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2025 (4) TMI 1185 - AT - Central ExciseReversal of CENVAT Credit as per Rule 6(3) of the Cenvat Credit Rules 2004 - inputs used in manufacture of dutiable as well as exempted final products - appellant had not maintained the separate accounts with regard to the dutiable goods as well as the exempted goods - invocation fo extended period of limitation - interest and penalty - HELD THAT - This issue is no more res integra and Rule 6(3) of Cenvat Credit Rules was amended vide Notification No. 10/2008-CE(NT) dated 01.03.2008 wherein sub-rule (3A) was incorporated with effect from 01.04.2008. The appellant has reversed the proportionate amount of Cenvat Credit amounting to Rs.14, 683.70 on 18.08.2008 availed in respect of services attributable to exempt goods as per the procedure prescribed under Rule 6(3A) of the Cenvat Credit Rules. The appellant also paid the interest and the same was not disputed in the impugned order. Vide Section 73 of the Finance Act 2010 Rule 6 of the Cenvat Credit Rules was amended retrospectively to provide for reversal of credit on proportionate basis alongwith interest and in the present case the appellant has reversed the credit alongwith interest and therefore the appellant is entitled to the benefit of the retrospective amendment in Rule 6 ibid as held in the cases relied upon by the appellant - it is a settled law that reversal of credit amounts to non-availment of credit. Extended period of limitation - HELD THAT - The learned Commissioner confirmed the demand by invoking the extended period but the department had not established anything on record to show that the appellant has suppressed the material facts with intent to evade the payment of duty. Further we find that the appellant made the proportionate reversal of Cenvat Credit even before the objection was raised by the department in the audit proceedings and the same is not disputed by the department. Also the issue involves interpretation and hence extended period of limitation cannot be invoked. Interest and penalty - HELD THAT - Since the demand itself is not sustainable therefore the question of interest and penalty does not arise. Conclusion - i) The appellant s reversal of Cenvat Credit under Rule 6(3A) satisfies the legal requirement for reversal of credit attributable to exempted goods despite non-maintenance of separate accounts. ii) The extended period of limitation cannot be invoked as there was no suppression or fraud and the appellant disclosed and reversed the credit before audit objections. iii) The demand of Rs.1, 79, 25, 988/- along with interest and penalty is unsustainable and is set aside. Appeal allowed.
The core legal questions considered in this appeal are:
Issue-wise detailed analysis: 1. Reversal of Cenvat Credit under Rule 6(3A) and its sufficiency in absence of separate accounts The relevant legal framework comprises Rule 6(3) and the amended Rule 6(3A) of the Cenvat Credit Rules, 2004, which govern reversal of credit where inputs or input services are used partly for exempted goods. Rule 6(3A), introduced effective 01.04.2008, prescribes a detailed procedure for proportionate reversal of credit by manufacturers who do not maintain separate accounts for dutiable and exempted goods. The appellant availed Cenvat Credit on inward freight input services used for both dutiable and exempted goods and later reversed Rs.14,683.70 as per Rule 6(3A) on 18.08.2008. The department's objection was that separate accounts were not maintained, and therefore, the appellant was liable to pay 10% of the value of exempted goods under Rule 6(3). The Court relied on precedents including Chandrapur Magnet Wires (P) Ltd. v. Collector of Central Excise, Nagpur, and decisions of various Tribunals and High Courts, which hold that reversal of credit effectively amounts to non-availment of credit. The Court emphasized that proportionate reversal under Rule 6(3A) satisfies the legal requirement and that the procedure is designed to operationalize Rule 3 of the Cenvat Credit Rules. The Tribunal's own earlier decisions in cases such as M/s Star Agriwarehousing & Collateral Management Ltd and M/s Panacea Biotec Ltd were cited, which affirm that once proportionate reversal is made, the requirement of non-availment of credit is met, and the department cannot demand an additional 10% of exempted goods' value merely because separate accounts were not maintained. The department's reliance on the Bombay High Court judgment in Commissioner of C. Ex., Thane v. Nicholas Piramal was distinguished on the ground that subsequent amendments to Rule 6, particularly the retrospective amendment by Section 73 of the Finance Act, 2010, permit proportionate reversal and thereby supersede the earlier position. 2. Retrospective effect of amendments to Rule 6 and Section 73 of the Finance Act, 2010 The appellant contended that the amendments to Rule 6, particularly the insertion of sub-rule (3A) and the retrospective amendment by Section 73 of the Finance Act, 2010, apply to the present case. The Court agreed, noting that these amendments provide for proportionate reversal of credit along with payment of interest and that the appellant complied by reversing the credit and paying interest. The Court referred to authoritative decisions supporting the retrospective application of these amendments, including rulings by the Bombay High Court and various Tribunals, which held that such procedural amendments have retrospective effect and benefit the assessee. 3. Extended period of limitation under proviso to Section 11A(1) of the Central Excise Act The department invoked the extended period of limitation to demand duty for the period 2006-07 and 2007-08. The appellant argued that the demand is barred by limitation as the proportionate reversal was made before the audit objection and the department was aware of the reversal. It was further contended that there was no suppression or wilful misstatement warranting extended limitation. The Court noted that the department failed to prove suppression or fraud by the appellant. The appellant's disclosure and reversal of credit before audit negates the applicability of extended limitation. The Court relied on Supreme Court decisions and Tribunal rulings which establish that extended limitation cannot be invoked in the absence of suppression or fraud and where the issue is one of legal interpretation. 4. Interest and penalty under Sections 11AB and 11AC The appellant submitted that since the demand itself is unsustainable, imposition of interest and penalty is unwarranted. The Court agreed, holding that when the foundational demand is quashed, consequential interest and penalty cannot be sustained. 5. Department's claim of 10% of exempted goods value under Rule 6(3) The department's claim under Rule 6(3) for 10% of value of exempted goods was rejected by the Court. It was held that Rule 6(3) provides options for reversal of credit, and the choice lies with the assessee. The department cannot impose an option not exercised by the assessee. The Court relied on decisions that interpret Rule 6 as giving the assessee discretion to choose the method of reversal and that the department cannot unilaterally impose a different method. Conclusions:
Significant holdings: "Once the proportionate reversal of the Cenvat credit has taken place, that tantamount to not availing of the input services credit of the common inputs which are going into the exempted services." "The procedure prescribed in Rule 6(3A) of the Credit Rules is only to make the provisions of Rule 3 workable. By means of proportionate reversal the requirement of Rule 6(3) has been substantially satisfied." "The extended period of limitation cannot be invoked in the absence of suppression of facts or wilful misstatement." "Since the demand itself is not sustainable, the question of interest and penalty does not arise." "Rule 6(3) provides options for reversal of credit and the choice between the said options is to be made by the assessee; the department cannot choose an option on behalf of the assessee."
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