2014 (11) TMI 330 - AT - Central Excise

CENVAT Credit - Rule 3(5B) of CCR, 2004 - Written off of goods versus Devaluation of inputs / stock - Defective Inputs were segregated and were valued at lower rate for the purpose of valuation of stock - Held that - Subsequent to taking of credit, if any amount is written off fully or where provision is made to write off fully in the books of account, then the manufacturer shall pay an amount equivalent to the CENVAT credit taken in respect of the said input. There is no such finding that the appellant have written off the process rejection inputs . The only finding is that the appellant have valued the process rejection materials at the lower value than the purchase price for the purpose of finalization of account. Valuing at lower rate is not equivalent to writing of the value of inputs in the books of account. Thus on the finding, I hold that the proceedings initiated is due to mis-interpretation of the Rules - Decided in favour of assessee.

Summary

Issues:
- Interpretation of Rule 3(5B) of CENVAT Credit Rules, 2004 regarding valuation of rejected inputs
- Whether valuation of rejected inputs at a lower rate amounts to writing off partially
- Applicability of CENVAT credit on rejected inputs in the course of manufacture

Analysis:
1. Interpretation of Rule 3(5B) of CENVAT Credit Rules, 2004:
The appellant, a manufacturer of automobile components, availed CENVAT credit on inputs, input services, and capital goods. The dispute arose when rejected inputs were valued at a lower rate for stock valuation purposes. The Commissioner of Customs & Central Excise issued a show-cause notice regarding the valuation of rejected inputs based on an audit report. The issue was whether the rejected inputs should be considered as inputs under Rule 3(5B) of CENVAT Credit Rules.

2. Valuation of rejected inputs and writing off partially:
The appellant argued that the rejected inputs, termed as 'process rejection,' were not fully written off in the books of account, and hence, Rule 3(5B) did not apply. The lower valuation of rejected inputs was for stock valuation purposes and did not equate to writing off the value of inputs in the books of account. The appellant contended that the impugned order wrongly interpreted the rules by considering the valuation as a partial write-off.

3. Applicability of CENVAT credit on rejected inputs:
The Tribunal analyzed Rule 3(5B) which mandates payment equivalent to CENVAT credit if inputs are fully written off in the books of account. The Tribunal noted that there was no finding that the appellant had written off the 'process rejection inputs.' Valuing rejected inputs at a lower rate for stock valuation did not constitute a write-off in the books of account. Therefore, the Tribunal held that the proceedings were initiated due to a misinterpretation of the rules. Consequently, the appeal was allowed in favor of the appellant, and the impugned order was set aside.

In conclusion, the Tribunal's decision clarified that valuation of rejected inputs at a lower rate for stock purposes does not amount to a partial write-off as per Rule 3(5B) of CENVAT Credit Rules. The judgment emphasized the distinction between valuation for accounting purposes and actual write-off in the books of account, providing relief to the appellant based on the correct interpretation of the legal provisions.