2014 (10) TMI 804 - AT - Central Excise

CENVAT Credit - reversal of credit when final product become exempt after taking cenvat credit - Rule 6 (1) as well as Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 - Held that - sub-Rule would be applicable only in the case when there is only one final product being made from one or more cenvated inputs and that final product has become exempt from duty or if there are more than one final products being made out of one or more cenvated inputs, all the final products have become exempt from duty at the same time. This Rule would not be applicable if more than one final products are being manufactured out of one or more final product and out of them only some have become fully exempt but other final products have remained dutiable. In our view, in such a situation, it would be incorrect to apply this sub-Rule and prohibit the utilization of the Cenvat credit available as on the date of the exemption for payment of the duty on the dutiable final products, as in terms of Rule 3 (4) of the Cenvat Credit Rules, 2004, the Cenvat credit can be utilized for payment of any duty of excise on any final product. Needless to say, various Rules of the Cenvat Credit Rules, 2004, have to be read harmoniously and, therefore, Rule 11 (3) cannot be given an interpretation which is in-conflict with the provisions of Rule 3 (4). From a perusal of Rule 11 (3) as well as 11 (2) it is clear that these two sub-Rules of Rule 11 are also in accordance with the general principles of the Cenvat credit that no Cenvat credit would be admissible in respect of inputs or input services which have been used in or in relation to manufacture of the exempted final products. As observed by the Apex court in its judgment in the case of CCE, Vadodara vs. Gujarat Narmada Fertlisers Co. Ltd. (2009 (8) TMI 15 - SUPREME COURT) mentioned above, this principle is inbuilt in the very structure of the Cenvat credit scheme and Rule 6 (1) and Rule 6 (2) also merely reiterate and highlight this principle. Therefore, no Cenvat credit would be admissible in respect of any inputs which have been used in or in relation to manufacture of final product. While the provisions of Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 are not applicable, the availability of the Cenvat credit in respect of the inputs lying in stock and in process as on 01/03/08 would be subject to the provisions of Rule 6 and the Cenvat credit would be admissible only to the extent these inputs were used in or in relation to manufacture of dutiable final product and would not be admissible in respect of the quantity of the inputs which were used in the manufacture of exempted final products. Accordingly, in respect of clearance of exempted final products, an amount equal to the Cenvat credit involved on the inputs used in the manufacture of those final products shall be payable. - Matter remanded back - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004.
2. Recovery of Cenvat credit on inputs used in exempted final products.
3. Admissibility of Cenvat credit on returned goods after exemption.

Detailed Analysis:

1. Applicability of Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004:
The appellant's factory manufactures Menthol Flake, Menthol Crystals, De-Mentholized Oil (DMO), and other essential oils. As of 01/03/08, Menthol Flakes and Menthol Crystals became fully exempt from duty, while other products remained dutiable. The Department argued that Rule 11 (3) (ii) required the appellant to pay an amount equivalent to the Cenvat credit on inputs used in the manufacture of exempted products, resulting in a demand of Rs. 95,51,299/-. The appellant contended that Rule 11 (3) (ii) does not apply since only some products became exempt, not all. The Tribunal agreed with the appellant, stating Rule 11 (3) (ii) applies only when all final products become fully exempt, not when only some do.

2. Recovery of Cenvat credit on inputs used in exempted final products:
The Tribunal examined Rule 6 of the Cenvat Credit Rules, which prohibits Cenvat credit on inputs used for exempted goods. The appellant had inputs in stock and in process as of 01/03/08. The Tribunal held that the appellant is eligible for Cenvat credit only for inputs used in dutiable final products, not for those used in exempted products. The provisions of Rule 6 (1) and (2) apply, requiring the appellant to maintain separate accounts or pay an amount equal to the credit attributable to inputs used in exempted products.

3. Admissibility of Cenvat credit on returned goods after exemption:
A consignment of Menthol cleared for export on 29/02/08 was returned to the factory on 07/03/08. The Department argued that since Menthol became exempt on 01/03/08, the appellant could not avail Cenvat credit on the returned goods. The Tribunal disagreed, stating the duty was correctly paid when the goods were initially cleared, and Cenvat credit was admissible under Rule 16 of the Central Excise Rules, 2002, when the goods were returned. However, if the reprocessed goods were cleared without duty, the credit would not be admissible.

Conclusion:
The Tribunal set aside the impugned order and remanded the case to the Commissioner for re-quantification of the demand, considering the Tribunal's observations. The penalty will be based on the re-quantified demand.