2006 (2) TMI 576 - AT - Central Excise

Revenue's Appeal Dismissed: Court Upholds Small-Scale Unit's Modvat Credit Utilization, Affirms Indefeasibility Principle.

The revenue's appeal challenging the Commissioner (Appeals) order quashing a demand of Rs. 56,427 under Rule 12 of the Cenvat Credit Rules was dismissed. ... Demand - Cenvat/Modvat - Inputs - Reversal of outstanding credit - HELD THAT:- It is to be noted that it remains ruled by the Apex Court that Modvat credit is indefeasible. The effect of the ruling is that credit once correctly taken and utilised is incapable of being set aside, made void. In the present case, the revenue is demanding back credit which was correctly taken and utilised relying on rule 9(2). This is not permissible in view of the ruling of the Supreme Court in Dai Ichi Karkaria [1999 (8) TMI 920 - SUPREME COURT]. Coming to the submission of the learned DR that assessee opting for exemption must fulfil the terms of the exemption, it is to be noted that exemption is in terms of notification issued from year to year and not in terms of Rule 9(2) of Cenvat Credit Rules. There is no reference or incorporation of the condition of Rule 9(2) in those notifications. That apart, Rule 9(2) cannot be interpreted in a manner as to undermine the indefeasibility of Modvat credit. A reading of the said rule would make it clear that what is required in terms of the rule is to determine the Cenvat credit taken on the inputs in stock and debit it from the credit balance, 'if any”, lying in assessee’s credit, and further credit balance, 'if any”, lapsing and not recall of Modvat credit already utilised correctly. If the Rule contemplated additional cash payment on account of balance in Cenvat credit being insufficient, the Rule would not have qualified the credit balance as balance ”if any”. The addition of those words make it clear that Cenvat credit balance alone is contemplated and no additional payment. An interpretation that requires additional payment if the balance in the credit account is not sufficient to meet debit of Cenvat credit on inputs in stock etc. would be to permit recall of Modvat credit correctly utilised. Such an interpretation goes against the scheme of Cenvat credit and the language of Rule 9(2). Thus, there is no merit in the appeal of the revenue. It fails and is rejected. Issues:Challenge to order quashing demand under Rule 12 of Cenvat Credit Rules.Analysis:1. The appeal was filed by the revenue challenging the Commissioner (Appeals) order quashing a demand of Rs. 56,427 under Rule 12 of the Cenvat Credit Rules.2. The respondent, a small scale unit, availed annual value-based duty exemption, with no Modvat credit on inputs for exempt clearances, followed by taking Modvat credit upon duty payment.3. Rule 9(2) of Cenvat Rules pertains to transition from duty paid to exempt clearances, requiring payment equivalent to Cenvat credit upon opting for exemption.4. The demand arose when the appellant reverted to exemption, leading to a dispute over the required payment, which was set aside in appeal citing relevant legal precedents.5. The revenue contended that the assessee must pay the Cenvat credit amount upon opting for exemption, citing legal principles and judgments emphasizing strict interpretation of exemption provisions.6. The respondent argued that recovery under Rule 12 is limited to cases of wrongly taken or utilized credit, which did not apply in this scenario compliant with Cenvat Credit Rules.7. Relying on legal precedents and the Apex Court's ruling on the indefeasibility of Modvat credit, the respondent emphasized that correctly utilized credit cannot be reclaimed.8. The record confirmed the correct initial taking and utilization of credit, which cannot be demanded back, as established by legal judgments favoring the respondent.9. The Apex Court's ruling on the indefeasibility of Modvat credit prohibits demanding back correctly taken and utilized credit, as attempted by the revenue in this case.10. Exemption terms are governed by yearly notifications, not Rule 9(2) of Cenvat Credit Rules, and interpreting Rule 9(2) to undermine credit's indefeasibility is not permissible.11. The appeal of the revenue lacked merit as the interpretation requiring additional payment upon insufficient credit balance contradicted the scheme of Cenvat credit and Rule 9(2), leading to its rejection.