ELIGIBILITY OF CREDIT ON CAPITAL GOODS ON RE-REGISTRATION.

[Mr. M. GOVINDARAJAN]

                        Rule 3(7) of Service Tax Rules, 1994 provides that every registered assessee, who ceases to provide the taxable service for which he is registered, shall surrender his registration certificate immediately to the Superintendent of Central Excise.  Rule 3(8) provides that on receipt of the certificate, the Superintendent of Central Excise shall ensure that the assessee has paid all monies due to the Central Government under the provisions of the Act, and the rules and the notifications issued there under, and there upon cancel the registration certificate.

                        The service provider may surrender the certificate of registration in the following circumstances:

• When the service provider ceases to provide the taxable service but his business is running;
• When the service provider closes his unit permanently;
• When the service provided by him is given exemption by means of Notification issued by the Central Government.

When the exemption given by the Government is revoked then the service provider is liable to levy service tax  from the date on which the notification is revoked.   Then he has to re-register himself with the Central Excise Authorities.  Let us assume a service is given exemption by the Central Government and the service provider surrenders his certificate on the basis of the exemption notification.  At that time the service provider is having credit on capital goods which has not been utilized since as per the CENVAT Credit Rules, 2004 only 50% of duty paid on capital goods shall be utilized in the financial year and the remaining 50% is to be utilized in the subsequent years.   Let us assume that the exemption given by the Central Government is revoked in the next year.   The service provider re-registers himself on the basis of the said notification.   Now the question is whether the service provider is able to utilize the balance unutilized credit before surrendering the certificate after re-registration.   The said is discussed in ‘Godson Spinners Limited V. Commissioner of Central Excise, Jalandhar’ – 2011 (270) ELT 127 (Tri. Del).  The facts of the said case run as follows:

                        The appellants are engaged in manufacture of cotton yarn and availed credit on the capital goods.   The appellant availed credit of Rs.10,55,996/- during the period from September 2001 to March 2002 being 50% of the total credit of Rs.20,84,172/- pertaining to the capital goods received by them during the said period.  On 13.12.2000 the appellants surrendered the registration as the exemption limit of SSI units was raised to Rs.1 crore under Notification No. 47/2000 dated 01.09.2000.   At the time of surrendering registration the appellants had a credit balance of Rs.10,42,371/-.   In the year 2001 SSI exemption on cotton yarn was withdrawn and accordingly the appellants got registered with the Central Excise Department on 02.03.2011.  The appellants immediately availed the balance amount of credit on capital goods being the opening balance of credit of Rs.10,42,371/-.   The utilization of the said credit was also indicated in the return.   The Department issue a show cause notice dated 21.12.2001 and dated 30.10.2002 which were contested by the appellants.  The Adjudicating Authority disallowed the credit to the tune of Rs.20,84,782/- while confirming demand of Rs.14,70,206/- along with the interest and penalty of Rs.20,84,782/- against the appellants.   The appellants filed appeal before the Commissioner of Central Excise (Appeals) against the order of the Adjudicating Authority.  The Commissioner dismissed the appeal filed by the appellants.   Therefore the appellants filed the present appeal before the Tribunal.

                        The appellants put forth the following arguments before the Tribunal:

• The credit in question was earned in relation to the duty paid on the capital goods and there being no provision in the excise law and rules made there under for lapsing of such credit merely on the ground of surrender of registration certificate or on the ground of availing the exemption benefit under a notification granting such exemption based on value of quantity or clearances made in a financial year;
• The authorities below erred in denying the credit availed on the capital goods by wrongly applying the provisions of law which are otherwise applicable to the credit earned on the inputs;

The Department put forth the following arguments below the Tribunal:

• The appellants having surrendered the registration certificate, they could not have claimed the benefit of enjoying the credit which was earned by them during the period of subsistence of registration in their favour;
• Considering the elaborate discussions justifying the finding in the impugned order the same do not call for interference.

After hearing both the parties the Tribunal observed that there is no dispute that the registration certificate was surrendered by the appellants consequent to notification issued by the Central Government increasing the limit for SSI which the appellants are entitled to avail the same.  It is also not in dispute that prior to the surrender of registration certificate they had to their account such credit earned in relation to the capital goods as was disclosed by them in their RG register.   It was the balance credit they sought to avail pursuant to re-registration.  The controversy arose is whether the appellants were entitled to avail such credit which had remained in balance prior to surrendering the registration, once they re-registered in March, 2001.   The benefit in that regard is sought to be denied essentially with reference to Rule 57AG (2) on the ground that pursuant to surrender of registration certificate the credit so earned had lapsed.

                        The Tribunal analyzed the provisions of Sec. 57AG(2) and held that the provisions are entirely in relation to the inputs.   Plain reading of the said sub rule would disclose that it nowhere applies to the credit earned out of duty paid on the capital goods.   In only relates to the credit availed from duty paid on inputs.  The same has not been disputed by the representative of the Department.  However he submitted that the logic behind the said rule would also apply to the credit earned from the duty paid on capital goods as has been held by the lower authorities.   The Tribunal did not accept this contention.   The Department did not point out any other provision which could deal with the subject of lapsing of credit earned in relation to the duty paid on capital goods nor a provision which could result in denial of benefit of credit in balance at the time of surrender of registration.  The Tribunal held that mere surrender of registration, irrespective of the fact that the manufacturing activity had continued availing the benefit of SSI notification, it cannot be said that the appellants were not entitled to avail the benefit of the balance credit available with them at the time of earlier surrender of registration and more particularly in view of proviso to Rule 57AC(2)(b).    The Tribunal further held that the appellants were entitled for availing the said credit and no fault could be found in relation to the utilization thereof by the appellants.   Thus the appeal succeeds and the Tribunal quashed the impugned order.