2022 (3) TMI 325 - HC - Central Excise

Refund of Excise Duty in cash - CENVAT credit for acquisition of capital goods used in its process of manufacture - Rule 3(5) of the Cenvat Credit Rules, 2004 - HELD THAT - In the present case, upon the assessee using the Arc Furnace for a considerable period of time, it desired to replace the same or, at any rate, to sell or transfer the same; whereupon the assessee was required to refund in cash the entire quantum of Cenvat credit that it had obtained at the time of the acquisition of the Arc Furnace. There is no dispute that such refund was made in cash - assessee contends that since the expression for any reason did not find any place in Section 11A of the Act that ought to have been applied to the present case, it is evident that the Tribunal took irrelevant considerations into account and the decision-making process itself was awry. Refund of the Cenvat credit on account of capital goods having been raised on the assessee earlier - Rule 3(5) of CCR - HELD THAT - The Tribunal at various places and some High Courts have taken a view that the benefit given under amended Rule 3(5) of the said Rules for depreciation of the capital goods would, in effect, have retrospective operation. Rule 3(5) of the said Rules of 2004 could have been seen to have been arbitrary in not making a distinction between the quantum of Cenvat credit that ought to be refunded by an assessee who intended to sell any capital goods for which Cenvat credit which had been obtained, within a short time of the acquisition of capital goods or after long years of use thereof. The distinction was brought about and the remission, so to say, was provided in the amended Rule 3(5) of the said Rules in 2007 - it is correct in interpreting the benefit conferred by the amendment to Rule 3(5) to have retrospective operation even if the demand for the refund of the Cenvat credit obtained for the capital goods had been raised prior to the amendment of 2007. Exemption that the appellant is entitled to by reason of the location of its manufacturing facility - HELD THAT - What the assessee says is that if it was liable in a month to pay ₹ 100 on account of the excise duty it would be entitled to get refund of such amount of ₹ 100 the next month and so on. However, if the assessee had adjusted the Cenvat credit obtained for the capital goods against a part of the excise duty payable for its manufactured goods, then the appellant would have paid only the amount by which the duty exceeded the Cenvat credit in cash to be entitled to receive the refund of such cash only. In this case, when the appellant had used the Cenvat credit for acquiring the Arc Furnace and had adjusted the same against excise duty payable for its manufactured goods and paid the balance amount in cash after adjusting the credit, the quantum of credit which the assessee had obtained is lost forever to the assessee - What the assessee suggests is that the Cenvat credit given for acquisition of capital goods to a manufacturer, who is otherwise exempted from paying excise duty on its manufactured products, is revenue neutral. There is considerable force in such contention that when a manufacturer is entitled to refund of the entire excise duty, the refund to the Department of any adjusted Cenvat credit availed of would again have to be refunded by the Department by virtue of the exemption to which the assessee is entitled to. The Department, fairly, accepts that the matter may require fresh consideration. Accordingly, the judgment and order of the Tribunal is set aside. The order of the adjudicating authority that was carried to the Tribunal is also set aside - it is deemed fit and proper to remand the matter to the previous level, the adjudicating authority, for the entire gamut of the matter to be considered afresh in accordance with law - Appeal allowed by way of remand.

Issues:
1. Interpretation of Rule 3(5) of the Cenvat Credit Rules, 2004 regarding refund of Cenvat credit on sale or transfer of capital goods.
2. Application of Section 11A of the Central Excise Act, 1944 in demanding refund of Cenvat credit.
3. Retrospective operation of amended Rule 3(5) of the Cenvat Credit Rules, 2004.
4. Exemption entitlement of the appellant due to the location of the manufacturing facility and its impact on refund of Cenvat credit.

Issue 1: Interpretation of Rule 3(5) of the Cenvat Credit Rules, 2004:
The judgment addressed the appellant-assessee's procurement of an Arc Furnace and subsequent refund of excise duty paid. The appellant was entitled to Cenvat credit for capital goods used in manufacturing. Rule 3(5) mandated refund of Cenvat credit on sale or transfer of capital goods. The rule lacked clarity on the quantum of refund concerning the usage duration of capital goods. An amendment in 2007 introduced a rebate based on the period of use, aiming to prevent complete refund for short-term use and nominal refund for long-term use.

Issue 2: Application of Section 11A of the Central Excise Act, 1944:
The Department demanded a refund of Cenvat credit erroneously refunded to the appellant. The appellant argued that Section 11A couldn't be invoked as the Assistant Commissioner had already decided on the refund. The Tribunal's use of the amended Section 11A, incorporating "for any reason," was disputed as irrelevant to the unamended Section applicable at the time.

Issue 3: Retrospective Operation of Amended Rule 3(5):
The appellant contended that the amended Rule 3(5) should have retrospective effect, citing precedents. The judgment emphasized that clarificatory amendments should be retroactively applied to rectify irrational provisions. The Madras High Court upheld the retrospective interpretation, supporting the Tribunal's view.

Issue 4: Exemption Entitlement Impact on Cenvat Credit Refund:
The appellant argued against refunding Cenvat credit, claiming it negated the exemption due to the manufacturing facility's location. The appellant highlighted the revenue neutrality of Cenvat credit for exempted manufacturers. The Tribunal failed to consider this crucial aspect, prompting the High Court to set aside the Tribunal's decision and remand the case to the adjudicating authority for a fresh review within four months.

The judgment critically analyzed the legal intricacies surrounding the interpretation of Rule 3(5) of the Cenvat Credit Rules, 2004, the application of Section 11A of the Central Excise Act, 1944, the retrospective operation of amended rules, and the impact of exemption entitlement on Cenvat credit refunds. The High Court's decision to remand the case for a fresh review underscores the importance of considering all legal aspects and ensuring fairness in excise duty refund matters.

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