Once Rightly Availed, CENVAT Credit Cannot Be Disallowed Later: CESTAT [Read Order]

The Chandigarh Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that once CENVAT credit is rightly availed, it cannot be disallowed at a later stage merely because the final product is found to be exempt or not liable to duty.

Shree Krishna Paper Mills & Industries Ltd., the appellant, was engaged in the manufacture of coated paper. Relying on a CESTAT ruling in the Pitambar Coated Paper Ltd. case, the appellant informed the department in December 2003 that it would stop paying excise duty on such products, as coating did not amount to manufacture. On insistence from the department, the appellant reversed CENVAT credit amounting to Rs. 57,26,743 and later resumed payment of duty under protest, using both cash and credit.

After the Supreme Court upheld the Tribunal’s ruling in Pitambar in 2015, the department revived several show cause notices that had earlier been kept in the call book. While the adjudicating authority dropped the demand for duty on the basis that the activity was not a manufacture, it still directed recovery of duty that had been paid through CENVAT credit on the ground that such credit should not have been used for duty on exempt goods.

Stay Updated with the Latest Audit Report Formats & Audit Trials Requirements!, Click Here

The appellant’s counsel argued that it had paid the duty under pressure from the department and used a validly availed CENVAT credit to do so. They further argued that the credit had never been questioned in any show cause notice and that there was no legal requirement linking inputs to specific final products. Since no duty was actually payable, the question of whether it was paid by credit or in cash became irrelevant.

The revenue counsel argued that once it was established that the final product was not dutiable, the appellant should not have used CENVAT credit to pay duty. They claimed that using credit on exempt goods was not permitted and should be recovered.

The two-member bench comprising S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that the department had never challenged the credit availed by the appellant, nor did the show cause notices allege wrongful availment. It held that the Commissioner’s direction to recover duty paid through credit went beyond the scope of the show cause notices. The tribunal also explained that Rule 14 of the CENVAT Credit Rules, which deals with the recovery of wrongly availed credit, was not invoked by the department.

The tribunal explained that once the Supreme Court ruled the activity was not manufacture, there was no liability to pay duty, so it did not matter whether such non-payable duty was discharged by cash or credit. It ruled that the appellant’s use of credit, in this case, was proper and did not violate any rules. The tribunal allowed the appeal and set aside the order directing the recovery of the amount paid through CENVAT credit.

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