CENVAT Credit Reverses before issuance of Notice, No Cause to Initiate Proceedings under Rule 14 of CCR: CESTAT [Read Order]

The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that no cause to initiate proceedings under Rule 14 of the Cenvat Credit Rules (CCR), 2004 when Cenvat Credit reversed before the issuance of notice.

The proceedings, culminating in the impugned order of Commissioner of Central Excise, Customs & Service Tax, Raigad, initiated against Mehta Intertrade Steels P Ltd, the appellant, a manufacturer of ‘mild steel (MS) pipes’, has its roots in the allegation that M/s Mehta Intertrade Steels P Ltd had, though registered under Central Excise Rules, 2002, not deployed any production equipment and both elements in the demand, arising from denial of CENVAT credit availed by them between May 2007 and June 2011, may be considered as inevitable fallout of confirmation of lack of such facility during investigations. 

The appellant had been procuring ‘hard rolled (HR) coils/sheets’ along with other inputs to be supplied to ‘job-workers’ for production and return of ‘mild steel (MS) pipes’ to them and had been availing credit thereof to be utilized for clearing the finished goods from their premises.

They had also procured ‘‘mild steel (MS) pipes’ manufactured by some of these ‘job-workers’ on their account and by others that were subjected to processes like ‘end-cutting’ and ‘varnishing’ which, according to central excise authorities, did not amount to manufacture despite which they had not only been clearing these as though excisable but also availed credit of duty paid on such purchases. The demand was confirmed on the ground that the procured ‘mild steel (MS) pipes’ were not inputs as defined in rule 2(k) of CENVAT Credit Rules, 2004 and, hence, ineligible in terms of rule 3 of CENVAT Credit Rules, 2004.

The second element of the demand, of ₹ 14,55,597 towards credit availed of duty paid on procurement of  ‘angles’, ‘beams’ and ‘channels’, was confirmed on the ground that these were neither ‘inputs’, as defined in rule 2(k) of CENVAT Credit Rules, 2004, used in the manufacture of excisable goods nor finding fitment as required for the manufacture of ‘capital goods’, as defined in rule 2(a) of CENVAT Credit Rules, 2004, as permitted in Explanation 2 below the former definition. Inevitably, applicable interest was ordered to be recovered under section 11AB of the Central Excise Act, 1944 besides a penalty of ₹ 54,28,853 under section 11AC of the Central Excise Act, 1944 being imposed in the impugned order. 

The notice came to be issued on 11th June 2013 and it is on record that ₹ 14,55,597 had been reversed by the appellants on 22nd October 2008. The appellant submitted that, insofar as the availing of credit on unfinished ‘mild steel (MS) pipes’ is concerned, it was not open to the central excise authorities in proceedings under the authority of rule 14 of CENVAT Credit Rules, 2004 to decide on the excisability of a product on which duty liability had been duly discharged upon clearance from place of removal. She contended that it is not in dispute that some ‘processing’ had, indeed, been undertaken on the pipes procured by them.

It was further submitted that, in a catena of judicial decisions, it has been held that once duty has been accepted, it would be incorrect to deny entitlement to the applicability of CENVAT Credit Rules, 2004. Further submitted that the ‘angles’, ‘beams’ and ‘channels’ were not, of themselves, ‘capital goods’ and had not been utilized for the manufacture of ‘capital goods’ on-site thus placing these beyond the coverage of rule 2(k) of CENVAT Credit Rules, 2004. 

While rule 14 of CENVAT Credit Rules, 2004 enables recourse to section 11A of Central Excise Act, 1944 as does rule 15 of CENVAT Credit Rules, 2004 enabling recourse to section 11AC of Central Excise Act, 1944, the latter cannot be drawn upon in the absence of the former. Legislative intent is amply clear that recourse to rule 14 and rule 15 of CENVAT Credit Rules, 2004 will have the effect, and consequence, of section 11A and section 11AC of Central Excise Act, 1944 respectively and not vice versa. It is, therefore, moot if every case of credit erroneously availed must necessarily be visited with the penal consequence of section 11AC of the Central Excise Act, 1944 which follows from invoking section 11A of the Central Excise Act, 1944.

Indeed, as reversal of credit is also within the competence of the assessee without the pre-requisite of approval by central excise authorities, it would appear that it is only recovery compelled by inaction on the part of the assessee that lends itself to invoking of rule 14 and, thereby, rule 15 of CENVAT Credit Rules, 2004.

A two-member bench of Mr C J Mathew, Member (Technical) and Mr Ajay Sharma, Member (Judicial) viewed that the credit of ₹ 14,55,597 had been reversed well before the issuing of notice and there is no cause to initiate proceedings under rule 14 of CENVAT Credit Rules, 2004.

Further held that the absurdity of ‘appropriating’ credit already reversed, and not restorable without prior approval from jurisdictional central excise authorities, does not seem to have occurred to the adjudicating authority as an exercise in futility. In the light of this legal position, the notice itself was void ab initio and, thereby, the penalty. The CESTAT allowed an appeal to the extent of setting aside recovery of ₹ 39,73,256 and of the penalty in full. 

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates