2007 (8) TMI 2 - SC - Central Excise

Exemption under Notification No. 14/2002-CE upheld where duty paid on yarn and CENVAT credit reversed before use

Commissioner of Central Excise, Mumbai- I Versus M/s Bombay Dyeing & Mfg. Co. Ltd

SC held that the assessee satisfied both conditions of item 1 of Notification No. 14/2002-CE: duty on yarn was paid before clearance of grey fabric and ... Cenvat Credit - Interpretation of Notification No. 14/2002-CE - benefit of exemption, both full and partial to a range of goods - demand raised for differential duty - HELD THAT:- In the present case, before the account could be debited and before the assessee could avail of CENVAT credit, the assessee has reversed CENVAT credit which would amount to the assessee not taking credit for duty paid on input (yarn). Learned counsel submitted that the assessee was free to reverse the credit before utilization of such credit. In the circumstances, it was urged that both the conditions of item no. 1 of the table to the notification stood fulfilled and, therefore, the assessee was entitled to claim the benefit of exemption at nil rate of duty in this case. Under the notification, mode of payment has not been prescribed. Further, exemption is given to the final product, namely, grey fabric under the Central Excise Act, 1944, levy is on manufacture but payment is at the time of clearance. Under the Act, payment of duty on yarn had to be at the spindle stage. However, when we come to the Exemption Notification no. 14/2002-CE, the requirement was that exemption on grey fabrics was admissible subject to the assessee paying duty on yarn before claiming exemption and subject to the assessee not claiming CENVAT credit before claiming exemption. The question of exemption from payment of duty on grey fabrics arose on satisfaction of the said two conditions. In this case, payment of duty on yarn on deferred basis took place before clearance of grey fabrics on which exemption was claimed. Therefore, payment was made before the stage of exemption. Similarly, on payment of duty on the input (yarn) the assessee got the credit which was never utilized. That before utilization, the entry has been reversed which amounts to not taking credit. Hence, in this case, both the conditions are satisfied. Hence item no. 1 of the table to notification no. 14/2002-CE would apply and accordingly the grey fabrics would attract nil rate of duty. Accordingly, the civil appeal filed by the Department fails and the same is dismissed with no order as to costs. Issues Involved:1. Interpretation of Notification No. 14/2002-CE.2. Compliance with conditions for exemption under Notification No. 14/2002-CE.3. Payment of duty on yarn at spindle stage vs. clearance stage.4. Availment and reversal of CENVAT credit.5. Applicability of Trade Notice No. 40/96 and Rule 49A of Central Excise Rules, 1944.Detailed Analysis:1. Interpretation of Notification No. 14/2002-CE:The civil appeal revolves around the interpretation of Notification No. 14/2002-CE, which grants exemption to certain goods, including grey fabrics. The notification specifies that grey fabrics not subjected to any process are chargeable to nil rate of duty, provided two conditions are met: payment of duty on yarn and non-availment of CENVAT credit on inputs.2. Compliance with Conditions for Exemption:The Department contended that the assessee did not fulfill the twofold conditions for claiming nil rate of duty under item 1 of the notification: (i) payment of duty on yarn at the spindle stage, and (ii) non-availment of CENVAT credit on inputs. The Department argued that the assessee failed to pay duty on yarn at the spindle stage and had taken credit for the duty paid on inputs, thereby disqualifying them from claiming the exemption.3. Payment of Duty on Yarn at Spindle Stage vs. Clearance Stage:The assessee opted to pay duty on yarn on a deferred basis at the time of clearance of grey fabrics for home consumption, instead of at the spindle stage. The Commissioner (A) and the Tribunal allowed this deferment based on Trade Notice No. 40/96, which permitted deferment of duty payment subject to interest. The Department argued that this deferment was not permissible under the new Central Excise Rules, 2002, which replaced the earlier rules.4. Availment and Reversal of CENVAT Credit:The assessee reversed the CENVAT credit before utilizing it, arguing that this amounted to not taking credit for duty paid on inputs. The Department contended that the reversal of credit was not in compliance with the notification's conditions, as the credit had already been availed.5. Applicability of Trade Notice No. 40/96 and Rule 49A:The Department argued that Trade Notice No. 40/96, which allowed deferment of duty payment, was based on Rule 49A of the Central Excise Rules, 1944, which was not applicable after the introduction of Central Excise Rules, 2002. The assessee contended that the trade notice was issued to address operational difficulties and was still in effect.Judgment:The Court held that the assessee complied with the conditions for claiming exemption under Notification No. 14/2002-CE. The payment of duty on yarn on a deferred basis before the clearance of grey fabrics satisfied the requirement of paying duty before claiming exemption. The reversal of CENVAT credit before utilization amounted to not taking credit for duty paid on inputs. Therefore, both conditions for claiming nil rate of duty were met.The Court also noted that the mode of payment was not prescribed under the notification, and exemption was granted to the final product (grey fabrics) under the Central Excise Act, 1944. The payment of duty on yarn at the spindle stage was a requirement under the Act, but the notification allowed for deferment of duty payment subject to interest.The Court dismissed the Department's appeal, affirming the Tribunal's decision that the assessee was entitled to claim nil rate of duty on grey fabrics. The judgment emphasized that the conditions for exemption must be interpreted in a manner that does not impose undue hardship on the assessee.Conclusion:The civil appeal filed by the Department was dismissed, and the assessee was allowed to claim nil rate of duty on grey fabrics under Notification No. 14/2002-CE, with no order as to costs. The Court upheld the Tribunal's decision, affirming that the assessee had complied with the conditions for exemption.