2025 (7) TMI 67 - AT - Central Excise

CENVAT credit taken on duties paid towards procurement of capital goods - alleged utilisation of the capital goods in the manufacture and clearance of exempted goods which according to lower authorities is not permissible and should have been reversed in accordance with rule 6(4) of CENVAT Credit Rules 2004 - HELD THAT - Rule 6(4) of CENVAT Credit Rules 2004 is not a bar to taking credit which flows from the authority of rule 3(1) therein. The impugned order has erred in concluding that the appellant was not entitled to take the credit and contradicts application of rule 6(4) inasmuch as rule 6 is for extinguishment of credit by deployment of input or input service in manufacture of exempted goods or in rendering of exempted service. Unlike these insofar as capital goods is concerned retention of credit is barred if used exclusively in manufacture of exempted goods. The returns leave no room for doubt that goods have been exported and consequently rule 6(4) of CENVAT Credit Rules 2004 is inapplicable. Furthermore rule 6 is no authority for recovery and rule 14 of CENVAT Credit Rules 2004 is authority to do so when credit is retained contrary to the mandate therein. It falls to the central excise authorities to establish that the capital goods were used exclusively in the manufacture of exempted goods and mere allegation without substance cannot operate to shift the onus on to the appellant to disprove. That obligation has not been discharged in the proceedings leading to the impugned order. There is no merit in the impugned order which is set aside to allow the appeal - Appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the entitlement to CENVAT credit on capital goods under the CENVAT Credit Rules, 2004, specifically:

• Whether the appellant was entitled to take CENVAT credit on capital goods used in the manufacture of exempted goods, in light of rule 6(4) of the CENVAT Credit Rules, 2004;
• The interpretation and applicability of rule 6(4) concerning exclusive use of capital goods in manufacture of exempted goods and the consequent reversal or denial of credit;
• The scope and meaning of "exempted goods" under rule 2(d) of the CENVAT Credit Rules, 2004, and whether goods cleared under exemption notifications or exported qualify as exempted goods for the purpose of rule 6(4);
• The authority and conditions under which recovery of credit and imposition of penalty under rules 14 and 15 of the CENVAT Credit Rules, 2004 can be sustained;
• The burden of proof regarding exclusive use of capital goods in manufacture of exempted goods and the evidentiary standard required to deny credit.

Issue-wise Detailed Analysis:

1. Entitlement to CENVAT Credit on Capital Goods vis-`a-vis Rule 6(4) of CENVAT Credit Rules, 2004

The legal framework involves the CENVAT Credit Rules, 2004, particularly rule 3(1) which permits taking credit on inputs, input services, and capital goods, and rule 6(4) which restricts credit on capital goods used exclusively in manufacture of exempted goods for a specified two-year period from commencement of commercial production.

Rule 6(4) states: "No CENVAT credit shall be allowed on capital goods used exclusively in the manufacture of exempted goods or in providing exempted services for a period of two years from the date of commencement of the commercial production..."

The appellant claimed that the capital goods were not used exclusively for exempted goods but also for dutiable goods, supported by returns filed for the relevant period. The lower authorities, however, held that since the appellant cleared only exempted goods during the period, rule 6(4) applied, disallowing credit and mandating reversal.

The Court's interpretation distinguished between "inputs" and "capital goods" under rule 6(4). While rule 6 mandates extinguishment of credit on inputs used in exempted goods manufacture, for capital goods, the bar applies only if used exclusively for exempted goods. The Court found that the lower authorities erred in concluding that the appellant was not entitled to credit merely because exempted goods were cleared, without establishing exclusive use of capital goods for exempted goods.

Thus, the Court emphasized that rule 6(4) is not an absolute bar to credit on capital goods unless exclusive use is established. The appellant's evidence of use in manufacture of dutiable goods was not adequately considered or disproved by the authorities.

2. Definition and Scope of "Exempted Goods" under Rule 2(d)

Rule 2(d) defines "exempted goods" as excisable goods exempt from the whole of the duty of excise leviable thereon, including goods chargeable to nil rate of duty or goods benefiting from specific exemption notifications.

The appellant's goods, 'worsted yarn,' were exempted under Notification No. 30/2004-CE, subject to the condition that credit on inputs was not taken. However, the appellant had also cleared goods under export, which are not covered by the exemption notification but are zero-rated supplies under law.

The Court noted that the returns filed clearly showed export of goods, which are not "exempted goods" under rule 2(d) but are treated differently. Therefore, the application of rule 6(4) to deny credit on capital goods used in manufacture of such goods was misplaced.

The Court highlighted that the lower authorities conflated non-payment of duty (due to exemption or export) with the concept of exempted goods under rule 6(4), which was legally incorrect.

3. Authority for Recovery and Penalty under Rules 14 and 15

Rule 14 of the CENVAT Credit Rules, 2004, authorizes recovery of credit wrongly taken or retained, and rule 15 provides for imposition of penalty of like amount.

The lower authorities invoked these provisions to recover Rs. 16,05,559 and impose penalty of like amount on the appellant for alleged wrongful credit on capital goods.

The Court clarified that rule 6(4) itself does not provide authority for recovery; it only prescribes conditions for credit eligibility. Recovery under rule 14 requires the credit to have been taken contrary to the provisions, which must be established by the authorities.

In this case, the authorities failed to discharge the onus of proving exclusive use of capital goods in exempted goods manufacture. Mere allegation without substantive evidence cannot justify recovery and penalty. The Court found the impugned order lacking in this regard.

4. Burden of Proof and Evidentiary Standards

The Court underscored that the burden to establish exclusive use of capital goods in exempted goods manufacture lies with the revenue authorities. The appellant had furnished returns indicating use in manufacture of dutiable goods and exports.

The lower authorities did not produce any material to rebut this evidence or demonstrate exclusive use. Consequently, the presumption of correctness of appellant's claim could not be displaced.

This failure to discharge the burden of proof was a critical flaw in upholding the recovery and penalty.

Conclusions on Issues:

• Rule 6(4) restricts credit on capital goods only if used exclusively in manufacture of exempted goods; mere clearance of exempted goods does not automatically trigger disallowance.
• The definition of exempted goods excludes goods cleared under export or nil-rated notifications; thus, rule 6(4) is inapplicable to such goods.
• Recovery and penalty under rules 14 and 15 require proof of wrongful credit; the authorities failed to establish exclusive use or wrongful taking of credit.
• The burden of proof lies with the revenue; absence of evidence to rebut appellant's claim mandates allowing the credit.

Significant Holdings:

The Court held: "Rule 6(4) of CENVAT Credit Rules, 2004 is not a bar to taking credit which flows from the authority of rule 3(1) therein."

It further stated: "The returns leave no room for doubt that goods have been exported and, consequently, rule 6(4) of CENVAT Credit Rules, 2004 is inapplicable."

On burden of proof, the Court emphasized: "It falls to the central excise authorities to establish that the capital goods were used exclusively in the manufacture of exempted goods and mere allegation without substance cannot operate to shift the onus on to the appellant to disprove."

Finally, the Court concluded: "In the light of the facts and circumstances set out supra, there is no merit in the impugned order which is set aside to allow the appeal."