2010 (7) TMI 344 - AT - Central Excise

Cenvat credit - inputs became damaged or defective during process - reversal of credit Held that - CENVAT Credit Rules do not contain any provision for reversal of credit if inputs get damaged in the course of manufacturing process - assessees collected an amount from the job workers by raising debit note to the extent of loss occurred, cannot be a ground for demanding reversal of credit Appeal is allowed

Summary

Issues: Recovery of CENVAT credit due to defective inputs sent to job workers; Imposition of penalty.

Recovery of CENVAT Credit:
The assessees, manufacturers of textile machinery parts, sent Cenvat-credited raw materials/inputs to job workers following prescribed procedures. Some inputs put into the manufacturing process by job workers were found defective and returned to the assessees. A show-cause notice was issued proposing recovery of Rs. 52,268 as the equivalent CENVAT credit on the raw material and raw material in finished goods, along with interest and penalty. The Assistant Commissioner confirmed the demand, which was upheld by the Commissioner (Appeals), leading to this appeal.

Analysis:
The CENVAT Credit Rules do not provide for credit reversal if inputs are damaged during the manufacturing process. The issue of credit reversal only arises if inputs are defective before being used. In this case, since the inputs became damaged during the process, the collection of an amount from job workers through debit notes for the losses incurred cannot be a basis for demanding credit reversal. The Tribunal, after hearing both sides, set aside the impugned order and allowed the appeal, emphasizing that the collection of the amount from job workers does not justify the reversal of credit.

Imposition of Penalty:
The show-cause notice also proposed the imposition of a penalty. However, the Tribunal's decision to set aside the demand for recovery of CENVAT credit renders the question of penalty imposition moot, as the penalty was linked to the recovery demand. Since the demand itself was set aside, the penalty imposed by the Assistant Commissioner and upheld by the Commissioner (Appeals) is no longer valid.

Conclusion:
In conclusion, the Appellate Tribunal held that the collection of an amount from job workers due to losses incurred from defective inputs does not warrant the reversal of CENVAT credit. Therefore, the demand for recovery of CENVAT credit, along with the penalty imposed, was set aside, and the appeal was allowed in favor of the assessees.