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2021 (3) TMI 1084 - HC - Central ExciseReversal of Cenvat Credit - Scope of exemption notification - Notification exempting the basic excuse duty but not additional duty of excise - interpretation of provisions of Rule 6(1) and 6(4) of the Cenvat Credit Rules, 2004 - conditional exemption - contention of the appellants that the final product being exempt from payment of basic duties ignored - benefit of the notification dated 09.07.2004 as amended from time to time - HELD THAT - In case of COMMISSIONER OF SALES TAX, JAMMU AND KASHMIR AND OTHERS VERSUS PINE CHEMICALS LTD. AND OTHERS 1994 (10) TMI 262 - SUPREME COURT , brief facts were that the Government of Jammu Kashmir had granted exemption to goods manufactured by large or medium industrial units within 5 years of its commencement of production and sold within the said period. In such context, it was observed that such exemption was a conditional exemption and not a general exemption. The Notification appears to have a dual purpose in the mind of the authority. First was to encourage investment in manufacturing units of specified products in the North-Eastern States. The second purpose also is equally important namely, that the element of duty waived by the Government of India is also ploughed back into the region by augmenting the manufacturing capability of a unit in the said region or for other purposes such as development of infrastructure or civil works or social projects in the region. The amount of duties saved by the manufacturer thus under this Notification, was to be utilized in a specified manner. As per Rule 2(d), exempted goods would mean excisable goods which are exempt from the whole of the duty of excise leviable thereon or the goods which are chargeable to Nil rate of duty. The exemption Notification dated 21.01.2004 as amended subsequently cannot be seen as a Notification granting unconditional exemption from payment of duties. Such exemption was conditional on various requirements which limited the scope of the assessee to utilize the duty element so exempted, for any purpose at all. Such exemption, thus, did not directly increase the profitability of the product since the assessee could not retain the sum equivalent to the duty payable and utilized it at will. Appeal dismissed.
Issues Involved:
1. Interpretation of Rule 6(1) and 6(4) of the CENVAT Credit Rules, 2004. 2. Entitlement of the respondent-assessee to claim the benefit of exemption notifications despite the final product being exempt from payment of basic duties. 3. Definition and scope of "exempted goods" under Rule 2(d) of the CENVAT Credit Rules. 4. Conditional versus unconditional exemption under the Notification dated 21.01.2004. Issue-wise Detailed Analysis: 1. Interpretation of Rule 6(1) and 6(4) of the CENVAT Credit Rules, 2004: The core issue revolves around whether the respondent-assessee could avail CENVAT credit on inputs and capital goods used in manufacturing a final product that was exempt from basic excise duties. Rule 6(1) states, "The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2)." Rule 6(4) similarly restricts CENVAT credit on capital goods used exclusively in the manufacture of exempted goods. The Tribunal had to determine if the final product qualified as "exempted goods," thereby disallowing CENVAT credit. 2. Entitlement of the respondent-assessee to claim the benefit of exemption notifications: The respondent-assessee, engaged in manufacturing zarda (scented tobacco), claimed CENVAT credit on inputs despite the final product being exempt from basic duties under a Notification dated 21.01.2004. The adjudicating authority initially issued show cause notices and demanded reversal of CENVAT credit, arguing that the final product was not dutiable, hence CENVAT credit should not be available. The Tribunal, however, allowed the assessee's claim, leading to the department's appeal. 3. Definition and scope of "exempted goods" under Rule 2(d) of the CENVAT Credit Rules: Rule 2(d) defines "exempted goods" as "excisable goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to 'Nil' rate of duty." The Tribunal opined that the term "exempted goods" should cover only those goods exempt from all kinds of excise duties. The final product in question was not exempt from all duties, such as National Calamity Contingent duty and Education Cess, which influenced the Tribunal's decision. 4. Conditional versus unconditional exemption under the Notification dated 21.01.2004: The Notification dated 21.01.2004 granted conditional exemption from basic excise duties for units in North-Eastern States, provided the exempted amount was invested in specified ways within a certain timeframe. The Tribunal observed that this was not an unconditional exemption, as the exemption was contingent upon reinvestment in the region. This distinction was crucial in determining the applicability of Rule 6(1) and 6(4). Judgment Analysis: The Tribunal's judgment was based on the interpretation that the exemption under the Notification dated 21.01.2004 was conditional, not unconditional. The Tribunal noted that the exemption required the amount equivalent to the excise duties to be reinvested in the region, thus not directly benefiting the assessee's profitability. The Tribunal concluded that the final product did not qualify as "exempted goods" under Rule 2(d) since it was not exempt from all duties. Consequently, the Tribunal allowed the assessee to avail CENVAT credit on inputs and capital goods. The High Court upheld the Tribunal's decision, agreeing that the exemption was conditional and that the final product was not entirely exempt from all duties. The court dismissed the department's appeal, affirming that the assessee was entitled to claim CENVAT credit. Conclusion: The High Court concluded that the Tribunal correctly interpreted Rule 6(1) and 6(4) of the CENVAT Credit Rules, 2004, and the definition of "exempted goods" under Rule 2(d). The court held that the conditional exemption under the Notification dated 21.01.2004 did not render the final product as "exempted goods," thereby allowing the assessee to claim CENVAT credit. The appeals were dismissed, and the question was answered in favor of the assessee.
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