2014 (10) TMI 442 - AT - Central Excise

CENVAT Credit - finished goods become exempted subsequent to availing credit - Held that - obligation on the part of the assessee to reverse the credit is only in that case where he opts for exemption from the duty based upon a Notification relatable to value or quantum of the clearances. Inasmuch in the present case, the appellants final product became unconditionally exempt and the exemption was not dependent upon the value or quantum of clearance in a financial year, it has to be held that the said Rule 9(2) is not applicable. In fact, I find that the provisions were subsequently changed in the new CENVAT Credit Rules, 2002, with the introduction of Rule 11(3), with effect from 1-3-2007. In terms of the said Rule 11(3)(ii), where the final product become exempted absolutely under Section 5A of the Act, the quantum of CENVAT credit lying in his balance credit shall lapse and shall not be available for utilisation for payment of duty on any other product whether cleared for home consumption or for export - The said mandate of law was effective with effect from 1-3-2007, i.e., after the period involved in the present appeals. - Decided in favour of assessee.

Summary

Issues:
- Liability to reverse CENVAT credit when final product becomes exempted.

Analysis:
The judgment pertains to three appeals consolidated into a single order arising from the Commissioner (Appeals) confirming demands that the appellants must reverse earned CENVAT credit when their final product became exempted. The appellants were involved in manufacturing garden tools and availed CENVAT credit on duty paid inputs. The dispute focused on reversing CENVAT credit available in their accounts, inputs, or final products upon garden tools being unconditionally exempted from duty. The lower authorities directed the appellants to reverse the credit and imposed penalties.

The issue of reversing CENVAT credit upon final product exemption has been settled through various decisions, including a reference to a Larger Bench decision in the case of CCE v. Ashok Iron and Steel Fabricators. The Tribunal held that there is no legal requirement to reverse credit when the final product becomes exempted. During the relevant period, Rule 9 of the CENVAT Credit Rules, 2002 was applicable. The rule specified conditions for reversing credit, particularly when the final product is absolutely exempted under section 5A of the Act. In this case, since the appellants' final product was unconditionally exempt, not based on value or quantum of clearance, Rule 9(2) did not apply. The judgment highlighted that the provisions were later amended with the introduction of Rule 11(3), effective from 1-3-2007, which mandated lapsing of CENVAT credit upon absolute exemption of the final product.

Consequently, the order set aside the impugned decision and allowed all three appeals, granting consequential relief to the appellants. The judgment clarified the application of rules regarding CENVAT credit reversal in cases of final product exemption, emphasizing the distinction between absolute and conditional exemptions and the timeline of relevant legal provisions.