CENVAT Credit Need Not Be Reversed Under Rule 3(5B) For Inputs Or Sub-Assemblies Scrapped During Manufacturing: CESTAT [Read Order]
CESTAT rules that CENVAT credit reversal under Rule 3(5B) is not applicable to inputs or sub-assemblies scrapped during the manufacturing process.
CENVAT Credit - Sub-Assemblies - Scrapped - Manufacturing - CESTAT - taxscan
CENVAT Credit - Sub-Assemblies - Scrapped - Manufacturing - CESTAT - taxscan
The Chandigarh Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that CENVAT credit reversal under Rule 3(5B) of the CENVAT Credit Rules, 2004, is not required for inputs or sub-assemblies scrapped during the manufacturing process.
Pricol Limited, the appellant, is engaged in the manufacture of oil pumps, speedometers, and printed circuit boards (PCBs) at its unit in Manesar, Haryana. During an audit, the department found that the appellant had written off raw materials, sub-assemblies, and finished goods as “scrapped inventory” in its books of accounts for the financial years 2010-11 to 2014-15.
The department alleged that CENVAT credit was availed on these inputs but not reversed as required under Rule 3(5B) of the CENVAT Credit Rules.
A show cause notice dated 21 April 2015 was issued demanding recovery of Rs. 68,06,633, along with interest and penalties under Section 11AC of the Central Excise Act, 1944, Rule 15 of the CENVAT Credit Rules, and Rule 25 of the Central Excise Rules, 2002.
The Principal Commissioner of Central Excise, Gurgaon, passed an order on 26 April 2016 confirming disallowance of Rs. 45,70,560 along with equal penalties and interest. Aggrieved by the decision, the appellant filed an appeal before the Tribunal.
The appellant’s counsel argued that Rule 3(5B) was not applicable because the goods written off were not unused inputs but materials that had already undergone production processes and were scrapped during manufacturing.
They submitted that finished goods written off were those returned after sale and covered under Rule 16 of the CENVAT Credit Rules, for which no credit had been taken. The counsel pointed out that the recovery mechanism under Rule 3(5B) was introduced only from 1 March 2013 by Notification No. 3/2013-CE(NT), and it could not be applied retrospectively.
The revenue’s counsel, Ms. Amita Gupta, argued that the intent of Rule 3(5B), read with CBEC Circular No. 907/27/2009-CX dated 7 December 2009, was to prevent misuse of CENVAT credit on inputs not intended for use and later written off in the books.
The two-member bench comprising Justice S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that Rule 3(5B) applied only to inputs or capital goods written off before being put to use, and not to materials already used in manufacturing or at the sub-assembly stage.
The tribunal explained that the department had misapplied the CBEC Circular, which covered only inputs not utilized in production. It pointed out that the Chartered Accountant’s certificate confirmed that no input as such was written off, and the Principal Commissioner had rejected it without any contrary evidence.
The tribunal also referred to its earlier decision in GKN Driveline (India) Ltd., which held that no recovery mechanism existed under Rule 3(5B) before 1 March 2013, and any demand for the prior period could not be sustained.
The tribunal held that CENVAT credit reversal under Rule 3(5B) was not applicable to inputs or sub-assemblies scrapped during manufacturing and that the extended limitation period was wrongly invoked in the absence of suppression or intent to evade. The impugned order confirming the demand, interest, and penalties was set aside, and the appeal was allowed.
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