2022 (4) TMI 1359 - AT - Central Excise

Reversal of CENVAT Credit - slow-moving inventory, considering closing balance as on 31.03.2017 - it is claimed that provision for slow moving inventory made to write off their value in books of account require reversal of Cenvat credit on the said inputs - Rule 3(5B) of the Cenvat Credit Rules, 2004 - revenue neutrality - HELD THAT - The appellant have only created a general provision for slow-moving inventory and have actually not written off the inventory from the inventory or the asset account. In actuality such provision have been made by appropriation in the profit and loss account, without writing off any amount from the assets / inventory account. Rule 3(5B) of the Cenvat Credit Rules is attracted only when the value of the assets and/or inventory is written off fully or partially or wherein any specific provision to write off fully or partially has been made in the books of account. In the facts of the present case, the appellant have made a general provision, which is not attributable to any particular assets / inventory - Admittedly, Revenue has not been able to identify the details of inventory or asset, for which the general provision has been made. It is further evident that appellant have led evidence that such provision has been varied from year to year by way of writing back, on the usage of the inventory as required. Revenue Neutrality - HELD THAT - The situation is revenue neutral as the appellant have written off the majority of the provision created on utilisation of the inventory in manufacturing and clearance of finished goods. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Interpretation of Rule 3(5B) of the Cenvat Credit Rules, 2004 regarding the reversal of Cenvat credit on slow-moving inventory.
2. Application of Rule 3(5B) to the creation of provisions for slow-moving inventory.
3. Revenue neutrality in the context of re-credit of Cenvat credit on subsequent use of inputs.

Analysis:

Issue 1: Interpretation of Rule 3(5B) of the Cenvat Credit Rules
The appellant argued that Rule 3(5B) requires the reversal of Cenvat credit only when an inventory is fully or partially written off due to no value or negligible benefit. They emphasized the distinction between writing off inputs and creating provisions for slow-moving inventory. The appellant demonstrated that the provision for slow-moving inventory was gradually reduced over the years as the goods were used in manufacturing, and a Chartered Accountant certified that the provision became negligible by a certain date.

Issue 2: Application of Rule 3(5B) to provisions for slow-moving inventory
The appellant contended that since no inputs were written off, Rule 3(5B) did not apply to their case. They highlighted that the provision for slow-moving inventory was created in a specific financial year and decreased as goods were sold, indicating no creation of provisions during the disputed period. The appellant cited previous tribunal decisions where it was held that Rule 3(5B) does not apply when provisions are made for slow-moving inventory without actual write-offs.

Issue 3: Revenue neutrality and re-credit of Cenvat credit
The appellant argued that even if they had reversed the credit, they would be entitled to re-credit under the proviso to Rule 3(5B) when inputs are subsequently used in manufacturing. They asserted that the entire exercise was revenue neutral as the provision for slow-moving inventory was reversed in subsequent periods, and the demand was not justified as it did not result in any revenue loss.

In the final judgment, the Member (Judicial) noted that the appellant had created a general provision for slow-moving inventory without actually writing off any assets or inventory. It was highlighted that Rule 3(5B) applies only when specific write-offs occur, which was not the case here. The Member found the situation to be revenue neutral as the provision was adjusted based on the usage of inventory in manufacturing and clearance of finished goods. Consequently, the impugned order was set aside, and the appeal was allowed, granting the appellant consequential benefits.

This comprehensive analysis of the judgment highlights the key legal arguments, interpretations of relevant rules, and the ultimate decision reached by the Appellate Tribunal CESTAT NEW DELHI.