2019 (3) TMI 1698 - HC - Central Excise

CENVAT credit - inputs removed as such to a unit situated in the Special Economic Zone (SEZ) by using Form No. ARE-I - Rule 3(5) of the CENVAT Credit Rules 2004 - HELD THAT - Rule 3(5) of the CENVAT Credit Rules 2004 provides that when the inputs on which CENVAT Credit has been taken are removed as such from the factory the manufacturer of the final product shall pay an amount equal to the credit availed in respect of such inputs and such removal shall be made under the cover of an invoice referred to in Rule 9 - In the case at hand it is not in dispute that the inputs were removed as such from the factory of the appellant. It is also not in dispute that the inputs were removed to a unit situated in the SEZ. The term export is defined under Section 2(m) of the SEZ Act which includes supply of goods from the Domestic Tariff Area (DTA) to a unit in the SEZ. Section 26 of the SEZ Act provides about the exemptions drawbacks and concessions to an entrepreneur within the SEZ. Under It is not in dispute that the inputs in this case were removed from the factory of the appellant to a unit in the SEZ under the cover of ARE-1 Form and therefore the appellant is entitled to the exemption permitting retention of the credit availed on the duty paid on inputs. In terms of Rule 6(6) of CENVAT Credit Rules it is contended that the liability for reversal of the credit envisaged under Rule 3(5) of the CENVAT Credit Rules will not apply in this case because the inputs have been cleared to a unit in the SEZ through the bond executed. Therefore the demand for reversal cannot be sustained is the contention. In this regard Circulars issued by the Central Board of Excise Customs assumes importance. In Circular No. 29/2006-Cus. dated 27-12-2006 which pertains to implementation of the SEZ Act 2005 it is provided that in the light of provisions contained under Sections 2(m) and 51 of the Act the supplies from DTA to a unit in the SEZ for authorized operations inside the SEZ may be treated as in the nature of exports - It is mentioned that the provisions under Rule 30(1) of the SEZ Rules was framed in line with those provisions and it provides that a DTA supplier supplying goods to the SEZ shall clear the goods either under bond or as duty paid goods under the claim of rebate on the cover of ARE-1. It is further clarified that since the SEZ is deemed to be outside the customs territory of India any licit clearance of goods to the SEZ from DTA will continue to be exported and therefore be entitled to the benefit of rebate under Rule 18 of Central Excise Rules and for refund of the accumulated CENVAT Credit under Rule 5 of the CENVAT Credit Rules 2004. Since there is no dispute that the inputs were removed as such to a unit in the SEZ under cover of ARE-1 the above said provisions will apply and the appellant has to be exempted from reversal of credit availed on the duty paid on inputs. Hence the position remains clarified through the circular issued by the Central Board of Excise and Customs (Circular No. 1001/8/2015-CX.8 dated 28-4-2015) - the appellant need to be held as entitled for the CENVAT Credit and the demand for reversal of the credit availed along with interest and penalty with respect to the inputs removed as such to a unit situated in the Special Economic Zone cannot be sustained - appeal allowed - decided in favor of appellant.

Summary

Issues:
Challenge to order of Customs, Central Excise and Service Tax Appellate Tribunal regarding reversal of CENVAT credit availed for inputs removed to a unit in Special Economic Zone (SEZ).

Analysis:
1. The appellant contested a common order of the Customs, Central Excise and Service Tax Appellate Tribunal, challenging the demand to reverse CENVAT credit availed for inputs removed to an SEZ. The Commissioner and Commissioner (Appeals) upheld the demand, leading to the appeal.

2. The main issue revolved around whether the appellant should reverse the CENVAT credit for inputs removed to an SEZ under Rule 3(5) of the CENVAT Credit Rules, 2004. The appellant imported inputs duty-free but transferred them to an SEZ due to production capacity constraints, triggering a demand for credit reversal.

3. The appellant argued that Rule 3(5) does not apply to inputs transferred to an SEZ as it constitutes an 'export' under the Special Economic Zones Act, 2005. They cited specific exemptions and circulars supporting their position, emphasizing the SEZ Act's overriding effect on conflicting laws.

4. The opposing counsel contended that Rule 3(5) mandates credit reversal for inputs removed as such, emphasizing the potential double benefit if credits are retained for non-manufacturing transfers to an SEZ. They argued that Rule 6(6) exemptions apply only to manufactured goods transferred to an SEZ.

5. The court analyzed relevant provisions, including Rule 3(5) of the CENVAT Credit Rules and Section 26 of the SEZ Act, noting the SEZ Act's primacy in granting exemptions. Circulars by the Central Board of Excise & Customs clarified that transfers to SEZs are akin to exports, entitling the appellant to retain the credit.

6. After careful consideration, the court upheld the appellant's entitlement to CENVAT credit for inputs transferred to an SEZ, citing the SEZ Act's overriding effect and circulars supporting the exemption. Consequently, the demand for credit reversal along with interest and penalty was deemed unsustainable.

7. The court ruled in favor of the appellant, setting aside the Appellate Tribunal's orders and allowing the appeals. The judgment clarified the applicability of CENVAT credit rules to inputs transferred to SEZs, emphasizing the SEZ Act's exemptions and circulars supporting the appellant's position.