2017 (4) TMI 548 - AT - Central Excise

Reversal of CENVAT credit - the case of Revenue is that as per Rule 11 of CER, 1944 when the finished goods became exempted the appellant was not entitled to the credit of unutilised goods, they were supposed to reverse the credit - Held that - As per the provisions of cenvat credit on capital goods only if the capital goods is used exclusively for exempted goods credit is not admissible. In the present case after receipt of the capital goods on which credit was denied the finished goods was dutiable. Subsequently, the finished goods became exempted, therefore it cannot be said that the capital goods were used exclusively for exempted goods - Rule 11 is clear that this provision is applicable only in respect of inputs or input services and not on capital goods. Therefore the payment of amount equivalent to the cenvat credit in respect of stock of capital goods as on date of exemption is not applicable in the facts of the present case. Though appellants have paid the amount of cenvat credit but they have filed the appeal before the Commissioner (Appeals) challenging the entire order - it cannot be said that the appellant has not challenged the demand of cenvat credit. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Denial of credit on unutilized capital goods spares/consumables.
2. Interpretation of Rule 11 of Central Excise Rules, 1944.
3. Applicability of Rule 11 to capital goods.
4. Challenge to the demand of cenvat credit.

Analysis:

1. The appellants, engaged in manufacturing particle boards, faced a denial of credit on unutilized capital goods spares/consumables under Chapter heading 44109090 and 44109030 of the Central Excise Tariff Act 1985. The dispute arose when the finished goods became exempted from duty payment under notification no.6/06-CE, leading to a show-cause notice alleging that the credit availed on unutilized items was liable for reversal. Despite paying the denied credit of ?1,63,256, interest, and penalty, the appellants challenged the Order-in-Original by filing an appeal before the Commissioner (Appeals).

2. The Commissioner (Appeals) rejected the appeal citing Rule 11 of the Central Excise Rules, 1944, which mandates the reversal of credit when finished goods become exempted. The Rule states that upon opting for duty exemption, a manufacturer must pay back the CENVAT credit on inputs or input services. The Commissioner held that the appellants were required to reverse the credit of unutilized goods upon exemption of finished goods, as per Rule 11.

3. The issue of whether Rule 11 applies to capital goods was heavily debated. The Ld. Supdt. (AR) argued that the credit availed should be reversed when final products become exempted. However, upon a detailed analysis, the Tribunal found that Rule 11 specifically pertains to inputs or input services, not capital goods. Therefore, the provision requiring payment equivalent to the CENVAT credit in stock upon exemption does not extend to capital goods, as evident from the text of Rule 11.

4. Despite the Ld. AR's contention that the appellants did not challenge the duty liability during adjudication, the Tribunal observed that the appellants had indeed challenged the demand of cenvat credit by filing appeals at both the Commissioner (Appeals) and the Tribunal. Consequently, the Tribunal set aside the impugned order, allowing the appeal with consequential relief, as the denial of credit on unutilized capital goods spares/consumables was deemed unsustainable based on the specific provisions of Rule 11 and the facts of the case.