2022 (11) TMI 1460 - AT - Central Excise

CENVAT Credit - inputs written off or in respect of which provision has been made to write off, whether fully or partially - Extended period of Limitation - interest - penalties - HELD THAT - The intention for insertion of Rule 3(5B), was to plug those situations, wherein the assessee is availing benefit of Cenvat Credit on the inputs which are not intended to be used and are written off or provisioned for written off in the books of accounts, but still lying in the factory. Rule 3 (5B) is part of the CENVAT Credit scheme, and should be interpreted in a manner to fulfill the basic objective of scheme. On a plain reading of the aforesaid provision, it is clear that the assessee shall be liable to pay the amount of Cenvat credit availed on the inputs, which are either written off fully or partially or any provision for write off fully or partially has been made in the books of accounts. This provision shall only apply in respect, of those goods which are written off the input in the books of accounts of the appellants for the reason that they have been lost, destroyed or become obsolete. It cannot be applied to case where the value of goods for any reason is written down in the books of account. From the plain reading of the definitions of the term write off , it can be construed that write off is term used wherein the asset is permanently lost on account of pilferage, obsolescence or otherwise and is required to be removed from the books of accounts. Thus it is quite evident that the impact of write off , or making the provision to write off an asset (including the inputs) would be reflected as loss or an expense in the book of accounts of the appellant and shall be admissible as deduction while computing the income of the appellant. Whether the valuation of inventories as per the accounting standards and the accounting policies followed by the appellant would amount to write off or making the provisions to write off ? - HELD THAT - Admittedly the goods in respect of which demand for reversal of CENVAT credit has been made have been used in the production of the finished goods which are cleared on payment of duty. Further revenue has gone on the basis of monthly inventory valuation without even co-relating the same with the Annual Financial Statements i.e. Balance Sheet and Profit and Loss Account of the Appellant. As per the appellant the entries made in the respect of the slow moving items in inventory are reversed subsequently in the next month will neutralize each other, without having any impact on the total inventory at the closure of financial year. Even the auditors who value the stock at the closure of financial years will point out if any discrepancies exist in the actual physical stock of inventory and inventory records. Without making any reference to such financial statements can anybody conclude in respect of write off of the inputs or finished goods. Not a single case of such reference over the period from 2008 to 2017 has been put forth. Revenue has relied upon the Board Circular of 2009 to support their case. On perusal of the said circular, it is found that the circular is in respect of inputs contained in work in process. Hence there is no applicability of the said circular to fact of present case. Extended period of limitation - HELD THAT - During the period from April 2008 to June 2017 (period of demand), the appellant claim that they had already reversed Cenvat Credit of Rs. 7,05,86,921/- on obsolete inventory. Revenue do not dispute that in case where the appellants have written off the inputs in the books of accounts they have reversed the CENVAT Credit in respect of those inputs which were written off - since the demand made not upheld on merits, the issue in respect of quantification and invocation of the extended period not taken up. Interest - penalties - HELD THAT - Since the demand do not survive the demand for interest too fails and no penal consequences will follow. The impugned order set aside - appeal allowed.

Summary

Issues Involved:

1. Interpretation of Rule 3(5B) of the CENVAT Credit Rules, 2004.
2. Liability to reverse or pay CENVAT credit on written-off inputs.
3. Interest and penalty on inadmissible CENVAT credit.
4. Quantification of demand and invocation of extended period of limitation.
5. Maintenance of proper records under Rule 9(5) of the CENVAT Credit Rules, 2004.

Detailed Analysis:

1. Interpretation of Rule 3(5B) of the CENVAT Credit Rules, 2004:

The primary issue revolves around the interpretation of the phrase "written off fully or partially or where any provision to write off fully or partially, has been made in the books of account" as used in Rule 3(5B) of the CENVAT Credit Rules, 2004. The rule mandates that if the value of any input or capital goods on which CENVAT credit has been taken is written off or provisioned to be written off, the manufacturer must pay an amount equivalent to the CENVAT credit taken on such inputs. The Tribunal examined the legislative history and intent behind the insertion of Rule 3(5B), which aimed to prevent revenue leakage when inputs are written off in books but not reversed in terms of CENVAT credit.

2. Liability to Reverse or Pay CENVAT Credit on Written-off Inputs:

The Tribunal noted that the appellant followed an accounting policy where slow-moving inputs were provisioned for write-off but subsequently recredited in the next month. The Tribunal emphasized that "write-off" or "provision to write off" should be interpreted as permanent removal from books, indicating that the inputs are no longer usable. The Tribunal found that the appellant's practice of monthly valuation for slow-moving items did not equate to a permanent write-off, as these inputs were eventually used in production and cleared on payment of duty. Thus, the Tribunal concluded that the appellant was not liable to reverse CENVAT credit on such inputs.

3. Interest and Penalty on Inadmissible CENVAT Credit:

Since the demand for reversal of CENVAT credit was not upheld, the Tribunal also dismissed the associated demand for interest and penalties. The Tribunal observed that interest under Rule 14 of the CENVAT Credit Rules, 2004, read with Section 11AA of the Central Excise Act, 1944, and penalties under Section 11AC of the Central Excise Act, 1944, were contingent on the validity of the primary demand, which did not survive in this case.

4. Quantification of Demand and Invocation of Extended Period of Limitation:

The Tribunal did not delve deeply into the quantification issues or the invocation of the extended period of limitation, as the primary demand itself was not upheld. However, it was noted that the appellant had already reversed CENVAT credit on obsolete inventory during the period in question, which was not disputed by the revenue.

5. Maintenance of Proper Records under Rule 9(5) of the CENVAT Credit Rules, 2004:

The Tribunal found that the appellant maintained proper records and books of accounts as per the CENVAT Credit Rules, 2004. The Tribunal did not agree with the revenue's contention that the appellant failed to maintain proper records, noting that the appellant's inventory management system was compliant with accounting standards and did not violate Rule 9(5) of the CENVAT Credit Rules, 2004.

Conclusion:

The Tribunal allowed the appeals, setting aside the impugned orders. It concluded that the appellant's accounting practices for slow-moving inventory did not amount to a "write-off" or "provision to write off" under Rule 3(5B) of the CENVAT Credit Rules, 2004. Consequently, the demands for reversal of CENVAT credit, interest, and penalties were not sustainable. The Tribunal emphasized that accounting standards and practices should not override the clear provisions of law, and any conflict should be resolved in favor of the statutory provisions.