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TMI Blog2022 (11) TMI 1460X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounts. This provision shall only apply in respect, of those goods which are written off the input in the books of accounts of the appellants for the reason that they have been lost, destroyed or become obsolete. It cannot be applied to case where the value of goods for any reason is written down in the books of account. From the plain reading of the definitions of the term write off , it can be construed that write off is term used wherein the asset is permanently lost on account of pilferage, obsolescence or otherwise and is required to be removed from the books of accounts. Thus it is quite evident that the impact of write off , or making the provision to write off an asset (including the inputs) would be reflected as loss or an expense in the book of accounts of the appellant and shall be admissible as deduction while computing the income of the appellant. Whether the valuation of inventories as per the accounting standards and the accounting policies followed by the appellant would amount to write off or making the provisions to write off ? - HELD THAT:- Admittedly the goods in respect of which demand for reversal of CENVAT credit has been made have been used in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 001- COM030- 032- 14-15 20.11.2014 02/P-I/R-TGN/ COMMR/ADJ/ 2014 04.01.2014 04/P-I/R-TGN/ COMMR/ ADJ/2014 31.01.2014 64/P-I/R-TGN/ COMMR/ADJ/2014 08.04.2014 E/85819/2017 PUNEXCUS001- COM047- 15-16 30.01.2017 04/TGN/RI/PC/ADJ/ 2016- 17 05.04.2016 E/85190/2019 PUNEXCUS001- COM014- 18-19 15.10.2018 02/P-I/COMMR/ 2017-18 14.05.2018 1.2 By the impugned orders following has been held: A. PUN-EXCUS-001-COM-030-032-14-15 dated 20.11.2014 ORDER 28.1 in respect of the Show Cause Notice bearing No. 02/P-I/RTGN/COMMR/ADJ/2014, dated. 04.01.2014, I determine and confirm the demand of inadmissible Cenvat credit amounting to Rs.25,33,05,174/- (Rupees Twenty Five Crores, Thirty Three Lakhs, Five Thousand, One Hundred and Seventy Four Only), attributable to the cenvat credit availed on inputs written off or in respect of which provision has been made to write off, whether fully or partially, during the period from December 2008 to December 2012, as discussed and detailed in para 24.4.3 above, under the provisions of Rule 14 of the CCR, 2004, read with Section 11A(2)/Section 11A(10) of the Central Excise Act, 1944, as the-case may be. Further, I order the assessee, M/s General Motors India Pvt. Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rule 14 of the Cenvat Credit Rules, 2004, read with Section 1IAB/11AA of the Central Excise Act, 1944, as applicable during the relevant period. 28.5 Further, in respect of Show Cause Notice bearing No. 02/PI/R-TGN/COMMR/ADJ/2014, dated. 04.01.2014, I impose a penalty of Rs. 25,83,05,1741- (Rupees Twenty Five Crores, Thirty Three Lakhs, Five Thousand, One Hundred and Seventy Four Only), on M/s. General Motors India Pvt. Limited, Urse, Pune, under Rude 15(2) of the CCR, 2004, read with Section 11AC/11AC(I)(a) of the Central Excise Act, 1944, i.e. Rs.8,97,94,670/- under the provisions of Section 11AC of the Central Excise Act, 1944, for the period from December 2008 to March 2011 plus Rs.16,35,10,504/- under the provisions of Section 11AC(1)(a), ibid, for the period from April 2011 to December 2012 for contravention of provisions of Rule 3(5B) of the Cenvat Credit Rules, 2004. 28.6 However, I give an option to the assessee, under the first and second proviso to Section 11AC of the Central Excise Act, 1944, to pay 25% of the penalty amount imposed under Section 11AC, ibid, in para 28.5 above 1.. 25% of Rs.8,97,94,670/- which is equal to Rs.2.24,48,6684-), provided the assessee pays ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise Act, 1944, i.e. Rs.8,97,94,670/- under the provisions of Section 11AC of the Central Excise Act, 1944. E/85456/2015,85819/2017,85190/2019 6 iv. However, I give an option to the assessee, under the Section 11AC (1) (c) of the Central Excise Act, 1944, to pay 25% of the penalty amount imposed under section 15 (2) of the CCR, 2004 read with Section 11AC (1) (c), of the Act, in sub para iii above, provided the Noticee pays the entire amount of demand of Cenvat credit, as determined/ confirmed, in sub para i above, along with interest payable thereon as ordered in sub para ii above on the said amount as well as the 25% penalty, within 30 days of the date of communication of this order. 29. This order is issued without prejudice to any other action that may be taken against the Noticee under the provisions of the Central Excise Act, 1944, and/ or the rules made thereunder and/ or any other law for the time being in force. C. PUN-EXCUS-001-COM-014-18-19 dated 15.10.2018 Order a) I determine and confirm the demand of inadmissible Cenvat credit amounting to Rs.11,57,52,298/- (Rupees Eleven Crores, Fifty Seven Lakhs, Fifty Two Thousand, Two Hundred and Ninety Eight Only), attributable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee, the accounting entries are made for provision of write off and subsequently the same is recredited in the next month. 2.3 As per rule 3 (5B) of the CENVAT Credit rules, 2004 as amended, even in cases, where provision to write off the inputgoods is made, CENVAT credit has to be reversed on such goods/ inputs. A manufacturer is allowed to take re-credit on such credit reversed only when these goods are used in the manufacture of final products. This indicates that before use in manufacturing, the assessee is not entitled for taking re credit of such written off Input-goods. Therefore, the practice followed by the assessed in terms of their General Motors Accounting Policy, of re-crediting (referred as reversing by CM) the input-goods, shall not entitle them to take re-credit of Cenvat amount attributable to such input-goods that were written off or in respect of which a provision for write off, was made. 2.4 Appellant was availing the Cenvat Credit on the inputgoods both imported as well as locally procured. The Cenvat credit amount in respect of such imported goods is higher to the extent of the Special Additional Duties (SAD). Their accounting records. indicate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 Arguing for the appellant learned counsel submits that: The accounting entries passed by the appellant are for the purpose of valuation of inventory in the books of accounts. These entries are in respect of inputs which are categorized as slow moving, in terms of schedule of requirements. So far as the inputs which are declared obsolete or not usable , the appellant had written off the same from the books of accounts and had reversed the Cenvat credit availed on these inputs, Following the above principles appellant passed a general entry at the end of every month, for the provision of slow moving stock which is automatically reversed in the subsequent month. Such entry is made for the purpose of valuation of inventory and to determine the Profit and Loss at the end of the month. It is merely a provisional entry, and no stock is reduced from the inventory account. Effectively, there is no provision been made, due to reversal of provision entry in subsequent month. The appellant had a system in place, wherein, once the inputs have been identified and declared as obsolete and are no longer fit to use, the appellant write off the same in the books of accounts and reduces the stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st March, 2013. Reliance is placed on the following decisions wherein it was held that no duty could be recovered for want of machinery of the recovery provisions prior to 1.3.2013 a. Ericsson India Pvt. Ltd. Vs. CCE [2019 (3) TMI 776 DEL] b. Heidelberg Cement India Ltd. Vs. CCT [2017 (11) TMI 1394 Bang] c. Steel Authority of India Ltd. Vs CCE [2020 (3) TMI 147 Chennai] The recovery provision inserted by way of explanation to Rule 3(5B), only provides for recovery of Cenvat Credit. There is no machinery for recovery of interest and penalty. The appellant has sufficient accumulated Cenvat Credit balance throughout the period from April 2008 to Feb 2017. All the facts were throughout in the knowledge of department. Hence extended period of limitation cannot be invoked. Nor there is any case for demanding the interest and imposing penalty on the appellants. 3.3 Arguing for revenue, special counsel while reiterating the findings recorded in the impugned order submitted: Rule 3 (5B) makes it clear that when write off or provision made to write off value of the inputs, fully or partially, then the manufacturer has to pay an amount equivalent to the CENVAT credit taken on such inputs. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy states that excess The Appellant reverses CENVAT credit wherever there is a provision for write-off or write-off of inventory which is not consumed subsequently in the light of above accounting policy and in compliance with the US GAAP. However, in the case of subject inputs towards which a temporary creation of provision of slow moving stock is made, which is subsequently reversed in the very next month, the provisions of Rule 3(5B) are intended to cover these transactions also wherein the value of the inputs has been written off or provisionally written off from the inventory records, It is evident from the SAP system maintained by the Appellant that they do not have a separate GL code for recording slow moving inventory , and the same is recorded under the GL code provision for write-off . Therefore, rule 3(5B) CCR is equally applicable to such inputs. The question is that whether the re-credit taken back next month on such inputs is in order? The answer should be no because once the provision (even though temporarily) is made for their value to be written off then, only when they are actually put to use afterwards in the manufacture of finished goods can the re-credit be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by them in the manufacture of their final products and consequently, they would be liable to reverse the CENVAT credit availed on such inputs. Interest payable - Under Rule 14 of CCR, 2004, read with Section 11AA of the Act, CENVAT credit taken and utilized wrongly is required to be recovered along with applicable interest. Reliance is placed on the decision of Hon'ble Bombay High Court in the case of M/s. P. V. Vikhe Patil SSK Vs. CCE, as reported in 2007 (215) ELT 023 (Bom). Penalty imposable - Penalty under Section 11AC of the Central Excise Act, 1944, read with Rule 15 of the CENVAT Credit Rules, 2004, is imposable because the Appellant has contravened the provisions of Rule 3(5B) of the CCR, 2004 and Rule 9(5) of the CCR, 2004, as submitted above. The Appellant had failed to pay or reverse the CENVAT credit taken in respect of 'Inputs' which have been written off, or in respect of which provision has been made in their Books of Accounts, whether fully or partially, to write off, and on which CENVAT credit was availed by them. The Appellant was having knowledge that their inventory management system was not in consonance with and compatible with the provisions of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable to the inputs, which were written off fully or partially and/or in respect of which provision for such write off was made in their books of account, during the period from December 2008 to December 2012, under the provisions of Rule 14 of the CCR, 2004, read with the proviso to erstwhile Section 11A(1)Section 11A(4) and 11A(5) of the Central Excise Act, 1944 (hereinafter referred to as the Act'), as the case may be; demanding Interest under the provisions of Rule 14 of the CCR, 2004, read with Section 11AB /11AA of the Act, as the case may be and proposing penalty under Rule 15(2) of the CCR, 2004, read with Section 11AC/11 AC(b) of the Act, as applicable during the relevant period. Periodical Show Cause Notices/Statements of Demands covering the period from January 2013 to March, 2015 were also issued to the Noticee alleging contraventions as above on the above grounds. 6.2. As the charges against the Noticee in the subsequent period i.e. from 2015 2016 (Written off entry posted on 31-03-2016) 2016-17 (Written off entry posted on 31-03-2017) were the same, the instant Statement of Demand No. 16/P1/COMMR/2017-18 dated 14-03-2018 issued under F. No. V/15-103/CGST/Adj/ DSC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f resulting in demand of reversal at multiple occasions on the same part, on account of goods in transit and on account of credit already reversed on obsolete inputs g) Interest is not recoverable if Original Demand is not sustainable. The disputed CENVAT credit has not been utilized in the instant case and hence, interest can in no manner be recovered. h) No Penalty can be imposed in the instant case 9. From the averments made in the SOD, reply to the SOD, oral submissions during the course of personal hearing, I find that the main issues to be decided in this case, are -- (a) Whether the Noticee is liable to reverse or pay CENVAT credit attributable to the inputs which have been written off fully or partially and in respect of which provision for write off of such inputs has been made by them in their books of account; (b) Whether interest is payable by the 'Noticee on the amount of CENVAT credit demanded from them; (c) Whether penalty is imposable on the Noticee. 10.1. Now, I take up the issues mentioned in Para 9 above one by one. Whether the Noticee is liable to reverse or pay CENVAT credit attributable to the inputs which have been written off fully or partially and in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite off, then it would signify that such inputs cannot be utilized by the Noticee in the manufacture of their final products and consequently, they would be liable to reverse the CENVAT credit availed on such inputs. However, I find that the provisions of Rule 3(5B) of the CCR, 2004, also cover within its ambit inputs which have been rendered obsolete temporarily due to change in production line, introduction of new models, physical deterioration of the inputs etc., but which are capable of being used in the future and available with the assessee. I find that this is evident from the wordings of the proviso to Rule 3(58) of the CCR, 2004, which stipulates that as and when such inputs rendered obsolete are used subsequently in the manufacture of the final products, then the assessee is entitled to the CENVAT credit reversed or paid by them. 11.4. Thus, I find that whether the inputs are rendered obsolete permanently or temporarily, if they are written off fully or partially and / or if a provision for such write off has been made by the assessee in their books of account, then it is mandated under Rule 3(5B) of the CCR, 2004, that at the time of such write-off or while making a prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to mention here that prior to the introduction of this Rule 3(5B) in the CCR, 2004, vide Notification No. 26/2007-CE (NT) dated 11-05 2007, the CBEC, vide Circular No.645/36/2002-CX dt. 16-07-2002, had clarified that - In cases where the value of the inputs is partially written off/ reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of CENVAT Credit availed.' 11.7. The provisions of the CCR, 2004 were subsequently amended vide Notification No.26/2007-CE (NT) dated 11-05- 2007, and Rule 3(5B) was introduced to specifically take care of write-off cases, whether permanent or temporary. I find that, where the inputs are rendered absolutely useless and not fit for consumption any more in the production process and which are written off and/or a provision is made in the books of account for such write off, then the value of such inputs would be booked as permanent loss' in the books of account. Consequently, the Noticee would be liable to reverse the CENVAT credit taken on such inputs. As contended by the Noticee, had the legislature intended to introduce R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 771 (Tri-Ahmd) e. Tecumseh Products India Pvt. Ltd. Vs. CCE - (2008 (221) ELT 129 (Tri Bang) f. CCE Vs Fairfield Atlas ltd. - 2008 (230) ELT 511(Tri-Mum) g. Hindustan Zinc Limited Vs. CCE - 2005 (191) ELT 724 (Tri-Bang) 11.11. The gist of these cases is that CENVAT credit will not be denied on inputs and capital goods, the value of which has been written off in the books of account. However, on having gone through the aforesaid case-laws, I find that the same have been issued in the context of CENVAT Credit Rules as they existed prior to the introduction of Rule 3 (5B) of the CCR, 2004, and therefore the ratios therein would not be applicable to the facts and circumstances of this case. 11.12. Further, I do not agree with the Noticee's contention that Rule 3(5B) of the CCR, 2004, has frustrated the true intention of the legislature and that 'Heydon's Rule of interpretation should be resorted to construe, the true intention of the legislature behind the introduction of this Rule. In this context, as observed in the preceding paras, Rule 3(5B) of the CCR, 2004, has been introduced to deal with situations where the Noticee avails credit on inputs and utilizes the same fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking of demand in the Statement of Demand has been done on the basis of information supplied by the Noticee themselves and not on the basis of any assumptions and presumptions and also that this issue has been in dispute since the first SCN issued to them on 04-01 2014. In this regard, I find that the Noticee have enclosed Annexure 12 to the reply dated 25-07-2018, purported to be having details of part wise slow moving details. In this regard, I find that the said Annexure 12 is the statement showing part wise slow moving details for the period from January 2014 to March 2015. I find that the period of demand in the instant case is from 2015-2016 (Written off entry posted on 31-03 2016) 2016-17 (Written off entry posted on 31-03-2017). Hence the same is not relevant for the instant case. Therefore, I am unable to give them any relief on this count. I also find that the Noticee's appeals are pending before Hon'ble CESTAT, I am accordingly constrained to take a view that the averments made by them regarding re-computations are an afterthought to deviate from the core issue which being failure to reverse CENVAT credit on the inputs on which provision to write off has been e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er records to prove the admissibility of CENVAT credit availed by them on the written off 'Inputs', as they have already made provision in their books of accounts. Accordingly, I hold that the Noticee GMI had failed to pay or reverse the CENVAT credit taken in respect of 'Inputs' which have been written off, or in respect of which provision has been made in their Books of Accounts, whether fully or partially, to write off, and on which CENVAT credit was availed by them, Consequently, inadmissible CENVAT Credit in respect of 'Inputs, as detailed in Annexure A to the Statement of Demand dated 14-03-2018 and also detailed in their letter dated 19-02-2018, which have been written off, or in respect of which provision has been made in their Books of Accounts, whether fully or partially, to write off, and on which CENVAT credit was availed by them, during the period from 2015-2016 ( Written off entry posted on 31-03-2016) 2016-17 (Written off entry posted on 31 03-2017), totally amounting to Rs. 11,57,52,298/- (Rupees Eleven crores fifty seven lakhs fifty two thousand two hundred ninety eight only (Rs. 9,00,88,206/- BED + Rs. 4,73,873/- Ed. Cess + Rs. 2,36,937/- SHE C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plug those situations, wherein the assessee is availing benefit of Cenvat Credit on the inputs which are not intended to be used and are written off or provisioned for written off in the books of accounts, but still lying in the factory. Rule 3 (5B) is part of the CENVAT Credit scheme, and should be interpreted in a manner to fulfill the basic objective of scheme. On a plain reading of the aforesaid provision, it is clear that the assessee shall be liable to pay the amount of Cenvat credit availed on the inputs, which are either written off fully or partially or any provision for write off fully or partially has been made in the books of accounts. This provision shall only apply in respect, of those goods which are written off the input in the books of accounts of the appellants for the reason that they have been lost, destroyed or become obsolete. It cannot be applied to case where the value of goods for any reason is written down in the books of account. Explaining the scheme of MODVAT Credit, Hon ble Supreme Court has in the case of Dai Ichi karkaria Ltd [1999 (112) ELT 353 (SC)] observed as follows: 17. It is clear from these Rules, as we read them, that a manufacturer obtains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chine in a fire when the company has no insurance and the machine no salvage value. 2. elimination of a specific customer's account balance because of uncollectibility, as in the case of a bankruptcy. A Dictionary of Accounting (Oxford) 4th edition write off 1. To reduce the value of an asset to zero in a balance sheet. An expired lease, obsolete machinery, or an unfortunate investment would be written off. 2. To reduce to zero a debt that cannot be collected (see BAD DEBE). Such a loss will be shown in the *profit and loss account of an organization. BLACK's Law Dictionary (8th Edn) WRITE OFF write off,vb. To remove (an asset) from the books, esp. as a loss or expense the partnership wrote off the bad debt . See TAX WRITE-OFF. - write-off,n. 4.5 From the plain reading of the above definitions of the term write off , it can be construed that write off is term used wherein the asset is permanently lost on account of pilferage, obsolescence or otherwise and is required to be removed from the books of accounts. Thus it is quite evident that the impact of write off , or making the provision to write off an asset (including the inputs) would be reflected as loss or an expense in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the stock-intrade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. [533G-H] Whimster Co. v. The Commissioners of Inland Revenue, [191726] 12 Tax Cases, 813,823 The object of stock valuation is the correct determination of the profits and loss resulting from a year's trading. It is the true result of the trading activity of that year that must be disclosed by the books. .....the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value. [Whimster and Co.v. CIR (1925] 12 TC 813, 827 (C. Sess.) ... Emphasis Supplied Following the above principles of accounting the appellant had been valuing their inventory on monthly basis and making the consequential adjustments, specifically in respect of the slow moving items. They followed the global policies laid down by their principals abroad. The accounting standards and policies followed by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the CENVAT credit taken in respect of the said input or capital goods. 7. On a plain reading of the said Rule it is clear that in the event the value of any input or capital goods before being put to use on which Cenvat credit has been availed are written off fully or partially or any provision has been made to write off fully or partially than the manufacturer or service provider are required to reverse/pay Cenvat credit availed on such inputs or capital goods. In the present case from the very beginning the appellant have submitted that they have only written down the value of the raw materials in their books of account and has not written off the value fully or partially. Also, the claim of the appellant are that all these raw materials are still available in their factory and are in usable conditions; the value is written down as per the accounting principle and since the credit availed is on inputs, therefore, under the CCR, 2004, there is no bar in taking depreciation benefit under Income-tax Act, 1961. Further, I find that there is no evidence to the effect that the inputs whose value had been written down had been removed from the factory. Thus, reducing the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. 9. Apart from the said decision, we have perused the rules. The Modvat credit was available as provided under Rule 57A. Subrule (1) thereof provided that the provisions of this Chapter [which is Chapter V(AA) pertaining to credit of duty paid on excisable goods used as inputs] shall apply to such finished excisable goods as may be notified by the Central Government for the purpose of allowing credit on any duty of excise or additional duty as may be specified in such notification paid on the goods used in the manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit taken on inputs which had actually been written off for stock account purpose would clearly amount to misconstruction and abuse of the Modvat scheme. 12. Quite apart from the question whether such circular can provide for reversal of the Modvat credit when the rules did not envisage to which question we shall advert to later, to our mind, this circular did not provide any clarity about the writing off of the inputs namely, whether the circular desired to strike at nonreversal of the Modvat credit upon writing off of the value of the inputs for the accounts and income-tax purpose or to strike at non-reversal of the Modvat upon physical writing off or the stock writing off of the goods. Be that as it may, the C.B.E. C. issued yet another circular dated 16-7-2002 and provided as under :- (i) In cases, where unused inputs are fully written off, Board s instructions dated 22-2-1995 shall apply i.e. the credit availed must be paid back. (ii) In cases where the value of the inputs is partially written of/reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of Cenv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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