2006 (2) TMI 340 - AT - Central Excise

Cenvat - Transitional provisions for textiles and textile articles - Interpretation of statute - Demand/Recovery of Cenvat

Issues Involved:
1. Denial of Cenvat credit on inputs not physically contained in stock as on 31-3-2003.
2. Plea of limitation regarding the issuance of the Show Cause Notice (SCN).

Detailed Analysis:

1. Denial of Cenvat Credit on Inputs:
The appellants, manufacturers of knitted garments, claimed Cenvat credit on inputs present in stock as on 31-3-2003 under Rule 9A of the Cenvat Credit Rules, 2002. They filed a declaration on 23-5-03 detailing the description, quantity, and value of such stock. The department observed that the appellants had availed extra credit on 5% of the weight of fabrics, semi-finished goods, and finished goods, treating this as "process loss" of input. This extra credit amounted to Rs. 7,06,433/-, which was proposed to be disallowed.

The original authority confirmed the proposal, ordering the recovery of the credit and imposing a penalty equal to the disallowed amount. The first appellate authority reduced the penalty to Rs. 70,643/-. The appellants argued that the credit should be allowed for inputs used in or in relation to the manufacture of the final product, whether directly or indirectly, and whether contained in the final product or not, as per CBE&C's Circular No. B-4/7/2000-TRU, dated 3-4-2000.

The tribunal held that Rule 9A should be strictly construed as it is a transitional provision. Cenvat credit was not available for any input not physically present in stock as on 31-3-2003. The rule specified that credit was admissible only for inputs lying in stock, in process, or contained in finished products as on the specified date. Therefore, the appellants were not entitled to claim credit for inputs lost during the manufacturing process.

2. Plea of Limitation:
The appellants contended that the SCN issued on 8-7-04 was time-barred. They argued that the relevant date for computing the limitation period should be 10-5-03, the last date for filing the Cenvat return for April 2003. The department, however, argued that the relevant date was 17-7-03, the date on which the appellants filed the quarterly return along with Cenvat returns for April, May, and June 2003.

The tribunal found that the returns filed on 17-7-03 were accepted by the department, implying condonation of delay. Therefore, the relevant date for computing the limitation period was 17-7-03. Since the SCN was issued within one year from this date, the plea of limitation was rejected.

Conclusion:
The tribunal held that the appellants were not entitled to Cenvat credit on inputs not physically present in stock as on 31-3-2003. The case was remanded to the original authority for requantification of the credit to be disallowed and the penalty to be imposed. The original authority was directed to provide the appellants with a reasonable opportunity of being heard. The decision of the lower appellate authority to fix the penalty at 10% of the amount of credit disallowed was sustained.

(Pronounced in open Court on 6-2-2006)

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