2019 (4) TMI 900 - HC - Central Excise

Reversal of CENVAT Credit - clearance of goods (inputs) to their sister concern M/s. IMIL - Rule 3(4) of the Credit Rules, 2002 - Held that - Respondent M/s. IML had purchased Iron Ore Pellets from M/s. IIL. It is also an admitted position that M/s. IIL in turn had purchased inputs i.e. Iron Ore Pellets from M/s. Kundermukh which is a 100% EOU. Further, it is undisputed that M/s. IIL on receipt of Iron Ore Pellets, took CENVAT Credit of the duty paid by M/s. Kundermukh. However, it did not use the purchased inputs i.e. Iron Ore Pellets for further manufacture. In fact, the Iron Ore Pellets were removed by M/s. IIL as such i.e. as received from M/s. Kundermukh - when removing the Iron Ore Pellets as such i.e. without it being used in manufacture of any other product or it being processed per se, it had correctly in terms of Rule 3(4) of the Credit Rules, 2002 had correctly reversed the CENVAT Credit taken - decided in favor of the Respondent- Assessee and against the Appellant-Revenue. CENVAT Credit - Rule 3(6)(a) of CENVAT Credit Rules - Whether M/s. IMIL has correctly availed the CENVAT Credit as prescribed under Rule 3(6)(a) of CENVAT Credit Rules? - Held that - The impugned order of the Tribunal proceeds incorrectly on the basis that there can be no limitation/ capping on the credit taken by the Respondent- M/s. IMIL where the goods have been supplied by M/s. IIL i.e. supplier in terms of Rule3(4) of the Credit Rules, 2002. Thus it is a complete misreading of the provisions. The capping of the CENVAT Credit is only in case of that manufacturer who uses the inputs in further manufacture and does not apply to a manufacturer who on acquisition of inputs does not use it for further manufacture but removes it as such so as to be governed by Rule 3(4) of the Credit Rules 2002.Thus in such case Rule 3(6)(a) of the Credit Rules, 2002 will prevail over Rule 3(5) of the Credit Rules, 2002 as it reduces the availing of credit in respect of goods manufactured by a 100% EOU. The next submission that the entire exercise of restricting the credit is an exercise for reassessing the duty paid by the supplier viz. M/s. IIL. Therefore, the submission that this exercise cannot be done in the absence of M/s. IIL in the present facts cannot be accepted. The question is answered in the negative i.e. in favor of the Appellant -Revenue and against the Respondent -Assessee. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether M/s. IIL correctly reversed the CENVAT Credit while clearing the goods (inputs) to their sister concern M/s. IMIL.
2. Whether M/s. IMIL has correctly availed the CENVAT Credit as prescribed under Rule 3(6)(a) of CENVAT Credit Rules.

Issue-wise Detailed Analysis:

Issue 1: Whether M/s. IIL correctly reversed the CENVAT Credit while clearing the goods (inputs) to their sister concern M/s. IMIL.

The court examined whether M/s. IIL properly reversed the CENVAT Credit when clearing Iron Ore Pellets to M/s. IMIL. The facts reveal that M/s. IIL purchased Iron Ore Pellets from M/s. Kundermukh, a 100% EOU, and took CENVAT Credit for the duty paid. However, M/s. IIL did not use these pellets for further manufacturing but cleared them as such to M/s. IMIL under Rule 3(4) of the Credit Rules, 2002. The court held that M/s. IIL was entitled to remove the pellets on payment equal to the credit taken, and M/s. IMIL was eligible to take the CENVAT Credit based on the invoice issued by M/s. IIL. Thus, M/s. IIL correctly reversed the CENVAT Credit as mandated by Rule 3(4) of the Credit Rules, 2002. Consequently, the question was answered in the affirmative, favoring the Respondent-Assessee and against the Appellant-Revenue.

Issue 2: Whether M/s. IMIL has correctly availed the CENVAT Credit as prescribed under Rule 3(6)(a) of CENVAT Credit Rules.

The court analyzed if M/s. IMIL correctly availed the CENVAT Credit under Rule 3(6)(a) of the Credit Rules, 2002. M/s. IMIL took credit for the amount reversed by M/s. IIL when clearing the Iron Ore Pellets. The Revenue contended that Rule 3(6)(a)(i) restricted the credit M/s. IMIL could take, as the pellets were manufactured by a 100% EOU. The court observed that Rule 3(6) begins with a non-obstante clause, overriding Rule 3(1), and restricts credit if the inputs are manufactured by a 100% EOU. The Tribunal had incorrectly concluded that there could be no limitation on credit taken by M/s. IMIL under Rule 3(4). The court clarified that Rule 3(6)(a) applies even when inputs are received under Rule 3(4), capping the credit for inputs used in further manufacturing. The court rejected the argument that the restriction reassessed the supplier's duty, stating the restriction applied to the recipient using the inputs for further manufacturing. The court also dismissed the argument that Rule 3(6) was unworkable, noting the undisputed fact that the inputs were manufactured by a 100% EOU. Thus, the question was answered in the negative, favoring the Appellant-Revenue and against the Respondent-Assessee.

Conclusion:

The court answered the two substantial questions of law as follows:
1. Question (a) was answered in the affirmative, in favor of the Respondent-Assessee and against the Appellant-Revenue.
2. Question (b) was answered in the negative, in favor of the Appellant-Revenue and against the Respondent-Assessee.

Given the answer to question (b), the appeal was allowed in favor of the Revenue, as the primary issue was whether the CENVAT Credit could be restricted under Rule 3(6) of the Credit Rules, 2002. The court held that the credit could indeed be restricted, thus allowing the appeal in favor of the Revenue.