2022 (11) TMI 644 - AT - Central Excise

Reversal of CENVAT Credit - Valuation of exempted goods - inputs/input services used in manufacture of the ammonia and to the extent that ammonia was used to further manufacture urea which was cleared under the exemption notification - HELD THAT - Laws of taxation have to be strictly construed regardless of the consequences. It is true that by reckoning the value of urea which is heavily subsidized, the amount of ineligible Cenvat credit to be reversed is reduced substantially. If the value of the intermediate products viz. ammonia is reckoned the amount of ineligible Cenvat credit will be much higher. An illustration will make it clear. If the assessee had availed Cenvat credit of Rs. 1000/- and manufactured only ammonia and cleared it on payment of duty it can avail the entire Rs. 1000/- as Cenvat credit. On the other hand, if the assessee had converted the entire amount of ammonia into urea it would not have been eligible to any Cenvat credit because the urea is exempted. While applying the formula under Rule 6(3A), the subsidized urea prices would result in the amount of ineligible Cenvat credit going down substantially to the extent sale 80%. Therefore, instead of Rs. 500/- being ineligible, the appellant will be ineligible to about Rs. 100/- as Cenvat credit as per the formula. The remaining Rs. 400/- which will logically be the credit on inputs/input services which have gone into the manufacture of ammonia which finally got converted into urea will still be available to the appellant and it can use this credit for clearing other dutiable goods. However, this inherent unfairness/distortion created by the formula given in Rule 6(3A) should make no difference. An intelligent asessee, who manufactures urea can, by selling a small percentage of the intermediate product ammonia as such on payment of duty avail Cenvat credit on all the inputs and reverse a small percentage of it only. Such a tax planning by the assessee is perfectly within the frame work of law. The formula under Rule 6(3A) only requires the value of the exempted goods removed to be reckoned and not the value of the intermediate goods. The exempted good in this case is the urea. Its value is not in dispute. The 1% concessional rate of duty (without Cenvat credit) paid by the appellant is also on such value and not on the value without the subsidy. The value of urea does not change for calculation of Cenvat to be reversed under Rule 6(3A). Therefore, the appellant has correctly reversed proportionate amount of Cenvat credit reckoning the value of the urea removed instead of reckoning the intermediate product ammonia which has gone into the manufacture of such urea. The impugned order cannot be sustained and needs to be set aside - Appeal allowed.

Summary

Issues:
- Dispute over the calculation of Cenvat credit reversal under Rule 6(3A) for the manufacture of urea and ammonia.
- Interpretation of the value to be considered for exempted goods removed.
- Application of Rule 6(3A) in determining the amount of eligible/ineligible common credit.
- Whether the value of exempted final goods (urea) or intermediate product (ammonia) should be considered for Cenvat credit calculation.
- Assessment of penalty and interest imposition.

Analysis:
1. The appellant, engaged in fertilizer manufacturing, challenged an order upholding the reversal of Cenvat credit under Rule 6(3A) for urea production. The dispute centered on whether to consider the value of urea or ammonia for credit reversal calculation.
2. The Cenvat credit availed by the appellant was subject to conditions, including no credit on inputs for exempted goods. The appellant reversed Cenvat credit under Rule 6(3A) based on the value of exempted goods removed, leading to the dispute.
3. The Tribunal analyzed Rule 6 provisions, emphasizing the calculation of eligible/ineligible common credit under Rule 6(3A) based on the value of exempted goods. The appellant argued for considering only urea value, while the Revenue advocated for ammonia value inclusion.
4. Referring to a previous Tribunal decision, the appellant sought alignment with the interpretation favoring urea value for credit reversal. The Tribunal reiterated that Rule 6(3A) mandates considering the value of exempted goods removed, affirming the appellant's approach.
5. The Tribunal highlighted the strict construction of tax laws and addressed the disparity caused by subsidized urea prices in credit reversal calculations, emphasizing the rule's application based on exempted goods' value.
6. By underscoring the importance of following statutory provisions, the Tribunal ruled in favor of the appellant, setting aside the impugned order and granting consequential benefits, emphasizing the correct application of Rule 6(3A) based on urea value for Cenvat credit reversal.

This detailed analysis showcases the legal intricacies surrounding the dispute over Cenvat credit reversal calculation and the Tribunal's thorough examination of Rule 6 provisions to resolve the issue in favor of the appellant.