2016 (1) TMI 730 - AT - Central Excise

Penalty under Section 11AC - procedural lapse - written off of inputs as obsolete in their books of account and did not reverse Cenvat credit pertaining to them - Held that - In this case although at the time of writing off as obsolete of inputs in question, the appellant was required to reverse the Cenvat Credit as per Rule 3(5)(b) of the Cenvat Credit Rules, 2004. But later on, these inputs have been used by the appellant in manufacturing of final product and these inputs were lying in their factory itself. In these circumstances, hold it is a situation of revenue neutrality and appellant has not gained anything by writing off these inputs as obsolete. In these circumstances, hold that it was only the procedural lapse on the part of the appellant. Therefore, mandatory penalty under Section 11AC is not imposable. But for procedural lapse by the appellant, penalty under Rule 27 of the Cenvat Credit Rules, 2002 is imposable. Therefore, impose a penalty under Rule 27 of the Cenvat Credit Rules, 2002 to the extent of ₹ 5,000/-.

Summary

Issues:
Appeal against setting aside mandatory penalty under Section 11AC of the Act.

Analysis:
The appellant, a manufacturer of various goods, imported components for manufacturing products for export. They had written off certain inputs as obsolete in their books of accounts during 2008-09 but did not reverse the Cenvat credit as required by Rule 3(5)(b) of the Cenvat Credit Rules, 2004. After an audit and a subsequent show cause notice, the appellant reversed the Cenvat credit related to the written-off inputs before adjudication. These inputs were later used in manufacturing final products, and the Cenvat credit was re-availed. Despite this, a penalty was imposed on the appellant for the initial procedural lapse. The appellant contended that since the inputs were eventually used for manufacturing and were lying in their factory during the audit, it was a case of revenue neutrality and no penalty under Section 11AC should be imposed.

The Tribunal considered the submissions and held that the situation indeed amounted to revenue neutrality as the inputs were utilized in the manufacturing process, resulting in no undue benefit to the appellant. Therefore, the Tribunal concluded that the penalty under Section 11AC was not applicable due to the procedural lapse. However, a penalty under Rule 27 of the Cenvat Credit Rules, 2002, was imposed on the appellant amounting to Rs. 5,000 for the said procedural lapse. The Tribunal disposed of the appeal based on this analysis.

This judgment highlights the importance of compliance with procedural rules in availing Cenvat credit and the distinction between procedural lapses and cases warranting penalties under specific sections of the law. It underscores the concept of revenue neutrality in determining the imposition of penalties in tax matters and serves as a precedent for similar cases involving procedural errors in tax credit utilization.