CENVAT CREDIT IS ADMISSIBLE ON MERGER/AMALGATION OF UNITS.

[Mr. M. GOVINDARAJAN]

                        Rule 10 of CENVAT Credit Rules, 2004 deals with the transfer of CENVAT credit.  Rule 10(1) provides that if a manufacturer of the final products shift his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.

                        Rule 10(2) provides that if a provider of output service shifts or transfers his business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business, then, the provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated business.

                        Rule 10(3) provides that the transfer of CENVAT credit under sub rules (1) and (2) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central Excise or, as the case may be, the Assistant Commissioner of Central Excise.

                        In this article the points to be discussed are whether the unutilized CENVAT credit in the event of amalgamation can be availed and for such availment previous permission from the department is required with deciding case laws.

                        In ‘Commissioner of Central Excise, Pune – II V. Dow Agro Sciences India (P) Limited’ – 2009 (11) TMI 652 (Tri) the Tribunal held that no permission is required to be taken for the transfer the credit on merger of one unit to another unit.

                        In ‘OM Glass Works Private Limited V. Commissioner of Central Excise, Kanpur’ – 2011 (4) TMI 893 (Tri) the audit team of the department during the course of scrutiny of records observed that the appellant has taken CENVAT credit in their RG 23A Part II on merger of M/s Pankaj Glass Work for which no proper documents were produced.   A show cause notice was issued for contravention of Rule 9 of CENVAT Credit Rules, 2004 read with Rule 11 of the Central Excise Rules, 2002.   The CENVAT credit was denied by the adjudicating authority.  The demand of service tax was confirmed along with interest and equal amount of penalty against the appellant.  The first appellate authority confirmed the order-in-original.  Aggrieved against the order the appellant filed appeal before the Tribunal.  The appellant contended that the appellant has not violated any provision of any rule.  Moreover on merger they have taken credit and after taking credit, they have intimated the Department regarding the said merger and availment of credit on the finished goods, work process or inputs lying in the factory of M/s Pankaj Glass Works.   The Department contended that the appellants have violated the Rules.   As per Circular No. 1/93-CX8, dated 5.1.1993 the appellant has to move an application before merger of unit with the another unit, which they have failed to do so.  The Department further contended that the appellants have violated Rule 9 and Rule 10 of the CENVAT Credit Rules, 2004 and therefore the credit is not available to them.

                        The Tribunal analyzed the provisions of Rule 10 of CENVAT Credit Rules and held that no requirement to take prior permission to transfer the credit on merger of one unit with another unit.  The only requirement is that the credit taken by the unit is to be verified up to the satisfaction of the concerned officers whether the assessee has correctly taken the credit or not.  The Tribunal held that the appellants have correctly taken the credit subject to the verification by the concerned officers and there is no violation of any rule by the appellants.   The Tribunal set aside the order of the first appellate authority.        

                        In ‘Commissioner of Customs, Bangalore V. Hewelett Packard India Sales Limited’ – 2012 (279) ELT 203 (Kar) the assessee M/s Hewelett Packard Sales Limited is EHTP unit functioning under 100% EOU scheme manufacturing personal computers and another unit at Pondicherry in the name of Hewelett Packard India Private Limited for manufacture of computers and printers.   The Pondicherry Unit availed input credit for the manufacture of computers and printers.   There was amalgamation of the Pondicherry Unit with the assessee unit at Bangalore vide order dated 28.05.2004 of the High Court of Karnataka from which the Pondicherry unit stopped the production and transferred the unutilized credit to the Bangalore unit.   The Bangalore unit reversed the credit on pointing out by the Department.  Vide letter dated 28.12.2005 the assessee submitted to the Pondicherry Authorities for permission to transfer the available credit balance of Rs.15,85,47,475/- to the Bangalore factory.  Also vide letter dated 10.3.2005 the assessee addressed jurisdictional Assistant Commissioner of Customs, Bangalore, informing that they would transfer unutilized balance of CENVAT credit from Pondicherry Unit to EFTP unit at Bangalore.  The said request was rejected on the ground that there was neither shifting of the factory building nor there was any transfer of inputs/raw materials or finished goods.  The Pondicherry Authority had not permitted the transfer. 

                        The assessee filed an appeal before the Commissioner (Appeals) who held that as per Rule 10 permission was required to transfer the credit.  Since the assessee has not fulfilled any of the conditions laid down under Rule 10 of CENVAT Credit Rules they are not entitled for transfer of credit.  It was also held that that in the event of manufacturer opting for exemption an accumulated credit would lapse and would not be allowed to be utilized for payment of duty on any excisable goods.  The matter was remanded to the lower authority.   The assessee filed an appeal against this order before the Tribunal.

                        The Tribunal held that the rule provides for transfer of credit lying unutilized in the event of shifting of a factory to another factory on account of amalgamation and therefore the assessee is legally eligible for the transfer under Rule 10 (1) of the Rules.  It was further held that Rule 11(1) provides for utilization of unutilized credit by the transferee company on such amalgamation.   Rule 11(2) speaks of a situation when a manufacturer opts for exemption under a Notification based on the value or quantity of clearances in a financial year, in which event the benefit of unutilized credit is not available.   The instant case does not come within Rule 11(2) the Commissioner (Appeal) erred in denying the benefit of Rule 11© to the assessee.  

                        Aggrieved by the order the Department filed the present appeal before the High Court.  The Department put forth the following arguments:

• The assessee is claiming exemption from payment of excise duty by virtue of a Notification dated 9.7.2004.  Therefore Rule 11(2) is attracted and unutilized CENVAT credit shall lapse;
• The Commissioner (Appeals) remanded the matter back to the original authority who decided the case on merits.   In tune with the rejection of the request of the asessee for availing the benefit, the assessee preferred an appeal to the Commissioner.   By that time, the Tribunal has passed the impugned order.  Following this the Commissioner (Appeals) set aside the order of the assessing authority.   Therefore this appeal which originated on the basis of reply letter rejecting the benefit of credit, the Tribunal could not have entertained the same and granted the relief to the assessee and therefore the impugned order has to be set aside and remanded back to the assessing authority to consider the case on merits.

The High Court analyzed the provisions of Rule 10 and Rule 11.   The High Court held that Rule 10(1) declares that when any manufacturer of final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger or amalgamation or transfer of the factory or joint venture with the specific provision for transfer of liabilities on such factories, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred solid, merged, leased or amalgamated factory.  The High Court, therefore, held that the law provides for transfer of unutilized CENVAT credit, in the event of an amalgamation in favor of the transferor company.                    

                        The High Court held that Rule 11(1) makes it clear that CENVAT credit availed by a manufacture under the earlier Rules 2002, if it remains unutilized prior to 10.09.2004, the said unutilized credit shall be allowed as CENVAT credit to the manufacturer under the Rules of 2004 and allowed to be utilized in accordance with the said Rules.   The explanation to this rule is provided that if the manufacturer opts for an exemption from the payment of duty of excise leviable on goods manufactured by him under a Notification based on the value or the quantity of clearances in a financial year, then he would not be entitled to the benefit of both Rule 10 and Rule 11(1) of the Rules.   Therefore the said benefit is not available to the manufacturer who opts for exemption based on the value of quantity of clearances in a financial year.   In all other cases the said benefit is available to the manufacturer. 

                        The High Court also the analyzed the exemption Notification availed by the assessee.  The High Court held that a bare perusal of the notification makes it very clear that the exemption has no reference to the value of the quantity of the goods which are set out in the Table to the Notification.   Rule 11(1) has no application to the exemption notification and therefore the assessing authority and the appellate Commissioner were totally in error in denying the benefit of transfer of unutilized credit to the assessee.