2011 (4) TMI 1123 - HC - Central Excise

Penalty - Cenvat credit reversal - order passed by the Tribunal which held that the assessee is not liable to reverse the cenvat credit in respect of the inputs which were purchased prior to 1-8-2004, the day from which an exemption was granted, from payment of excise duty in respect of final products, notification came to be issued on 9-4-2004 granting exemption in respect of the final products and consequently, from 1-8-2004, the day from which the notification came into force, the assessee was not entitled to cenvat credit. However, as on 1-8-2004, the assessee held inputs and semi-finished goods in stock. The revenue proceeded against the assessee invoking the proviso of Section 11A and proposed demand for irregularly availed cenvat credit and interest thereon. Penalty was also proposed - Held that - till 1-3-2007, the assessee was entitled to benefit, of the cenvat credit in respect of inputs contained in the work in progress and semi finished products. The said amendment is prospective in nature, the period is anterior to 1-3-2007, which has no application, decision in favour of the assessee and against the revenue.

Summary

Issues:
1. Whether the assessee is liable to reverse the cenvat credit for inputs purchased before 1-8-2004?
2. Whether the assessee is entitled to cenvat credit for inputs and semi-finished goods held in stock before 1-8-2004?
3. Interpretation of the exemption notification issued on 9-4-2004 and its impact on cenvat credit reversal.
4. The applicability of Section 11A proviso and penalty imposition.
5. The legal position on cenvat credit reversal post-exemption notification.

Issue 1:
The Tribunal held that the assessee is not liable to reverse the cenvat credit for inputs purchased before 1-8-2004, the date from which an exemption was granted from excise duty on final products. The Original Authority and Commissioner of Appeals had earlier ruled against the assessee, proposing demands for irregularly availed cenvat credit and penalties. The High Court cited the case of Commissioner Central Excise v. M/s. TAFE Limited, emphasizing that once cenvat credit is legally taken and utilized on dutiable final products, it does not need to be reversed upon subsequent exemption of the final product.

Issue 2:
The Tribunal further ruled that the assessee is entitled to the benefit of cenvat credit for semi-finished products and raw materials held in stock before 1-8-2004. The Court highlighted that the law does not provide for divesting the assessee of cenvat credit availed on inputs until the date of exemption. It was clarified that the assessee cannot be compelled to reverse the credit for final products existing on the date of the exemption or for inputs stored in the godown, work in progress, and finished products.

Issue 3:
The Court addressed the substantial questions of law raised, including the correctness of the CESTAT's decision on input credit post-exemption notification. The judgment in the case of Commissioner Central Excise v. M/s. TAFE Limited was applied, stating that the assessee retains cenvat credit on inputs until the date of exemption, even if the final product becomes exempt subsequently. The Court found that the Tribunal was justified in granting the benefit to the assessee based on established legal principles.

Issue 4:
The Court discussed the applicability of Section 11A proviso and penalty imposition by the revenue. It was clarified that the assessee, in this case, was not obligated to reverse the cenvat credit for inputs and semi-finished goods held in stock before the exemption date. The judgment highlighted that the law does not allow for the reversal of cenvat credit in such circumstances, as established through legal precedents.

Issue 5:
The Court referenced the insertion of sub-rule (3) in 2007, which required manufacturers opting for exemption from excise duty to pay an amount equivalent to the cenvat credit on inputs lying in stock or in process. However, this rule was deemed prospective and not applicable to the period before its enactment. Therefore, the Court ruled in favor of the assessee, emphasizing their entitlement to cenvat credit for inputs and semi-finished goods held before the exemption date, as per the prevailing legal provisions.