2014 (8) TMI 255 - HC - Central Excise

CENVAT Credit - entitlement of duty drawback - audit team noted that the petitioner had wrongly availed of CENVAT credit of the Excise duty, contrary to Rule 3(5) of the CENVAT Credit Rules, 2004, as the goods were temporarily imported capital goods, meant to be re-exported - Claim of drawback claim was rejected on the ground of period of limitation - petitioner contends that it has suffered a double tax by virtue of having paid duty at the time of import in 2007, and then having complied with the CENVAT demand along with penalty and interest in 2012, to make good its wrongful utilization of CENVAT credit. Held that - time period to claim a duty drawback had expired by 2009, it is also equally clear that the petitioner could have reversed the CENVAT credit it had claimed in August 2009, while it awaited a relaxation of the time period under Rule 7A. The petitioner, had it paid the CENVAT demand when it received the Show Cause Notice in November 2009, would not have incurred any penalty. The petitioner was, in fact, only liable to an amount of ₹ 8,58,235/- at that time, with interest. However, the petitioner did not reverse the CENVAT credit amount in 2009, but instead only paid the CENVAT credit amount after it received the Show Cause Notice of 1.5.2012. Regardless of the petitioner s possible entitlement to a drawback, it did not reverse the CENVAT credit in 2009 despite its awareness that it had wrongly availed of the same in 2007, and thus acted contrary to Rule 3(5) of the CENVAT Credit Rules. This Court thus need not labour to discern that the petitioner had willfully retained the CENVAT credit from November 2009, when its wrongful utilization was brought to its notice, all the way up to May 2012. During this period, this credit could have in all probability been used by the petitioner for whatever purposes necessary, as all availed credit accumulates in the CENVAT credit account, which is a common account used to pay service tax, central excise duty etc. Such wrongful utilisation of CENVAT credit amounts to a loss to the Revenue, as tax owed to the Revenue is in effect being withheld. However, while awaiting the decision on time relaxation, the petitioner continued to profit from the wrongly utilized CENVAT credit till May 2012, clearly in contravention of Rule 3(5) of the CENVAT Credit Rules. The petitioner cannot be allowed a drawback on the Excise duty as that would tantamount to allowing it to profit from its unjustly derived benefit of the CENVAT credit till May 2012. This Court is thus of the opinion that the petitioner cannot be granted relief as its claim to relief is not made with clean hands - Decided against assessee.

Summary

Issues Involved:
1. Entitlement to duty drawback.
2. Wrongful availing of CENVAT credit.
3. Time relaxation under Rule 7A of the Re-export Rules.
4. Compliance with procedural formalities.

Issue-wise Detailed Analysis:

1. Entitlement to Duty Drawback:
The petitioner, a small-scale manufacturer-exporter, imported machinery on a trial basis under a declaration to re-export it, paying necessary duties and availing CENVAT credit. The machinery was re-exported within three months, and the petitioner claimed a drawback of the basic customs duty but not the Central Excise duties. The petitioner argued that it had a substantive right to the drawback, which should not be curtailed due to procedural formalities. The petitioner claimed that it suffered a double loss by paying the duty on import and subsequently the CENVAT credit amount with interest and penalty.

2. Wrongful Availing of CENVAT Credit:
During an internal audit, it was found that the petitioner wrongly availed CENVAT credit, contrary to Rule 3(5) of the CENVAT Credit Rules, 2004, as the goods were temporarily imported capital goods meant to be re-exported. The petitioner admitted to the wrongful utilization of CENVAT credit and paid the demanded amount along with interest and penalty. The petitioner contended that it treated the Central Excise duties paid on import as capable of CENVAT credit without delving into the excise rules and procedures.

3. Time Relaxation under Rule 7A of the Re-export Rules:
The petitioner sought relaxation of the time period to claim the duty drawback under Rule 7A, arguing that the respondents have the power to exempt any exporter from complying with any condition for reasons beyond their control. The petitioner made several representations for time relaxation, which were not responded to, leading to the filing of a writ petition. The Court directed the respondent to decide on the application, but the second respondent rejected the application, stating that the reasons were not beyond the control of the exporter as required by Rule 7A.

4. Compliance with Procedural Formalities:
The petitioner argued that the removal of export goods without complying with the bond procedure was not akin to removal without payment of duty, as the imports were made under the claim of drawback. The petitioner contended that the respondents were aware of the import declaration and that the petitioner had received the drawback after proper scrutiny of documents. The respondents argued that the petitioner was aware of the wrongful availing of CENVAT credit as early as 2009 but did not reverse the credit until 2012, indicating mala fide intentions.

Conclusion:
The Court noted that the petitioner was aware of the wrongful availing of CENVAT credit by August 2009 and could have reversed the credit while awaiting the decision on time relaxation. The petitioner, however, retained the CENVAT credit until May 2012, which could have been used for various purposes, resulting in a loss to the Revenue. The Court emphasized that a party seeking relief must come with clean hands and concluded that the petitioner's continued retention of the CENVAT credit was in contravention of Rule 3(5) of the CENVAT Credit Rules. Consequently, the Court dismissed the writ petition, denying the petitioner the relief of time relaxation for claiming the duty drawback.