2022 (3) TMI 916 - AT - Central Excise

Reversal of CENVAT Credit - creation of provisions in the balance sheet for the old and slow-moving inputs during the period 2007 08, 2008 09 and 2009 2010 (upto August 2009) - non-reversal of CENVAT credit in relation to these provisions so made in the balance sheet - Rule 3 (5B) of CENVAT Credit Rules, 2004 - HELD THAT - From Rule 3 (5B) which was introduced with effect from 11.5.2007 and also the amendment brought forth with effect from 1.3.2011, it can be seen that credit has to be reversed even if partially written off for the period prior to 1.3.2011. The Rule was introduced in 2007 and then the requirement was to reverse credit when fully written off. In the present case, the department does not allege that the appellant has fully written off the value of inputs. It is merely alleged that the appellant has created a provision for the old and slow-moving inventory. In the Show Cause Notice, it is not at all alleged that the appellant has fully written off the value of inputs. The method adopted by the appellant is more akin to partially writing off the value of inputs. The rule requiring reversal of credit even when there is partial write off of the value of the inventory has come into application only after the amendment with effect from 1.3.2011. On perusal of the balance sheet, it can be seen that the appellant has not fully written off the value of inventory - It is very evident from the balance sheet that the value of the inputs has not been fully written off. In such circumstances, Rule 3(5)(B) does not apply for the disputed period. The Tribunal in the case of M/S. SANGHAVI ENGINEERING VERSUS CCE, HYDERABAD 2012 (7) TMI 821 - CESTAT BANGALORE as well as M/S. KIRLOSKAR FERROUS INDUSTRIES LTD. VERSUS COMMISSIONER OF CENTRAL TAX AND CENTRAL EXCISE, BELGAUM 2018 (11) TMI 348 - CESTAT BANGALORE had occasion to analyse the very same issue and has held that the requirement of reversal of credit when the value has been partially written off would take effect only after 1.3.2011. The demand cannot sustain - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the appellant was required to reverse the CENVAT credit for provisions made for old and slow-moving inventory under Rule 3(5B) of the CENVAT Credit Rules, 2004, prior to its amendment on 1.3.2011.

Issue-wise Detailed Analysis:

1. Requirement to Reverse CENVAT Credit:
The core issue revolves around the interpretation of Rule 3(5B) of the CENVAT Credit Rules, 2004. The appellant was alleged to have contravened this rule by not reversing the CENVAT credit for provisions made for old and slow-moving inputs in their balance sheet for the periods 2007-08, 2008-09, and 2009-10 (up to August 2009).

2. Show Cause Notice and Original Authority's Decision:
A Show Cause Notice was issued proposing recovery of CENVAT credit along with interest and penalties. The original authority confirmed the demand and imposed penalties, which was subsequently challenged and remanded by the Tribunal for denovo adjudication. The original authority reaffirmed the demand of ?11,78,217/- along with interest and equal penalty, which was upheld by the Commissioner (Appeals) on the grounds that the appellant had not reversed the CENVAT credit despite the provisions made for old and slow-moving inventory.

3. Appellant's Argument:
The appellant argued that Rule 3(5B) as it stood during the disputed period required reversal of credit only if the value of inputs or capital goods was fully written off or a provision to write off fully was made in the books of account. The appellant contended that the provisions made in their books were only partial and not full write-offs, thus not necessitating reversal of credit under the rule prior to its amendment on 1.3.2011.

4. Rule 3(5B) and Its Amendment:
Rule 3(5B) initially required reversal of credit only when inputs or capital goods were fully written off or a provision to fully write off was made. The rule was amended effective 1.3.2011 to include partial write-offs as well. The appellant's period of dispute was prior to this amendment, and the appellant argued that the rule as it stood then did not mandate reversal for partial write-offs.

5. Tribunal's Observations and Decision:
The Tribunal noted that the department's allegation was based on the creation of provisions for old and slow-moving inventory, not on full write-offs. The Tribunal emphasized that Rule 3(5B) required reversal only for full write-offs during the disputed period. The balance sheets provided by the appellant showed that the value of inputs was not fully written off.

6. Precedents Cited:
The appellant cited decisions from the Tribunal in Sanghavi Engineering vs. CCE, Hyderabad and Kirloskar Ferrous Industries Ltd. vs. CCE, Belgaum, which held that the requirement for reversal of credit for partial write-offs took effect only from 1.3.2011. The Tribunal concurred with these precedents, reinforcing that prior to 1.3.2011, reversal was not required for partial write-offs.

Conclusion:
The Tribunal concluded that the demand for reversal of CENVAT credit could not be sustained as the appellant had not fully written off the value of inputs. The impugned order was set aside, and the appeal was allowed with consequential reliefs.

Pronouncement:
The judgment was pronounced in open court on 21.03.2022.