2024 (4) TMI 372 - AT - Central Excise

Reversal of CENVAT Credit - inputs consumed/utilized for production, at the work-in-progress stage, were destroyed in fire in the factory - HELD THAT - Under the Cenvat Credit Rules, Rule 3(5) provides when inputs or capital goods on which credit has been taken are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice. Further rule 3(5C) of CCR provides where any goods manufactured or produced by the assessee, the payment of duty is ordered to be remitted under Rule 21 of Central Excise Rules 2002, the Cenvat credit taken on inputs used in the manufacture or production of said goods and the Cenvat credit taken on input services used in or in relation to the manufacture or production of said goods, shall be reversed. Under the facts and circumstances, it is an admitted fact that the work in progress or semi-finished goods are no longer inputs. Thus, no case is made out of inputs removed as such from the factory on the destruction of WIP or semi-finished goods. In case of destruction of goods/inputs, the liability is restricted to reversal of Cenvat credit on such inputs only. The appellant is not required to reverse Cenvat credit on the inputs already issued for production forming part of WIP or semi-finished goods. The impugned order set aside - It is clarified that the appellant is not required to reverse the Cenvat credit of Rs.76,88,124/- with respect to inputs forming part of work in progress/semi-finished goods destroyed in fire - appeal allowed.

Summary

Issues involved:
The judgment deals with the demand of Cenvat credit on inputs destroyed in a fire incident at the factory of the appellant.

Details of the Judgment:

Issue 1: Classification and characteristics of Chlorinated Paraffin (CP)
The appellant, a manufacturer of CP, used in various applications, argued that different grades of CP have distinct characteristics depending on the product's usage. CP is manufactured by chlorination of liquid paraffin and adding of Olefins, with each variety of liquid paraffin having different characteristics. The appellant provided technical details of the products to support their claim.

Issue 2: Process of manufacturing CP
The process of manufacturing CP involves blending paraffins and olefins in specific tanks, followed by filtration and heating in reactors with the addition of chlorine gas. The final product, Chlorinated Paraffin, is then packed and dispatched. The appellant detailed the entire manufacturing process to demonstrate the uniqueness and complexity of their production process.

Issue 3: Destruction of goods in fire incident
A major fire in October 2016 caused significant loss to the appellant's factory, resulting in the destruction of materials in blending tanks, reactors, storage tanks, finished products, and packing materials. The appellant sought remission of duty on all destroyed goods, including inputs, through proper communication and documentation to the Commissioner.

Issue 4: Commissioner's decision on remission of duty
The Commissioner granted remission of duty on certain destroyed materials but ordered reversal of Cenvat credit on inputs, blending oil, packing materials, and other items. The appellant contested this decision, arguing that the destroyed inputs forming part of work in progress or semi-finished goods should not require credit reversal.

Issue 5: Appellant's appeal and legal arguments
The appellant filed an appeal challenging the Commissioner's decision, citing legal provisions under the Cenvat Credit Rules and previous tribunal decisions. They argued that once inputs are issued for production and destroyed in the WIP stage, there is no obligation to reverse the credit taken on those inputs.

Issue 6: Tribunal's decision and conclusion
After considering the contentions of both parties, the Tribunal held that the destruction of work in progress or semi-finished goods does not necessitate the reversal of Cenvat credit on inputs. The appellant was not required to reverse the credit amount with respect to the destroyed inputs. The appeal was allowed, and the appellant was entitled to consequential benefits as per the law.

This judgment clarifies the treatment of destroyed inputs forming part of work in progress or semi-finished goods in the context of Cenvat credit rules and manufacturing processes.