2009 (12) TMI 170 - HC - Service Tax

Cenvat credit- Notification No. 16/96-CE, dated 23-7-1996- The assessee was engaged in manufacture of vegetable products and was taking credit of the duties paid on the inputs used in the manufacture of final products. The final product was exempted from payment of duty vide Notification No. 16/96-CE, dated 23-7-1996. Therefore, the notice was issued requiring the assessee to reverse the credit. Held that- We are in respectful agreement with the judgment of the Kerala and Rajasthan High Courts. Since the language of rule 9(2) of the Cenvat Credit Rules is identical to that of rule 57H(5) of the Excise Rules, we feel that the interpretation given by the Apex Court has to apply in the present case also and, therefore, even though the final product may be exempt from payment of excise, the assessee cannot be asked to reverse the Modvat credit already taken by it. Thus, the question is answered in favour of the assessee and against the revenue. The appeal is accordingly dismissed.

Summary

Issues:
Whether Modvat/Cenvat credit on inputs, inputs in process, and finished products is required to be reversed when the final product becomes exempt from duty.

Analysis:
The judgment deals with the issue of whether a manufacturer must refund the credit obtained on Central Value Added Tax paid on inputs when the final product is exempted from excise duty. The appellant, engaged in manufacturing vegetable products, contested a notice requiring the reversal of Modvat credit, arguing that once credit is taken, it cannot be disallowed as it has already been used. The authorities relied on rule 9(2) of the Cenvat Rules to support the reversal of credit. The Commissioner (Appeals) upheld the order disallowing credit, prompting the appellant to approach the Customs, Excise & Service Tax Appellate Tribunal (CESTAT).

The Tribunal, guided by a precedent in CCE v. Ashok Iron & Steel Fabricators, allowed the appeal, emphasizing the absence of a rule permitting the department to seek credit reversal. The Assistant Solicitor General highlighted rule 9(2) of the Cenvat Rules to support the department's position. The judgment referenced a ruling by the Apex Court in Collector of Central Excise v. Dai Karkaria Ltd., which emphasized the indefeasibility of credit validly taken, except in cases of illegal or irregular acquisition. The Court concluded that the manufacturer is not obligated to reverse Modvat credit upon exemption of the final product from excise duty.

Moreover, the judgment cited the High Court of Kerala's decision in Collector of CE&C v. Premier Tyres Ltd., which aligned with the Apex Court's stance on credit reversal. Additionally, the High Court of Rajasthan upheld the Tribunal's decision in Hindustan Zinc Ltd. v. Union of India, emphasizing that credit availed on inputs used in destroyed goods need not be recalled. The Court concurred with the Kerala and Rajasthan High Courts, asserting that the interpretation of rule 9(2) of the Cenvat Credit Rules mirrors that of rule 57H(5) of the Excise Rules, thereby affirming that the assessee is not obliged to reverse Modvat credit upon exemption of the final product.

In conclusion, the judgment ruled in favor of the assessee, dismissing the appeal and holding that the Modvat credit need not be reversed despite the final product's exemption from excise duty.