2025 (7) TMI 924 - AT - Central Excise

Wrong availment of CENVAT credit on cancelled invoice and imposition of penalty - revenue neutrality - suppression of facts - extended period of limitation - HELD THAT - It is an admitted fact that there was an omission on the part of the Appellant in crediting the CENVAT credit on a cancelled invoice. However considering it as a clerical mistake during audit they have reversed the entire amount. Facts being so and the evidence adduced by the Appellant they were holding sufficient CENVAT credit in their books of accounts. In the absence of any willful negligence or suppression of facts for evasion of duty invoking extended period of limitation is prima facie unsustainable. As regarding the issue on merit it is found that the issue regarding such mistake/omission was brought to the notice of the Appellant and they have paid the entire amount. Following the ratio of the decision of this Tribunal and also considering the revenue neutrality as urged by the Learned Consultant for the Appellant it was not a fit case for confirming the demand under the provisions of Rule 14 of the CENVAT Credit Rules 2004 r/w proviso to Section 11A (10) of Central Excise Act 1994. Appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the propriety of demand and penalty imposed for alleged wrongful availment of CENVAT credit on cancelled invoices, the applicability of extended limitation period for recovery, and the principle of revenue neutrality in the context of CENVAT credit rules and Central Excise Act provisions.

The primary issues presented and considered are:

• Whether the appellant's availment of CENVAT credit on cancelled invoices constitutes wrongful or irregular credit under the CENVAT Credit Rules, 2004 and the Central Excise Act, 1994.
• Whether the appellant's failure to follow prescribed procedures under Section 11B of the Central Excise Act, 1994 in relation to cancelled invoices justifies the demand of credit recovery along with interest and penalty.
• The legal effect of reversal of credit entries pertaining to cancelled invoices and whether such reversal negates the allegation of wrongful availment.
• The applicability and correctness of invoking the extended period of limitation for initiating recovery proceedings in this case.
• The relevance and application of the principle of revenue neutrality in cases involving alleged wrongful availment of CENVAT credit.
• The extent to which procedural lapses affect substantive rights to credit and whether penalty is justified in absence of willful evasion or suppression.

Issue-wise detailed analysis:

1. Wrongful availment of CENVAT credit on cancelled invoices and recovery demand

The appellant, engaged in manufacturing, availed CENVAT credit on input services during April 2011 to November 2012, including credit on invoices that were subsequently cancelled. The Department alleged violation of CENVAT Credit Rules, 2004 and initiated proceedings for recovery of Rs. 50,31,141/- along with interest and penalty, contending that the appellant did not comply with Section 11B of the Central Excise Act, 1994, which prescribes the procedure for dealing with credit on cancelled invoices.

The appellant admitted an omission in the ERP system which failed to exclude cancelled invoices from excise duty liability computation, resulting in payment of duty on cancelled invoices and corresponding credit entries. However, the appellant reversed the debit entries upon audit, and contended that the credit was availed only after payment of duty, making it a revenue neutral transaction.

Relevant legal framework includes the CENVAT Credit Rules, 2004, specifically Rule 14 which deals with recovery of credit wrongly availed, and Section 11B of the Central Excise Act, 1994 which governs credit on cancelled invoices. The Central Excise Manual's provisions on invoice systems and computer-generated invoices were also referenced to demonstrate procedural safeguards and departmental oversight responsibilities.

The Court noted that the appellant's failure was a clerical or system error rather than deliberate evasion. The appellant maintained sufficient CENVAT credit balance and reversed the excess credit upon detection. The Department's reliance on cancelled invoices as a basis for wrongful credit was found to be a mischaracterization; the appellant's case was one of reversal of excess duty paid rather than wrongful credit on unprescribed documents.

Precedents relied upon include the Tribunal's decision in Motorola India Pvt. Ltd., which recognized revenue neutrality and procedural errors not amounting to wrongful credit, and Supreme Court decisions in Commissioner of Central Excise vs. Narayan Polyplast and Commissioner of Central Excise & Customs vs. Creative Enterprises, which held that credit availed after actual payment of duty cannot be denied merely due to procedural irregularities.

The Court applied these principles and found that the credit was availed only after payment of excise duty, and reversal of excess credit was made, negating the Department's claim of wrongful availment. The procedural lapse did not translate into substantive loss to revenue.

2. Applicability of extended period of limitation for recovery

The Department invoked the extended limitation period for recovery proceedings, citing the period of April 2011 to November 2012 with show cause notice issued on 14.10.2013.

The Court examined the facts and observed that there was no willful suppression or attempt to evade duty by the appellant. The omission was admitted and rectified during audit. In such circumstances, invoking the extended period of limitation was found to be prima facie unsustainable.

The Court emphasized that extended limitation applies only in cases of fraud, collusion, or willful misstatement, which were absent here.

3. Principle of revenue neutrality and procedural lapses

The appellant argued that the entire transaction was revenue neutral as the duty was paid on cancelled invoices and the credit was reversed accordingly. The Court acknowledged this principle, supported by the Motorola India and Narayan Polyplast judgments, which held that revenue neutrality negates the basis for demand and penalty.

Further, the Court cited judgments such as Mangalore Chemicals and Fertilizers Ltd. and Formica India Division, which held that substantial benefits should not be denied due to procedural lapses absent mala fide intent.

The Court found that the appellant's case fell squarely within these principles, as the error was inadvertent and corrected, with no loss to revenue or evasion.

4. Penalty imposition

Given the admitted omission was a clerical error without willful negligence or suppression, and the appellant had reversed excess credit and paid duty, the Court found the imposition of penalty unjustified.

Conclusions:

• The appellant's availment of CENVAT credit on cancelled invoices was due to a bona fide clerical error in the ERP system and was subsequently rectified by reversal of excess credit.
• The credit was availed after payment of excise duty, making the transaction revenue neutral, and thus not constituting wrongful availment under the CENVAT Credit Rules, 2004 or Central Excise Act, 1994.
• The Department's attempt to treat reversal of excess duty paid as wrongful credit on unprescribed documents was unsustainable.
• Invocation of extended limitation period was not justified in absence of fraud, collusion, or willful suppression.
• Penalty imposed on the appellant was unwarranted given the absence of mala fide intent and corrective action taken.

Significant holdings:

"In the absence of any willful negligence or suppression of facts for evasion of duty, invoking extended period of limitation is prima facie unsustainable."

"Following the ratio of the decision of this Tribunal and also considering the revenue neutrality as urged by the Learned Consultant for the Appellant, it was not a fit case for confirming the demand under the provisions of Rule 14 of the CENVAT Credit Rules, 2004 r/w proviso to Section 11A(10) of Central Excise Act, 1994."

"Where the scheme opted for by the assessee is found to have been misused (in contradistinction to mere deviation or failure to observe all the conditions) the existence of an alternate scheme would not be an acceptable defence. Therefore, mere procedural lapses without misuse do not warrant denial of credit or imposition of penalty."

These principles affirm that procedural errors in credit availment, when rectified and not resulting in loss of revenue, do not justify recovery demands or penalties, particularly where the credit is availed post payment of duty and the appellant has acted in good faith.