2006 (11) TMI 48 - AT - Central Excise

Cenvat/Modvat Final products exempted from duty which were earlier dutiable and credit on it has already been taken validly Benefit of it avail to manufacturer because reversal of credit legally taken is not correct

Summary

Issues Involved:
1. Availment of Modvat credit on closing stock of inputs upon issuance of an exemption notification.
2. Requirement to reverse the credit availed on inputs lying in stock.
3. Legal validity of the penalty imposed under Rule 13 of the Cenvat Credit Rules, 2002.

Issue-Wise Detailed Analysis:

1. Availment of Modvat Credit on Closing Stock of Inputs Upon Issuance of an Exemption Notification:
The core issue pertains to whether the appellant could retain the Modvat credit availed on inputs when the final product, tractors, became exempt from duty effective from 9-7-2004. The appellant had closing stocks of tractors and inputs on 8-7-2004, for which credit was availed. The credit involved was Rs. 90,77,881/- for tractors and Rs. 1,19,06,475/- for inputs in stock. The Tribunal noted that the Cenvat credit scheme allows credit to be used for payment of duty on final products. If the final product is exempt, input credit should not be taken. However, credit validly taken when the final product was dutiable remains valid and can be used for other dutiable products.

2. Requirement to Reverse the Credit Availed on Inputs Lying in Stock:
Revenue argued that the appellant should reverse the credit availed on inputs lying in stock and those used in manufacturing tractors in stock. The Commissioner demanded recovery of Rs. 2,09,84,356/- and imposed interest and penalties. The Tribunal, however, emphasized that once credit is validly taken, it remains indefeasible unless the manufacturer chooses not to use the raw material in its excisable product. This position is supported by the Supreme Court's decision in the Dai Ichi Karkaria Ltd. case, which states that validly taken credit is available without any limitation in time or otherwise. The Tribunal also referenced the Larger Bench decision in Ashok Iron & Steel Fabricators, which upheld that credit need not be reversed upon subsequent exemption of the final product.

3. Legal Validity of the Penalty Imposed Under Rule 13 of the Cenvat Credit Rules, 2002:
The Commissioner imposed a penalty of Rs. 20,00,000/- under Rule 13 of the Cenvat Credit Rules, 2002. The appellant contended that the penalty was unjustified as the credit was validly taken and there was no provision for its reversal upon exemption of the final product. The Tribunal found that the penalty was not warranted as the demand for reversal of credit itself was incorrect, being contrary to the Supreme Court's ruling in the Dai Ichi Karkaria case. The Tribunal underscored that the adjudicating authority's reliance on the Board's Circular and decisions like Albert David was misplaced, as these did not align with the Supreme Court's definitive stance on the matter.

Conclusion:
The Tribunal concluded that the demand for reversal of Modvat credit was incorrect and contrary to the Supreme Court's ruling in the Dai Ichi Karkaria case. Consequently, the appeal was allowed, and the penalty imposed was deemed unjustified. The Tribunal emphasized adherence to the Apex Court's dictum and clarified that validly taken credit remains indefeasible, supporting the appellant's position.