Revenue cannot Question Economic Viability of making use of Low Grade Sponge Iron for the manufacture of High grade Sponge Iron : CESTAT allows CENVAT Credit [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ),Bench Kolkata, in its recent decision has held that the Revenue authorities cannot question the economic viability or business prudence of a manufacturer’s decision to use certain raw materials, so long as such materials are duly accounted for and statutorily recognized inputs.

The Tribunal thus set aside excise duty demands and allowed CENVAT credit on the use of low-grade sponge iron for reprocessing into high-grade sponge iron.

The appellant company, Nilachal Iron & Power Limited engaged in manufacturing sponge iron through the rotary kiln process, proposed to procure partly reduced or low-grade sponge iron (65-70% metallization) from other manufacturers and reprocess it in its own kilns to enhance its metallization to finished quality (85-92%).

The Department objected, arguing that such practice was neither technically nor economically feasible, and consequently disallowed CENVAT credit availed on such inputs. A Show Cause Notice alleged wrongful availment of credit, followed by adjudication against the assessee.

On appeal, the Tribunal noted that the issue had earlier come up in the assessee’s own case, where it was categorically held that there is no statutory bar on treating low-grade sponge iron as an eligible input under the CENVAT Credit Rules. Since sponge iron was specifically listed as an eligible input, the only condition was actual receipt, accounting, and use in the manufacturing process.

The Tribunal had already ruled that “economic considerations cannot override statutory entitlement to credit” and that once statutory records confirm receipt and consumption, credit cannot be denied.

In the present case, the Tribunal said that the Revenue had failed to produce any evidence of diversion or misuse of inputs. No discrepancies were found in statutory registers, and there was no material to establish that input-output ratios were manipulated.

The bench further observed that no prudent businessperson would pay for unusable inputs along with excise duty merely to avail CENVAT credit. Since the appellant had maintained proper accounts and discharged duty on finished goods, denial of credit solely on grounds of alleged economic impracticality was held unjustified.

Accordingly, the Tribunal held that Revenue cannot sit in judgment over business decisions or dictate what is economically viable for a manufacturer.

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