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2014 (10) TMI 639 - HC - Central ExciseCENVAT Credit - Whether Cenvat Credit attributable to the quantity of Inputs (Molasses) used in, or in relation to manufacture of exempted final product (Rectified Spirit, attracting nil rate of duty and which was reported as wastage / storage loss) should not be reversed as per provisions of para (a)(i) of Sub-Rule 3 of Rule 6 of CENVAT Credit Rules, 2004 - Held that - Rectified spirit, as we have already noted, is not dutiable being assessable at NIL rate, which, by the CENVAT Credit Rules, is exempted. Being exempt the final product, respondent could not possibly have claimed CENVAT credit in respect of the same. When admittedly duty paid molasses have been used for the manufacture of rectified spirit for which a formula has been deployed by the authorities; we can proceed on the basis that a particular quantity of duty paid molasses is used for the manufacture of the final product, which, because it is not dutiable, respondent becomes disentitled to claim CENVAT credit on the same. In such circumstances, the direction, which is impugned by the respondent, namely, to reverse the credit and imposition of the penalty and the interest for the failure to do so, cannot be complained of. Merely because it is not cleared for the reason that it cannot be cleared does not mean that the manufacture did not take place. The credit standing to the account of duty paid molasses used for the purpose of producing the non-dutiable final product necessarily must be proportionately reduced. The danger of the party using it for other purposes as highlighted by the Commissioner cannot be overlooked by us - Decided in favour of Revenue.
Issues Involved:
1. Whether CENVAT Credit attributable to the quantity of inputs (Molasses) used in the manufacture of exempted final products (Rectified Spirit) should be reversed as per Rule 6(3) of CENVAT Credit Rules, 2004. 2. The applicability of State Excise laws in determining wastage allowances under Central Excise laws. 3. The timing and conditions for the reversal of CENVAT Credit under Rule 6(3) when there is wastage or loss of the final product. Issue-Wise Detailed Analysis: 1. Reversal of CENVAT Credit for Exempted Final Products: The main issue revolves around whether CENVAT Credit attributable to the quantity of inputs (Molasses) used in the manufacture of exempted final products (Rectified Spirit) should be reversed. The court noted that the rectified spirit attracts a NIL rate of duty, making it an exempted good under the Central Excise Act. Rule 6(1) of the CENVAT Credit Rules, 2004, clearly states that CENVAT credit shall not be allowed on inputs used in the manufacture of exempted goods. The court emphasized that the fundamental essence of CENVAT credit is to avoid the cascading effect of duties, which applies when the final product is dutiable. Since the rectified spirit is not dutiable, the respondent cannot claim the benefit of CENVAT credit. 2. Applicability of State Excise Laws: The Tribunal had previously allowed the appeal based on the practice under the State Excise laws, which allows a permissible limit of 0.5% for wastage. However, the court found this reasoning flawed, emphasizing that the case arose under the CENVAT Credit Rules, not State Excise laws. The court stated that the volatile nature of rectified spirit and the permissible wastage under State Excise law cannot be the basis for allowing CENVAT credit under Central Excise law. The court concluded that the losses of rectified spirit in storage are natural losses, but credit cannot be denied within the permissible limit of 0.5% as settled by the State Excise Department. 3. Timing and Conditions for Reversal of CENVAT Credit: The appellant argued that the reversal of CENVAT credit should occur at the stage of actual clearance of goods. However, the court rejected this argument, stating that the reversal must take place when the manufacture of the final product, which is not dutiable, occurs. The court noted that the manufacture of rectified spirit, even if it results in wastage, necessitates the reversal of CENVAT credit. The court emphasized that the credit standing to the account of duty-paid molasses used for producing the non-dutiable final product must be proportionately reduced. The court agreed with the first appellate authority's reasoning, which highlighted that the issue is not about condoning losses but about whether credit for inputs used in exempted goods is available and whether it should be reversed when the goods do not exist. Conclusion: The court allowed the appeals, setting aside the impugned orders. The court answered the substantial question of law by stating that in the circumstances of these cases, when there is wastage, the reversal of CENVAT credit must take place as per Rule 6(1) of the CENVAT Credit Rules, 2004. The court concluded that the respondent must reverse the CENVAT credit attributable to the inputs used in the manufacture of rectified spirit, an exempted good, and upheld the imposition of penalty and interest for the failure to do so.
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