In major ruling, the Hyderabad bench of the Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) has quashed the reversal of Central Value Added Tax ( CENVAT ) credit on input parts following the destruction of semi-finished goods in a fire.
The assessee is a manufacturer of Chlorinated Paraffin ( CP ) falling under Chapter 38 and used in manufacture of PVC, plastic and leather products. The assessee manufactures various grades of CP depending on usage of the product in different applications. The CP of various grades vary in respect of their thermal stability, viscosity, refractive index, colour, etc.
CP is manufactured by chlorination of liquid paraffin and adding of Olefins and other materials in the process. Liquid Paraffin consists of carbon chains C9 to C30 or more. Olefins as unsaturated alkaline fall under Chapter 29 and Liquid Paraffin as saturated alkaline falls under Chapter 27. Each variety of liquid paraffin, say C9H20 or C12H26 or C24H50 have different characteristics. There are a number of PVC formulations manufactured from Chlorinated Paraffin and Olefins.
Some end products require mechanical strength, some require shining, some require electrical resistance, and some require durability, some flame retardancy and some chemical resistance. As per requirement of the product, various chains of carbon of paraffin and olefins are blended. Once blended, the original input cannot be restored nor sold nor used for any other purpose other than in the finished product, which is intended to be manufactured. In support thereof, the appellant have annexed web pages from the website of the assessee containing technical details of the products in the appeal file.
Upon not receiving any response and upon being advised that even the letter of the Commissioner dated 19th December 2017, which carries civil consequences for the appellant, is appealable, the appellant has filed the present appeal, inter alia, on the following grounds:
a) The direction to reverse Rs. 72, 77,180/- of Cenvat credit on Paraffin oil, currently in blending tanks and reactors in WIP stage, and Rs. 2, 70,818/- availed on HDPE and MS drums used for packing finished products, under the pretext of treating them as inputs per CBEC Circular dated 9th December 2009, without issuance of any show cause notice and without a reasoned order, is illegal.
b) Treating WIP material as raw material based on the appellant’s own description and the CA’s categorization under raw material is unjust. The appellant explicitly stated Paraffin Oil was “issued for process in blending tank,” and the CA certificate, issued for insurance purposes, cannot substantiate credit reversal.
c) The Commissioner’s contention that the assessee sought remission is erroneous. The appellant requested remission under Rule 3 of CCR for the credit availed, not for its reversal, which lacks legal basis.
d) It is firmly established that credit availed on inputs existing in WIP material cannot be reclaimed. Rule 3(5B) of CCR necessitates credit reversal only if inputs are destroyed as such, while Rule 3(5C) mandates reversal only if inputs used in finished goods’ manufacture are remitted. No provision in CCR mandates reversal of credit availed on inputs destroyed after issue for manufacture and in WIP stage.
Having considered the rival contentions, the tribunal found that under the Cenvat Credit Rules, Rule 3(5) provides – when inputs or capital goods on which credit has been taken are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice.
Further rule 3(5C) of CCR provides – where any goods manufactured or produced by the assessee, the payment of duty is ordered to be remitted under Rule 21 of Central Excise Rules 2002, the Cenvat credit taken on inputs used in the manufacture or production of said goods and the Cenvat credit taken on input services used in or in relation to the manufacture or production of said goods, shall be reversed.
The bench held that no case was made out of inputs removed as such from the factory on the destruction of WIP or semi-finished goods. In case of destruction of goods/inputs, the liability is restricted to reversal of Cenvat credit on such inputs only. Further held that the assessee was not required to reverse Cenvat credit on the inputs already issued for production forming part of WIP or semi-finished goods.
The two member bench of the tribunal comprising Anil Choudhary (Judicial member) and A.K Jyotishi (Technical member) allowed the appeal and set aside the impugned order. It was clarified that the assessee was not required to reverse the Cenvat credit of Rs.76, 88,124/- with respect to inputs forming part of work in progress/semi-finished goods destroyed in fire. The assessee shall be entitled to consequential benefits, in accordance with law.
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