The Bangalore bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) held that credit lying in stock on Returned goods had to be reversed in terms of SSI Notification read with Rule 11 of Cenvat Credit Rules, 2004( CCR ). The bench upheld the impugned order confirming the demand of cenvat credit of Rs.3,47,656/- and education Cess of Rs.6,953/- under Section 11A of the Central Excise Act, 1944 along with interest.
Under Chapter Headings 85.04, 85.34, and 90.32 of the Central Excise Tariff Act of 1985, the appellant, Hykon Power Electronics (P) Ltd., manufactures electronic equipment. The appellant, a non-SSI entity, received cenvat credit for the inputs used in the production of stabilizers during the 2004–2005 period after paying duty. One hundred stabilizers were returned for reconditioning and return on November 30, 2004. The returned products were eligible for cenvat credit in accordance with Rule 16(1) of the Central Excise Rules, 2002.
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For the 2005–2006 period, the appellant opted to utilize Notification No. 8/2003, dated 01.03.2003, which spared him from paying duty on the final clearance of goods up to Rupees one crore. In accordance with the aforementioned Notification read with Rule 11(2) of the Cenvat Credit Rules, 2004, the appellant was required to reverse the outstanding cenvat credit that was available in their books of accounts on April 1, 2005, since they had decided to pay “Nil” in duty under Notification No.8/2003 dated 01.03.2003. Notice was handed out to cancel the cenvat credit for 92 stabilizers that were in stock on March 31, 2005.
Following an appeal by the department, the Commissioner (Appeals) ruled that Rule 11(2) makes it clear that a manufacturer who chooses to forego duty must pay an equal amount equal to any cenvat credit that may be granted to him for inputs that are in stock, in process, or included in finished goods on the day the option is exercised.
Instead of undoing the whole credit obtained on 92 stabilizers that were in stock, the respondent simply reversed the cenvat credit obtained for the inputs included on those stabilizers. Therefore, the demand for Rs. 3,47,656 in cenvat credit and Rs. 6,953 in education cess under Section 11 of the Central Excise Act of 1944, coupled with the necessary interest under Section 11AB of the same Act, was confirmed.
In an email dated November 20, 2024, the attorneys asked that the matter be decided on the basis of their written arguments. According to the submission, the appellant paid duty on stabilizers he manufactured; of these, 100 stabilizers were found to be defective and returned to the appellant’s factory on November 30, 2004, for reconditioning; eight stabilizers were cleared on duty in the same fiscal year, 2004-05. The appellant qualified for an exemption under Notification No. 8/2003, dated 01.03.2003, with effect from 01.04.2005.
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It was stated that once the one crore threshold was reached, 45 stabilizers remained after being cleared upon payment of duty, while 47 stabilizers out of 100 stabilizers were cleared by obtaining exemption. Thus, under Notification No. 8/2003 dated 01.03.2003, the controversy only concerns 47 stabilizers that were cleared by obtaining complete exemption. The department is arguing that the money that was deducted from the cenvat credit when these 47 stabilizers were returned should be reimbursed.
According to Rule 11(2) of the Cenvat Credit Rules, 2004, only the credit taken on inputs contained in the aforementioned 47 stabilizers had to be reversed, which was admittedly done. The appellant argued that once the stabilizers are returned and manufactured, Rule 16(2) of the Central Excise Rules requires clearance at the appropriate rate, which in this case was full exemption.
In accordance with Rule 16 of the Central Excise Rules 1944, the Authorized Representative ( AR ) said that the appellant had received 100 server stabilizers back for reconditioning on November 30, 2004, and had taken advantage of a cenvat credit for the tax paid at the time of removal on those items. After paying the central excise charge, eight stabilizers were cleared in the same fiscal year. In accordance with Notification No. 8/2003 dated 01.03.2003, the appellant claimed complete exemption from duty on April 1, 2005; nevertheless, they did not reverse the credit that was recorded in their books of accounts on the balance of 92 stabilizers that were in stock.
In 2004–05, the appellant, a non-SSI unit, cleared stabilizers upon payment of duty. Eight stabilizers were refurbished and returned upon payment of duty out of the 100 stabilizers that were returned for reconditioning on November 30, 2004. The 92 stabilizers that remained were in stock. These facts are undeniable. Through Notification No. 8/2003 dated 01.03.2003, the appellant chose to opt for SSI exemption as of 01.04.2005. The sole point of contention in this case is whether the stock-based cenvat credit must be revoked as of April 1, 2005, when the appellant chose to use the SSI exemption.
Since the returned items are considered inputs, the cenvat credit applied to the returned goods (finished goods) is equal to the credit applied to the inputs, as stated in Rule 16 of the Central Excise Rules, 2001. As a result, the Commissioner (Appeals) was correct to request the cenvat credit that was in stock as of April 1, 2005.
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A single member bench of R. Bhagya Devi, Member ( Technical ) found that the original authority had observed that the appellant had cleared 45 stabilizers valued at Rs.11,80,134/- were cleared by them on payment of duty of Rs.1,88,821/- and Education Cess of Rs.3,776/- after crossing the SSI exemption limit in the year 2005-2006, which is also claimed by the appellant in their grounds of appeal. These goods were lying in stock at the time of opting for exemption under the SSI Notification. It was viewed that the credit lying in stock on the returned goods had to be reversed in terms of the SSI Notification read with Rule 11 of the Cenvat Credit Rules, 2004.
While dismissing the appeal, the bench upheld the impugned order confirming the demand of cenvat credit of Rs.3,47,656/- and education Cess of Rs.6,953/- under Section 11A of the Central Excise Act, 1944 along with interest.
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