2009 (9) TMI 337 - AT - Central Excise

Reversal of Cenvat Credit- Whether in terms of Notification No. 2/2004, dated 8/1/2004, came into force w.e.f. 9.1.2004 exempting finished goods? The appellant submits that because finished goods has been exempted in terms of Notification No. 2/2004 dated 8.1.2004, Cenvat credit already utilized cannot be called back by a reversal entry. Held that- We make it clear with the aforesaid reasoning that unutilised Cenvat credit existing on record as on 8-1-04 not being meant to be utilised, is never to be utilised during currency of the notification and the same calls for reversal. - . In view of the mandate of Rule 14 of the Cenvat Credit Rules, 2004, to call back the Cenvat credit without being wrongly taken or wrongly utilised, adjudication is unsustainable

Issues:
1. Interpretation of Notification No. 2/2004 regarding exemption of finished goods from duty.
2. Recovery of Cenvat credit under Rule 14 of the Cenvat Credit Rules, 2004.

Analysis:
1. The primary issue in this appeal was the interpretation of Notification No. 2/2004, dated 8/1/04, which exempted finished goods from duty. The appellant argued that since the inputs were not questioned to be non-Cenvatable and the Cenvat credit was lawfully earned and utilized, the authority could not invoke Rule 14 of the Cenvat Credit Rules, 2004, to recover the Cenvat credit. The appellant relied on a Larger Bench decision to support the argument that once finished goods are exempted, the utilized Cenvat credit cannot be called back for recovery through a reversal entry. The appellant also contended that Cenvat credit related to inputs converted into work in progress or finished goods on the cut-off date of 8-1-2004 should not be subject to recovery.

2. The Respondent argued that the Cenvat credit element related to inputs present on the cut-off date but not yet subjected to work-in-progress should be reversible. The Respondent maintained that any unutilized balance credit should be reversed as well. However, the Tribunal noted that there was no dispute that the inputs were Cenvatable, part of them were in work-in-progress, and part of them were in finished goods on the cut-off date. The Tribunal emphasized that the Cenvat credit earned by the appellant was utilized before the effective date of the notification, as allowed under Rule 3(4) of the Cenvat Credit Rules, 2004. The Tribunal concluded that there was no evidence of wrongful utilization of Cenvat credit, and therefore, calling for its reversal would be unjustified.

3. The Tribunal further clarified that unutilized Cenvat credit existing on record as of 8-1-04 should not be utilized during the currency of the notification and must be reversed. The Tribunal also examined the applicability of a Larger Bench decision cited by the appellant's counsel and found no information on its reversal or stay by a higher court. Consequently, the Tribunal held that the recovery of Cenvat credit without evidence of wrongful utilization was unsustainable under Rule 14 of the Cenvat Credit Rules, 2004. The impugned order was set aside, and the appeal was allowed, except for the reversal of unutilized Cenvat credit existing on record as of 8-1-2004.

In summary, the Tribunal's judgment addressed the issues of interpreting the notification exempting finished goods from duty and the recovery of Cenvat credit under the Cenvat Credit Rules, 2004. The Tribunal emphasized the lawful utilization of Cenvat credit, the absence of evidence of misuse, and the requirement to reverse unutilized credit as per the notification's terms. The decision highlighted the importance of following legal provisions and ensuring that recovery actions are based on valid grounds.

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