2015 (10) TMI 1931 - AT - Central Excise

Denial of cenvat credit - Reclassification of goods - final product was exempted from duty - On being pointed out for wrong availment, assessee revered the credit by debiting in their RG 23A Part-2 - held that - Classification issued was decided by the Dy. Commissioner of Central Excise in 23.6.2002 whereas the SCN of denial of cenvat credit was decided by the Addl. Commissioner subsequently on 31.03.2003. Though the appellants contended before the adjudicating authority which was recorded at para -20 of the OIO that the final product has been already re-classified under ch. 5205.11 and chargeable to duty and the appellants are eligible for modvat credit, the same was not considered by the adjudicating authority. We also find that the appellants reversed the entire ineligible credit on 28.02.2001 through RG23-part-2. We also find that when the duty was confirmed on the final products on account of change of classification, the appellants again paid the duty on 30.03.2004. We find that the appellants initially availed the credit when the final product was exempted but when the department re-classified the product Covered spandex yarn form ch. 5205.90 to ch. 5205.11, the final product becomes chargeable to duty, and the appellants eligible for cenvat credit on the inputs used in the said final product. Once the department demanded duty on the final products at a later date by changing classification the appellants are eligible for modvat credit on the inputs. Appellants are eligible for input credit of ₹ 21,85,955/- availed on the inputs Lycra Spandex yarn from the date of availing credit used in the manufacture of Covered spandex yarn, classified under Ch. 5205.11 as the final product is no more exempted and becomes dutiable. However, we find that the appellants have utilized the credit of ₹ 90,663/- when the final product was not dutiable till the classification was decided under ch. 5205.11, therefore they are liable for penalty under Rule 25. - Decided partly in favour of assessee.

Summary

Issues:
Denial of cenvat credit on inputs due to change in classification of final product and payment of duty; Applicability of modvat credit on inputs used in dutiable final product; Imposition of penalties under Section 11AC and Rule 25.

Analysis:

1. Denial of Cenvat Credit:
The appeal was filed against the denial of cenvat credit availed by the appellant on inputs like Lycra Spandex yarn and cotton yarn during a specific period. The appellant's final product, Covered spandex yarn, was initially classified under a specific chapter and was chargeable to nil rate of duty. However, upon pointing out by the preventive officers, the appellant reversed the credit by debiting in their records. Subsequently, a show cause notice (SCN) was issued proposing denial of cenvat credit. Another SCN was issued for re-classifying the final product under a different chapter chargeable to duty. The adjudicating authority confirmed the re-classification and demand of duty, leading to the denial of cenvat credit. The Commissioner (Appeals) set aside the penalty and allowed cum-duty benefit but upheld the denial of credit. The appellant contended that they should be eligible for modvat credit on inputs used in the final product, which had become dutiable due to re-classification.

2. Applicability of Modvat Credit:
The appellant argued that once the final product is classified under a dutiable category, they should be entitled to modvat credit on the inputs used. They cited relevant decisions to support their claim. The Tribunal observed that the final product had indeed been re-classified as dutiable, making the appellant eligible for cenvat credit on the inputs. The appellant had already reversed the credit before the issuance of the SCN, and upon the demand of duty, they paid the duty as well. The Tribunal held that the appellant should be allowed to re-avail the cenvat credit that was reversed earlier. However, a penalty under Rule 25 was imposed for utilizing the credit when the final product was not dutiable.

3. Imposition of Penalties:
The Tribunal set aside the penalty imposed under Section 11AC but imposed a penalty under Rule 25. The appellant was held liable for the penalty due to utilizing the credit when the final product was not dutiable. The Tribunal allowed the re-credit of cenvat credit and set aside the demand of a specific amount. The appeal was partly allowed, granting relief to the appellant on the issue of cenvat credit denial and penalties.

This detailed analysis of the judgment provides insights into the issues related to denial of cenvat credit, applicability of modvat credit, and imposition of penalties, as addressed by the Appellate Tribunal CESTAT CHENNAI in the case.