2022 (3) TMI 102 - HC - Central Excise

CENVAT Credit - removal of relevant goods from its manufacturing unit - Rule 3(5) of the then CENVAT Credit Rules, 2004 - HELD THAT - What is of paramount importance is that it is possible for the capital goods, on which CENVAT credit has been taken, to be removed after one day of use in the manufacturing process or after years of use altogether. Indeed, Rule 5A of the said Rules, introduced in the year 2005, throws some light on this aspect as the capital goods which are rendered waste or scrap attract only a payment by the manufacturer or an amount equal to the duty leviable on the transaction value. In the instant case, there is no doubt that the capital goods were used for some time and the assessee no longer desired to use such goods and, accordingly, sought permission to remove the same; whereupon, pursuant to the department s advice by the department s reply of October 12, 2006, the assessee paid the amount of CENVAT credit availed for acquiring the Arc furnace in cash since it had no CENVAT credit in its balance. According to the assessee, Rule 3(5) of the said Rules of 2004 came to be amended in November, 2007 by the incorporation of a proviso which, in effect, provided that the amount of CENVAT credit availed of at the time of acquisition of any capital goods for the use thereof by the manufacturer for producing any excisable products would have to be refunded, but the quantum of refund would stand reduced to 2.5 percent for every quarter that the capital goods had been used by the manufacturer - if a clever manufacturer wanted to hoodwink the department by obtaining the capital goods on CENVAT credit and after a short use thereof wanted to dispose of the same, he would have to refund a larger part of the CENVAT credit he availed of. According to the assessee, the Tribunals all over the country have always applied the proviso to Rule 3(5) with retrospective effect as the omission of the proviso would operate harshly on a manufacturer who wanted to replace the capital goods several years after its acquisition - This is the only area that requires attention. In the event the department is willing to give the present assessee the benefit under the proviso on the basis of the practice that may have evolved or by giving the proviso retrospective effect, the matter may end there. List on March 3, 2022.

Summary

Issues:
1. Interpretation of Rule 3(5) of the CENVAT Credit Rules, 2004 regarding payment upon removal of capital goods.
2. Validity of refund made by Assistant Commissioner of Excise and subsequent demand for repayment.
3. Applicability and interpretation of the proviso introduced in 2007 to Rule 3(5) regarding refund of CENVAT credit on capital goods.

Analysis:
1. The main issue in this case revolves around the interpretation of Rule 3(5) of the CENVAT Credit Rules, 2004. The appellant-assessee had procured an Arc Furnace as capital goods and later sought to remove it from its manufacturing unit. Rule 3(5) stipulates that when capital goods on which CENVAT credit has been availed are removed, the manufacturer must pay an amount equal to the credit availed. The rule does not specify a time limit for such removal, whether after one day or years of use. Additionally, Rule 5A addresses the payment required for capital goods rendered waste or scrap.

2. A significant aspect of the case involves the refund erroneously made by the Assistant Commissioner of Excise amounting to ?1.58 crore. Subsequently, a show-cause notice was issued to the assessee demanding repayment of the refund. The assessee raised defenses, including that Rule 3(5) did not necessitate any payment upon removal of capital goods and that the refund was made after due consideration by the Assistant Commissioner. The matter escalated to the Customs, Excise and Service Tax Appellate Tribunal, which ruled against the assessee.

3. The introduction of a proviso to Rule 3(5) in 2007 added a new dimension to the case. The proviso mandated the refund of CENVAT credit on capital goods used for producing excisable products, with a reduction of 2.5% for every quarter of use. This proviso aimed to deter manufacturers from obtaining capital goods on credit and quickly disposing of them. The assessee argued that the proviso should be applied retrospectively to avoid hardships on manufacturers replacing capital goods after several years. The potential retrospective application of the proviso could impact the outcome of the case.

In conclusion, the judgment highlighted the complexities surrounding the interpretation of CENVAT credit rules, the validity of refunds, and the implications of subsequent amendments. The case underscores the importance of clear legal provisions and the need for consistent application of rules to ensure fairness and compliance within the excise framework.