2025 (5) TMI 1128 - AT - Central Excise

Reversal of Cenvat credit availed on inputs and input services - appellants were admittedly clearing certain exempted goods along with certain dutiable goods from their factory or otherwise - applicability of Rule 6 of the Cenvat Credit Rules 2004 - HELD THAT - On going through the SCN dt.05.03.2010 we find that the appellants are primarily engaged in manufacture of sugar but are also manufacturing certain specialized products which are cleared to ISRO in terms of Notification No.64/95-CE being an exemption notification. The department s view is that since they have taken certain credit in respect of certain input services including services used by appellant for transportation of gas by pipeline used for generation of electricity and not maintained separate account Rule 6(3) is invokable. As per the provision of Rule 6(2) the appellants who are admittedly manufacturing both dutiable and exempted excisable goods were required to maintain separate record for receipt and use of input services. Apparently the appellants have not been able to adduce any evidence that they have maintained any record for receipt and use of input services separately though they have claimed that they have not at all used the input services for manufacture of exempted goods. As per Rule 6(2) in the event of nonmaintenance the appellants will have the right to choose any one of the options governed by Rule 6(3)(i) (ii) and (iii). In this case though claimed but they are not able to establish that they have maintained separate account for receipt and use of input services even though admittedly they are engaged in manufacture of both dutiable and exempted goods. As per the provisions of Rule 6(3) of CCR post 01.04.2008 there is a provision for payment of an amount equivalent to Cenvat credit attributable to inputs and input services used in or in relation to manufacture of exempted goods subject to condition and procedure specified in Rule 6(3A). Whereas prior to 01.04.2008 there was no such provision except for in terms of retrospective amendment in 2010 which provided for specialized procedure under Rule 6(7) for payment of amount equivalent to the credit attributable to exempted goods along with 24% interest before a specified date - In this case they have clearly not availed of the said provision and thus in terms of the extant rules when there was no provision for reversal of Cenvat credit attributable for period prior to 01.04.2008 as such then the only option left was to pay an amount at the specified rate indicated in the respective SCNs. However for the period post 01.04.2008 the option is to be chosen by the manufacturer and it cannot be imposed on him by Department. Further even if the procedure under Rule 6(3A) has not been followed in full they can work out the credit attributable to said exempted goods if any. The appellant s reliance on the judgment of Hon ble High Court in the case of Principal Commissioner CGST Ludhiana Vs Suraj Solvents Vanaspati Industries 2023 (3) TMI 7 - PUNJAB AND HARYANA HIGH COURT is distinguished as in that case the assessee could not apply because of pendency of proceedings in other forum which is not the case here. Hence it is distinguished. For the period prior to 01.04.2008 the appellant would be required to pay an amount as indicated in the respective SCNs. However for the period post 01.04.2008 they will be at liberty to pay an amount equivalent to the Cenvat credit attributable to the exempted goods. In case no credit is found attributable to the exempted goods then no amount shall be liable to be payable. As far as the issue of limitation is concerned it is found that the Adjudicating Authority has considered their submission and has held that in the facts of the case it is rightly invokable. It is found that in this issue of reversal of credit options under Rule 6 etc. were subject matter of differing interpretations during material time and even retrospective amendment was made to allow certain relief for period prior to 2008. The issue is interpretative in nature and there is no other strong and cogent ground for invoking extended period hence extended period cannot be invoked. Conclusion - i) The manufacturers engaged in production of both dutiable and exempted goods must maintain separate accounts for inputs and input services as per Rule 6(2). ii) Failure to maintain such records invokes Rule 6(3) requiring reversal or payment of proportionate credit. iii) For periods prior to 01.04.2008 statutory provisions did not allow reversal of credit limiting recovery to specified amounts. iv) Post 01.04.2008 manufacturers have the option to pay proportionate credit attributable to exempted goods which cannot be unilaterally imposed by the Department. v) Extended period for demand recovery was not justified given the interpretative nature of the issue and vi) Penalty cannot be imposed without evidence of fraudulent or willful conduct. Appeal is partly allowed by way of remand.

Summary

The core legal questions considered by the Tribunal revolve around the applicability and interpretation of Rule 6 of the Cenvat Credit Rules, 2004 (CCR) concerning the reversal of Cenvat credit availed on inputs and input services when a manufacturer is engaged in the production of both dutiable and exempted goods. Specifically, the issues include: (i) whether the appellants were liable to reverse proportionate Cenvat credit or pay an amount equivalent to such credit under Rule 6(3) and Rule 6(3A) of CCR given that they manufactured both dutiable goods and exempted goods cleared without payment of duty; (ii) whether the appellants maintained separate accounts for inputs and input services used in manufacture of exempted goods as required under Rule 6(2); (iii) the correct quantum of demand and the applicability of penalty under Section 11AC read with Rule 15(2) of CCR; and (iv) the question of limitation and invocation of extended period for demand recovery.

Regarding the first issue, the legal framework is anchored on Rule 6 of CCR, which governs the availment and reversal of Cenvat credit when inputs or input services are used in manufacture of exempted goods. Prior to 01.04.2008, there was no explicit provision for reversal of credit attributable to exempted goods except through retrospective amendments introduced in 2010, whereas post 01.04.2008, Rule 6(3) and Rule 6(3A) provide for payment of an amount equivalent to the credit attributable to exempted goods. The Court noted that the appellants manufactured both dutiable goods (such as sugar) and exempted goods (Ultra Hydrazine, Mono Methyle Hydrazine, Hydroxy Terminated Poly Butadiene) cleared under exemption notifications without payment of duty. The Department's contention was that the appellants availed common credit on input services (courier, rent-a-cab, telephone, transportation of gas by pipeline) without maintaining separate accounts, thereby necessitating reversal or payment of proportionate credit under Rule 6(3). The appellants argued that input services were exclusively used for dutiable goods and that they maintained separate accounts for different plants producing different goods, thus negating the applicability of Rule 6(3).

The Court examined the appellants' submissions regarding the use of input services: courier services were used only for dispatches related to dutiable goods, rent-a-cab services were exclusively for marketing officials of dutiable goods, and telephone services were not installed in plants manufacturing exempted goods. Concerning natural gas used for steam and electricity generation, the appellants contended that fuel was excluded from Rule 6(2) and that attributing electricity consumption between dutiable and exempted goods was difficult. The Tribunal recognized that fuel was excluded from Rule 6(2) prior to 01.04.2008 and that electricity used for captive consumption does not directly attract Rule 6 provisions unless sale of exempted goods occurs.

On the question of maintenance of separate accounts, Rule 6(2) mandates manufacturers producing both dutiable and exempted goods to maintain separate records for receipt and use of input services. The appellants failed to produce tangible evidence of such records, and the Adjudicating Authority doubted their claim. Consequently, the Tribunal held that in absence of such records, the appellants were obliged to comply with the provisions of Rule 6(3), which provide for reversal or payment of proportionate credit. The Court clarified that for the period prior to 01.04.2008, the only option was payment of an amount at the specified rate in the show cause notices (SCNs), as there was no statutory provision for reversal of credit. For the period post 01.04.2008, the appellants had the option to pay an amount equivalent to the credit attributable to exempted goods, but this option could not be imposed by the Department; it had to be exercised by the manufacturer.

The Tribunal distinguished the appellants' reliance on various judicial precedents. The judgment in Principal Commissioner, CGST, Ludhiana Vs Suraj Solvents & Vanaspati Industries was found inapplicable as the facts differed, particularly regarding the pendency of proceedings. The case of Shree Rama Multi Tech Ltd Vs UOI was also distinguished as it pertained to a different factual matrix involving retrospective amendments and High Court intervention. The Tribunal disagreed with the observation in CCE, Ahmedabad-II Vs Maize Products that allowed reversal of credit prior to 2008, emphasizing that the Tribunal cannot grant relief beyond statutory provisions. Thus, the Court underscored the binding nature of the statutory framework over judicial discretion in such matters.

Regarding the quantum of demand, the appellants contended that the Department wrongly confirmed demand at 10% of the value of HTPB cleared without duty, whereas the proportionate Cenvat credit attributable was significantly lower. The Tribunal accepted that the demand should be redetermined based on the correct application of Rule 6(3) and (3A), and if no credit was found attributable to exempted goods post 01.04.2008, no amount should be payable. The Court remanded the matter to the Adjudicating Authority for fresh determination and directed that the demand be upheld only for the normal period, rejecting the extended period invocation.

On the issue of limitation and extended period, the Tribunal noted that the provisions and interpretations of Rule 6 were subject to differing views during the relevant period, with retrospective amendments introduced later. Given the interpretative nature of the issue and absence of strong grounds for invoking the extended period, the Tribunal held that extended period could not be invoked. Consequently, penalty under Rule 15(2) was set aside due to lack of evidence of fraud, willful misstatement, or suppression of facts. The Adjudicating Authority's imposition of penalty based solely on extended period invocation was found untenable.

In conclusion, the Tribunal established that: (i) manufacturers engaged in production of both dutiable and exempted goods must maintain separate accounts for inputs and input services as per Rule 6(2); (ii) failure to maintain such records invokes Rule 6(3) requiring reversal or payment of proportionate credit; (iii) for periods prior to 01.04.2008, statutory provisions did not allow reversal of credit, limiting recovery to specified amounts; (iv) post 01.04.2008, manufacturers have the option to pay proportionate credit attributable to exempted goods, which cannot be unilaterally imposed by the Department; (v) extended period for demand recovery was not justified given the interpretative nature of the issue; and (vi) penalty cannot be imposed without evidence of fraudulent or willful conduct.

The Tribunal's key holding includes the statement: "when there is no statutory provision to reverse the applicable credit prior to 2008, Tribunal, as a creature of statute, cannot allow relief which is not within the four walls of the statute itself." This underscores the primacy of statutory provisions over judicial discretion in tax credit matters.

The appeal was partly allowed by way of remand to the Original Adjudicating Authority to re-determine the demand in accordance with these observations, uphold demand only for the normal period, and set aside penalty under Rule 15(2).