Peanut Butter Classified as Similar to Margarine: CESTAT Sets Aside ₹1.35Cr Cenvat Credit Demand While Upholding Credit Reversal on Written-Off Inputs [Read Order]

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) partly allowed the appeal, holding that peanut butter is an “edible preparation similar to margarine,” making the exemption available, and setting aside the demand of ₹1.35 crore of Cenvat credit on the ground of complete revenue neutrality.

The dispute arose after the department issued a Show Cause Notice proposing recovery to the appellant, Agro Tech Foods Ltd., of Cenvat credit on the allegation that peanut butter manufactured by the appellant was exempt from duty under Sl. No. 30 of Notification No. 3/2006-CE, which covered “edible preparations not elsewhere specified or included.”

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The department held that since the final product was exempt, the appellant was required to reverse the proportionate Cenvat credit.

The adjudicating authority confirmed a demand of ₹1,35,31,297 as Cenvat credit attributable to unit-I, along with interest and equivalent penalty, and further demanded reversal of credit on inputs written off amounting to ₹2,48,141.

Before the Tribunal, the appellant argued that peanut butter cannot be treated as “similar to margarine” and therefore did not fall under the exemption entry.

The appellant also contended that peanut butter has a different taste, composition, and application, and that the department failed to establish similarity. The appellant also argued that even assuming the exemption applied, the demand was unsustainable on the ground of complete revenue neutrality, as duty was paid on the final product and credit was available to the downstream units.

The Bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) examined the tariff entries and noted that margarine and peanut butter both fall under the broader category of edible preparations under Chapter 21, and that peanut butter shares essential commercial and functional characteristics of edible fat-based spreads.

The Tribunal held that the product was correctly classifiable as an “edible preparation similar to margarine,” making the exemption under Notification 3/2006-CE available.

However, the Tribunal observed that the appellant had paid duty on the final product and availed credit in downstream units, making the entire situation revenue-neutral. It held that when the duty paid by the appellant results in equivalent Cenvat credit available to subsequent manufacturers within the same chain, demand of credit allegedly wrongly availed cannot be sustained.

On the issue of inputs written off, the Tribunal held that Rule 3(5B) of the Cenvat Credit Rules clearly mandates reversal when inputs are written off and therefore upheld the demand to that extent.

Accordingly, the Tribunal set aside the demand of ₹1.35 crore, while sustaining the much smaller credit reversal related to written-off inputs.

The appellant was represented by Narendra Dave, while A. Rangadham appeared for the Revenue.

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