefit in respect of inputs destroyed in fire as such. There was credit balance of Rs. 4,68,858/- in the books of accounts of the Appellant and Appellant reversed the whole amount of credit. The Appellant further preferred an appeal before the Tribunal assailing the Order passed by Commissioner (Appeals).

The Tribunal vide its Order dated 9-3-2007, dismissed Appeal of the Appellant relying upon Single Member decision of the Tribunal in the case of 2003 (89) ECC 238 The Appellant has filed present Appeal against this Final Order of Tribunal.

The Counsel for the Appellant contended that as per Rule 57AB of the Central Excise Rules, as applicable during relevant period a manufacturer is entitled to take credit on any inputs received in the factory. It means an Assesses is entitled to take credit as soon as inputs are received in the factory. The Counsel contends that Larger Bench of Tribunal in the case of Grasim Industries v. Commissioner of Central Excise, Indore, 2007 (208) E.L.T. 336 (Tri.-LB) has held that Rule 49 of Central Excise Rules, 1944 and Rule 21 of Central Excise Rules, 2002 provides for remission of duty in respect of goods lost or destroyed. But it does not provide for reversal of credit in respect of inputs. The Modvat Rules prohibits the credit of duty availed in respect of inputs, which are used in the manufacturing of exempted goods or which are chargeable to Nil rate of duty. But there is no Rule requiring the Assessee to reverse the credit in case of destruction of inputs in fire. The Counsel also contends that in CEA No. 22 of 2006 [2010 (255) E.L.T. 204 (P & H)], this Court has held that Cenvat Credit is allowable on inputs in case inputs are destroyed in fire provided amount of Cenvat Credit is not received from the Insurance Company. The Counsel further relies upon judgment of Himachal Pradesh High Court in the case of Commissioner, Central Excise Vs. Saboo Alloys Pvt. Ltd.,

Per contra Counsel for the Revenue submits that Appellant is liable to pay an amount equal to Cenvat credit availed on inputs, which are destroyed as such. The Counsel supported his contention with the judgment of Tribunal in the case of Golden Polymex (India) Limited (supra).

We have heard arguments of both the ld. Counsels. We are of the considered opinion that this Appeal deserves to be allowed. Rule 49 of the Central Excise Rules, 1944 and Rule 21 of Central Excise Rules, 2001/2002 provide for remission of duty on goods destroyed. But there is no Rule providing reversal of credit in case of destruction of inputs. Credit on inputs is required to be reversed only if goods are used in the exempted goods. Hon''ble Supreme Court in the case of Collector of Central Excise, Pune Etc. Etc. Vs. Dai Ichi Karkaria Ltd. Etc. Etc., has 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 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 day that it becomes available.

The Rajasthan High Court in the case of Hindustan Zinc Ltd. Vs. Union of India (UOI) and Others, ) has held that:

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 in case of CEA No. 22 of 2006 agreeing with the decision of Karnataka High Court in the case of The Commissioner of Central Excise Vs. Tulsyan NEC Limited, have held that "the Assessee is entitled to claim Cenvat credit on the inputs destroyed in a fire accident, but in the event of settlement by the Insurance Company, they would remit the benefit back to the Department."

In the present case, it is on record that the Assessee has not received amount of Cenvat Credit involved on inputs, as compensation from the Insurance Company. It means, Assessee has borne loss of goods incident. It is undisputed fact that the Appellant has paid duty on inputs at the time of purchase of goods. The Assessee took credit and utilized the same for the payment of duty on finished goods. There is no one-to-one co-relation between the inputs and finished goods. In the absence of one-to-one co-relation, it is unjustified to ask the Assessee to reverse the credit which has already been utilized for the payment of finished goods. The Apex Court and other High Courts, as noted above, are of the considered opinion that if the finished product is subsequently exempted from duty, Assessee is not required to reverse the credit availed on inputs, which Assessee was entitled at the time of purchase of the inputs. Applying the same ratio and respectfully agreeing with the decisions of Himachal Pradesh High Court, Rajasthan High Court and Karnataka High Court, we are of the considered opinion that in the present case, the Assessee is not liable to pay duty equivalent to amount of Cenvat Credit availed on inputs and therefore question No. 1 is answered in favour of the appellant-assessee.

As far as the second question of law is concerned, a perusal of the order passed by the Tribunal shows that it is a speaking order. Hence, this question is also decided against the Revenue.

In view of above findings, the Questions of Law are answered in favour of the Appellant and against the Revenue. Accordingly, the appeal is allowed and the order dated 9-3-2007 (Annexure P-5) passed by the Tribunal is quashed.