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

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 ... Interpretation of exemption notification - nil rate of duty subject to pre-conditions - deferred payment of excise duty on inputs - reversal of CENVAT credit and non availment - trade notice permitting deferment of duty - interest under section 11AB and Rule 8(3)Nil rate of duty subject to pre-conditions - reversal of CENVAT credit and non availment - Entitlement to nil rate of duty under item 1 of Notification No.14/2002 CE where duty on yarn was paid on a deferred basis and CENVAT credit previously taken was subsequently reversed before utilisation - HELD THAT: - The Court examined item 1 of the Table to Notification No.14/2002 CE which grants nil rate to woven fabrics 'not subjected to any process' subject to two conditions: payment of appropriate excise duty on textile yarn and that no CENVAT credit for duty paid on inputs has been taken. The Court held that the notification does not prescribe the specific mode or timing of payment beyond the requirement that duty on yarn be paid before claiming the exemption on grey fabrics. Where duty on yarn was paid on a deferred basis prior to clearance of grey fabrics (the stage at which exemption is claimed), the condition of payment was satisfied. Similarly, a reversal of CENVAT credit prior to its utilisation amounts to non availment of credit for the purposes of the condition. Relying on the principles in Collector of Central Excise v. Dai Ichi Karkaria Ltd., the Court noted that a validly taken credit can be renounced by the manufacturer before utilisation and non utilisation is equivalent to not taking credit for the purpose of the exemption. Applying these conclusions to the facts, both pre conditions in item 1 were found to be satisfied and item 1 therefore applied, entitling the assessee to nil rate of duty on grey fabrics. [Paras 8, 9]Both conditions in item 1 were satisfied (deferred payment of duty on yarn before clearance and reversal of CENVAT credit before utilisation); item 1 applies and grey fabrics attract nil rate of duty.Deferred payment of excise duty on inputs - trade notice permitting deferment of duty - interest under section 11AB and Rule 8(3) - Permissibility of deferring payment of duty on yarn to the stage of clearance of grey fabrics (as effected under Trade Notice No.40/96) and the consequence of payment with interest under Section 11AB/Rule 8(3) - HELD THAT: - The Court rejected the Department's contention that reliance on Trade Notice No.40/96 was impermissible because Rule 49A of the earlier Central Excise Rules, 1944 was no longer in force. The Court observed that the exemption notification did not fix a particular mode of payment and that exemption attaches to the final product at the clearance stage, while duty on yarn may lawfully be paid on a deferred basis provided payment is made before claiming the exemption. Payment on a deferred basis accompanied by interest as prescribed under Section 11AB read with Rule 8(3) of the Central Excise Rules, 2002 satisfied the requisite condition. Consequently, the Commissioner (Appeals) and the Tribunal were justified in upholding the assessee's position permitting deferment subject to payment of duty with interest. [Paras 8]Deferment of payment of duty on yarn to the grey fabrics clearance stage (as effected under Trade Notice No.40/96) is acceptable where duty is paid before claiming exemption and interest under Section 11AB/Rule 8(3) is payable for the deferment.Final Conclusion: The appeal by the Department is dismissed. The Court held that for the period 13.3.2002 to 15.9.2002 the assessee satisfied the conditions of item 1 of Notification No.14/2002 CE (deferred payment of duty on yarn before claiming exemption and reversal/non utilisation of CENVAT credit), and accordingly grey fabrics attract nil rate of duty; deferment with payment of interest under Section 11AB/Rule 8(3) was acceptable. 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.