2007 (8) TMI 578 - AT - Central Excise

Tribunal upholds Commissioner's order on silica oxides, emphasizing input duty credit rules.

The Tribunal dismissed the Department's appeal against the Commissioner's order regarding the demand under Rule 57CC for the amount payable on exempted ... Demand - Cenvat/Modvat ISSUES PRESENTED AND CONSIDERED 1. Whether, where common inputs are used in manufacture of both dutiable and exempted final products and the assessee has not maintained separate accounts as required by Rule 57CC(9), the assessee is obliged to reverse duty-credit by paying an amount calculated at 8% of the value of clearances of the exempted goods under Rule 57CC(1), or whether the department/authority may accept reversal limited to proportionate input-credit attributable to the exempted goods. 2. Whether a voluntary or on-investigation payment made by an assessee in the course of departmental inquiry can be treated as final compliance with Rule 57CC(1) (option to pay 8%) or must be treated as a deposit subject to adjudication. 3. Whether, in the absence of compliance with the machinery in Rule 57CC(1) or (9), the department is entitled to proceed to recover corresponding input credit (under general recovery provisions) as an alternative to invoking the 8% reversal under Rule 57CC. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Obligation to reverse 8% under Rule 57CC(1) vs. reversal of proportionate input credit Legal framework: Rule 57CC of the Central Excise Rules, 1944, provides that where exempted goods are cleared and separate accounts are not maintained, the assessee may reverse an amount calculated at 8% of the value of clearances of the exempted goods (Rule 57CC(1)); Rule 57CC(9) prescribes maintenance of separate accounts for inputs used in exempted goods. The Cenvat credit scheme permits credit only where duty is paid on the final product; if duty is not paid, corresponding input credit is not admissible and is recoverable under the Rules. Precedent treatment: The Tribunal has earlier upheld recovery at 8% under Rule 57CC and held that the obligation to follow Rule 57CC(1) or 57CC(9) is independent of other recovery mechanisms. Other Tribunal decisions (as relied upon before the Court) have also allowed departmental recovery of input-credit where Rule 57CC machinery was not available or not complied with. Interpretation and reasoning: The Court accepts the principle that Rule 57CC(1) gives an option to the assessee to pay 8% of the price of exempted goods where separate accounts are not maintained; that option cannot be imposed on an assessee. Conversely, if the assessee does not comply with or opt under Rule 57CC(1) and does not maintain accounts under Rule 57CC(9), the department remains free to recover the input duty credit used in manufacture of exempted goods by pursuing recovery under appropriate provisions. The adjudicating authority's acceptance of payment equal only to the proportionate input credit (instead of enforcing payment of 8%) effectively conferred an option on the assessee that is not provided by Rule 57CC and thus was open to challenge. However, the Court examined whether the facts showed the assessee had in fact availed the option or had only made a deposit during investigation. Ratio vs. Obiter: Ratio - Rule 57CC(1) provides an elective mechanism (8% reversal) where no separate accounts are maintained; the department may alternatively pursue recovery of wrongly availed input credit. Obiter - observations on comparative correctness of accepting proportionate input-credit reversal as a substitute for the 8% option in other factual matrices. Conclusion: The correct legal position is that an assessee who has not opted for and complied with Rule 57CC(1) and has not maintained separate accounts under Rule 57CC(9) cannot unilaterally substitute reversal of proportionate input credit for the statutory 8% calculation; the department, however, is entitled to pursue recovery of input-credit separately. The Court found no ground to interfere with the Commissioner's exercise in the present facts (see Issue 2 analysis). ISSUE-WISE DETAILED ANALYSIS - Issue 2: Treatment of payment made during investigation - deposit vs. compliance with Rule 57CC(1) Legal framework: Payments made during investigation may be treated as deposits unless the statutory procedure for acceptance/settlement (here Rule 57CC(1)) is complied with. Rule 57CC(1) requires fulfillment of conditions to avail the 8% option; mere payment without completing the statutory option may not extinguish departmental remedies. Precedent treatment: Administrative circulars and Tribunal decisions recognize that amounts paid during inspection/investigation may be characterized as deposits and that separate recovery/outcome depends on adjudication under the Rules. Some earlier decisions permitted department to recover corresponding input-credit under general recovery provisions where Rule 57CC machinery was not complied with. Interpretation and reasoning: The Court emphasized that although the assessee paid a sum during investigation, the subsequent issuance of a show cause notice under Rule 57CC signals that the payment was treated as a deposit pending adjudication. The assessees' reluctance to opt under Rule 57CC(1) meant they did not fulfill the statutory option; therefore the Commissioner's discretion to address the matter (including recovering proportionate input-credit) was engaged. The Court treated the payment as not automatically constituting compliance with the 8% reversal option. Ratio vs. Obiter: Ratio - Payments made during investigation should be regarded as deposits where the department proceeds to issue show-cause and adjudicate the entitlement; such payments do not ipso facto discharge the statutory option under Rule 57CC(1) unless procedures are complied with. Obiter - remarks on departmental practice of adjusting/accepting payments in varying manners across cases. Conclusion: The payment by the assessee during investigation was correctly treated as a deposit and not as conclusive exercise of the 8% option; the Commissioner's action in proceeding with adjudication and addressing entitlement to credit reversal accordingly was proper. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Departmental entitlement to recover corresponding input-credit where Rule 57CC machinery not complied with Legal framework: Under the Cenvat credit scheme and Rules, credit is admissible only where duty is paid on the final product; where exempted products are cleared without payment of duty, any credit wrongly taken on inputs is recoverable under applicable recovery provisions (including erstwhile Rule 57-I/Rule 12). Rule 57CC(1) provides an alternative statutory mechanism where separate accounts are not maintained. Precedent treatment: Tribunal and Board circulars have accepted that in absence of compliance with Rule 57CC(1) or where machinery for recovery under Rule 57CC is unavailable, the department can resort to recovery of corresponding input-duty credit taken incorrectly. Such approach has been recognized as consistent with the basic principle of the Cenvat scheme. Interpretation and reasoning: The Court reiterated the underlying principle that credit flows from payment of duty on final products; absent such payment, credit is not permissible. Consequently, the department is entitled to recover wrongly availed credit even if the assessee has not been proceeded against under the specific Rule 57CC(1) mechanism. The availability of alternative recovery remedies does not negate the statutory option provided to assessees but complements enforcement where the option is not exercised or statutory conditions are not met. Ratio vs. Obiter: Ratio - Departmental proceedings to recover corresponding input credit are permissible and not mutually exclusive with Rule 57CC(1); recovery under general provisions is valid where Rule 57CC machinery has not been followed by the assessee. Obiter - comparative efficacy of alternative remedies in different fact-situations discussed but not exhaustively decided. Conclusion: The department is entitled to recover the wrongly availed input credit used in manufacture of exempted products where the assessee has not complied with Rule 57CC(1) or maintained separate accounts under Rule 57CC(9). In the present case, given the factual findings (common inputs used, no separate accounts, payment during investigation treated as deposit), the Commissioner's approach in recovering proportionate input-credit and dropping further demand was upheld as legal and proper. FINAL DISPOSITION (as concluded by the Court) The departmental appeal challenging the Commissioner's order (which accepted reversal limited to proportionate input-credit rather than enforcing payment at 8% under Rule 57CC(1)) was dismissed because the Commissioner's findings and reasoning were found to be lawful and appropriate on the facts: the payment made during investigation was a deposit; the assessee had neither availed the statutory 8% option nor maintained separate accounts; and the department retains the right to pursue recovery of input-credit where Rule 57CC machinery is not followed (see cross-reference to Issues 1-3 above).