Exice duty

By TIOL News Service

NEW DELHI, JULY 13, 2006 : EVEN Mona Lisa's smile is imperfect, they say. If this be so, how can we expect the Cenvat Credit Rules to be perfect. It is twenty years since we launched the modvat credit scheme and on more than one occasion we changed its contents finally making it independent and carefree assuming it was suffocating under the Central Excise Rules. We changed its name, but that has not gone well with a lot many and they still refer to it as Modvat, just like calling Mumbai, Bombay.

A small-scale unit avails the annual value of clearance based exemption from duty. As a result, first clearances of the manufacturer in the early part of any financial year remains exempt. And no modvat credit on inputs is available for such exempt clearances. Subsequently, upon changeover to payment of duty, modvat credit is taken in respect of inputs. This cycle repeats annually.

We know this, you may say, for as long as we remember - right from the day the first SSI notification hit the Tariff pages in 1986.
You also know that consequent upon switchover from modvat to exemption in the subsequent financial year, a manufacturer is required to reverse the credit in respect of inputs lying in stock, or in process or contained in final products lying in stock on the date when such option is exercised viz. on the 1 st of April. In plain terms, we understand that if the quantum of credit availed on the aforesaid items is more than that remaining in balance in the modvat account, the manufacturer makes good the difference and in case the balance is more than that warranted, the same automatically lapses.

No doubt, this understanding of ours found its way as a sub-rule (5) to the erstwhile Rule 57H [Transitional Provision] of the CER'44 for the first time on 16.3.1995 vide notification 11/95 CE(N.T) in a subtle manner. The reason being that no such provision existed earlier and there were conflicting decisions of the Tribunal. In some cases, it was held that in absence of an enabling provision, such credit would not be recoverable.

The erstwhile sub-rule 57H(5) read :- "(5) Where a manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearance in a financial year, and who has been availing of the credit of the duty paid on inputs before such option is exercised, he shall be required to pay an amount equivalent to the credit, if any, allowed to him in respect of inputs lying in stock or used in any finished excisable goods lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export."
In the instant case, the assessee while opting for the exemption w.e.f 01.04.2002 reversed the cenvat outstanding in his account. But revenue took the view that outstanding credit amount was less than the "Cenvat credit allowed in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when option was exercised" and the assessee should pay the differential amount in addition to reversing the outstanding credit. The rule referred to was Rule 9(2) [a rule similar to earlier 57H(5) with some subtle changes] of the Cenvat Credit Rules and the rule invoked for recovery was Rule 12. The demand which was confirmed in adjudication on this basis was set aside by the Commissioner (Appeal) by following the judgment of the Supreme Court in the case of Collector vs. Dai Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX and the judgment of the Tribunal in the case of C.C.E., Rajkot vs. Ashok Iron & Steel Fabricators - 2002-TIOL-274-CESTAT-DEL-LB.

Unhappy, Revenue went in appeal before the Tribunal. The amount involved is Rs.56,427/- - paltry one would say, but the implication - unimaginable.
The Ld. DR pleaded assiduously with all her might armed with Supreme Court decisions in the case of Grasim Industries Ltd, State of Jharkhand vs. Ambay Cement, 2004-TIOL-89-SC-CT and British Airways Plc. 2002-TIOL-114-SC-CUS stressing the need for applying the principle of harmonious construction, that exemption provision is to be strictly interpreted, that a statutory provision cannot be read as redundant and superfluous and that an interpretation of Cenvat Rules that goes contrary to the specific requirement under rule 9(2) to pay cenvat credit already taken on inputs, is to be avoided.

The Tribunal was unimpressed - it rejected the Revenue's appeal and the reasons:- A perusal of the record makes it clear that revenue has taken no objection whatsoever to the original taking of credit and its utilisation. Thus, both taking of credit and utilisation of credit were correct.

It is well settled that credit correctly taken and utilised cannot be demanded. Modvat credit is indefeasible. The judgment of the Larger Bench of this Tribunal in the case of Ashok Iron & Steel Fabricators and the judgment of the Apex Court in the case of Dai Ichi Karkaria are clearly in respondent's favour.
In the present case, the revenue is demanding back credit which was correctly taken and utilised relying on rule 9(2). This is not permissible in view of the ruling of the Supreme Court in Dai Ichi Karkaria.

Coming to the submission of the learned DR that assessee opting for exemption must fulfill the terms of the exemption, it is to be noted that exemption is in terms of notification issued from year to year and not in terms of rule 9(2) of CENVAT Credit Rules. There is no reference or incorporation of the condition of Rule 9(2) in those notifications.
That apart, Rule 9(2) cannot be interpreted in a manner as to undermine the indefeasibility of modvat credit. A reading of the said rule would make it clear that what is required in terms of the rule is to determine the CENVAT credit taken on the inputs in stock and debit it from the credit balance, "if any", lying in assessee's credit, and further credit balance, "if any", lapsing and not recall of modvat credit already utilised correctly.

If the Rule contemplated additional cash payment on account of balance in Cenvat credit being insufficient, the Rule would not have qualified the credit balance as balance "if any".
The addition of those words make it clear that cenvat credit balance alone is contemplated and no additional payment.

An interpretation that requires additional payment if the balance in the credit account is not sufficient to meet debit of cenvat credit on inputs in stock etc. would be to permit recall of modvat credit correctly utilised. Such an interpretation goes against the scheme of Cenvat credit and the language of Rule 9(2).
In passing : By the way, the Civil Appeal filed by Revenue against the Tribunal decision in Ashok Iron & Steel Fabricators was dismissed by the Supreme Court. However, in the case of Albert David Ltd, [2002-TIOL-114-CESTAT-DEL] the Tribunal distinguished this decision and held that reversal of credit taken on inputs is warranted when the final product was subsequently exempted. Civil Appeal filed by the company against this order was dismissed by the Supreme Court, and so also the review petition. Be that as it may, the wording employed in rule 9(2) [now rule 11(2) of Cenvat Credit Rules, 2004] appears to be similar to Rule 57H(5) except for usage of words "taken" in place of "availing of credit".(!) As far as the small scale notification goes, the new exemption scheme prescribed from 1.4.97 vide notification 16/97 CE specifically barred exit from the scheme of exemption under that notification during a financial year and any ingress or egress was made permissible only at the commencement of the financial year. This continues even today. So shall be expect an amendment in the rule 11(2) and/or in the small-scale notification in vogue? But for the time being, whom will the Revenue blame?