Cenvat credit and fire loss: reversal condition for remission cannot apply before the prospective amendment, but destroyed-input credit stays inadmissible.
Cenvat credit on inputs or raw materials destroyed in fire, and not used in the manufacture of final products, remained inadmissible because the credit scheme permits availment only on inputs used in or in relation to manufacture; the denial of such credit was upheld. For finished goods destroyed in fire, remission of duty could not be made conditional on reversal of Cenvat credit for the pre-7-9-2007 period, because the rule expressly requiring reversal operated only prospectively from that date and had no retrospective effect. The result was that the reversal condition was removed for the relevant earlier period while the credit denial on destroyed inputs was maintained.
Issues: (i) Whether Cenvat credit availed on inputs or raw materials destroyed in fire, but not used in manufacture of the final product, was admissible and could be retained when remission was claimed; (ii) Whether remission of duty on finished goods destroyed in fire could be made conditional upon reversal of Cenvat credit on inputs used in those finished goods for the period prior to 7-9-2007.
Issue (i): Whether Cenvat credit availed on inputs or raw materials destroyed in fire, but not used in manufacture of the final product, was admissible and could be retained when remission was claimed.
Analysis: The credit scheme permits availment only on inputs used in or in relation to manufacture. Since the raw materials and inputs in question were destroyed in fire and were not used in the manufacture of the final product, the credit taken thereon did not satisfy the basic admissibility condition. The earlier circular and the subsequent judicial development did not alter this position for such inputs.
Conclusion: The rejection of remission and denial of Cenvat credit on raw materials or inputs destroyed in fire was upheld, and this issue was decided against the assessee.
Issue (ii): Whether remission of duty on finished goods destroyed in fire could be made conditional upon reversal of Cenvat credit on inputs used in those finished goods for the period prior to 7-9-2007.
Analysis: The condition of reversal was founded on a Board circular issued on the basis of an earlier view that was later overruled by the Larger Bench. The amendment inserting Rule 3(5C) in the CENVAT Credit Rules, 2004 operated only from 7-9-2007 and was not retrospective. For the relevant period, there was no valid legal basis to insist on reversal of Cenvat credit as a condition for remission of duty on finished goods destroyed in fire.
Conclusion: The condition requiring reversal of Cenvat credit on inputs used in the finished goods was held unsustainable for the pre-7-9-2007 period, and this issue was decided in favour of the assessee.
Final Conclusion: The revision was disposed of by upholding the denial of credit on destroyed inputs while modifying the lower order to remove the reversal condition attached to remission of duty on finished goods destroyed in fire for the relevant period.
Ratio Decidendi: A later amendment expressly requiring reversal of Cenvat credit on inputs used in goods whose duty is remitted applies only prospectively, and in the absence of such retrospective operation, reversal cannot be insisted upon for periods prior to the amendment, though credit on inputs not used in manufacture remains inadmissible.