2012 (1) TMI 106 - AT - Central Excise

Tribunal allows appeal on CENVAT credit, rejects duty demand

The Tribunal ruled in favor of the appellant, setting aside the impugned order and allowing the appeal based on the established merits of the case ... Duty demand - Recovery of the credit in under Rule 14 of the CENVAT Credit Rules, 2004 read with the proviso to Section 11A(1) of the Central Excise Act - Bar of limitation - Held that:- Rule 3(5) provides that inputs or capital goods, on which CENVAT credit has been taken, can be removed as such from the factory of the manufacturer of the final products on payment of an amount equal to the credit availed thereon. Such removal is required to be made under an invoice referred to in Rule 9 of the Central Excise Rules, 2002. If these provisions are carefully perused, it would become clear that the removal of goods envisaged is a removal for good just like the removal of an excisable final product. A case of removal of input or capital goods to a job worker for further processing, testing, repair, re-conditioning or any other purpose is governed by Rule 4(5)(a) of the CENVAT Credit Rules, 2004. If the job-worked goods are not received back in the factory of the manufacturer of final product within such period, the manufacturer of final product shall pay an amount equivalent to the CENVAT credit attributable to the input or capital goods, by debiting the amount in the CENVAT account or otherwise. Rule 4(5)(a) allows CENVAT credit on the input to be taken by the manufacturer of final product before removal of the input to the job worker. It was this right which was exercised by the present appellant and the same is not assailable - manufacturer of final product is entitled not only to avail credit on the input supplied to their job worker but also to take credit of the duty paid on the intermediate product by the job worker - Following decision of VENLON POLYESTER FILM LTD. Versus COMMR. OF C. EX., BANGALORE-III [2007 (9) TMI 354 - HIGH COURT OF KARNATAKA] - Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a manufacturer of final products who supplies inputs to a job worker without reversing previously taken CENVAT credit is nonetheless entitled to retain CENVAT credit on those inputs and to avail CENVAT credit of duty paid by the job worker on the job-worked (intermediate) goods, under the CENVAT Credit Rules, 2004 (notably Rules 3(5) and 4(5)(a)) and related provisions. 2. Whether recovery of CENVAT credit, interest and penalty relating to such supplies to a job worker is barred by limitation where departmental internal audit recorded the omission earlier but the show-cause notice was issued after a substantial delay. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to CENVAT credit where inputs are supplied to a job worker without reversal and duty is paid by the job worker on the job-worked goods Legal framework: Rule 3(5) provides that inputs or capital goods on which CENVAT credit has been taken can be removed from the manufacturer's factory on payment of an amount equal to the credit availed, under an invoice as per Rule 9 of the Central Excise Rules. Rule 4(5)(a) governs removal of inputs to a job worker and permits the manufacturer of final products to take CENVAT credit on inputs before removal to the job worker, subject to the condition that job-worked goods are returned within the specified period or else the manufacturer must pay an amount equivalent to the credit attributable to those inputs. Precedent treatment: The Court relied on prior higher-court authority interpreting analogous facts to allow the manufacturer to both retain input credit and avail credit of duty paid by the job worker on the intermediate product. The judgment applies those prior authorities to uphold the manufacturer's entitlement. Interpretation and reasoning: The Tribunal construed Rule 3(5) as addressing removal of inputs as removal for good, akin to removal of an excisable final product, requiring appropriate invoicing where payment of an amount equal to credit takes place. Rule 4(5)(a) was interpreted as specifically governing the position of a manufacturer who sends inputs to a job worker: it expressly permits taking CENVAT credit on the input prior to removal to the job worker, and contemplates recovery only if the job-worked goods are not returned within the stipulated period. The Tribunal held that exercising the right under Rule 4(5)(a) to take credit before removal was lawful and not open to departmental attack in the circumstances presented. Ratio vs. Obiter: The holding that a manufacturer may lawfully retain CENVAT credit on inputs supplied to a job worker and claim credit of duty paid by the job worker on the job-worked goods, where Rule 4(5)(a) is properly invoked, is ratio decidendi as applied to the facts. Observations on the revenue-neutrality argument (that reversal by the manufacturer combined with credit availed by the job worker would result in no revenue loss) are explanatory and supportive but ancillary to the primary legal holding. Conclusions: The Tribunal concluded that the appellant validly exercised the right under Rule 4(5)(a) and that the demand on merits was unsustainable. The order of demand on this ground was set aside. Issue 2 - Limitation for recovery where departmental audit discovered the omission but show-cause notice issued after delay Legal framework: Limitation for recovery proceeds from the date of knowledge; departmental audit noting an omission constitutes knowledge for limitation purposes, triggering the period within which a show-cause notice must be issued. Precedent treatment: The Tribunal acknowledged prior authority holding that delay between departmental knowledge (via audit) and issuance of show-cause notice can render recovery time-barred. The appellant relied on such precedents to contend the show-cause notice issued well beyond the normal limitation period measured from departmental knowledge. Interpretation and reasoning: The Tribunal noted that internal audit had recorded the non-reversal as early as December of a given year, whereas the show-cause notice was issued only in April nearly three years later, a period described as 'far beyond the normal period of limitation from the date of knowledge.' On this factual matrix the Tribunal indicated that the appellant had a prima facie good case on limitation. However, having resolved the dispute on merits against the Revenue, the Tribunal did not undertake a detailed limitation analysis and expressly stated it was unnecessary to enter into a full discussion of limitation. Ratio vs. Obiter: The Tribunal's acceptance that there was a prima facie case on limitation is obiter in this decision because the ultimate disposal turned on the merits; no definitive ratio on limitation was laid down after full consideration. Conclusions: While the Tribunal found that the appellant appeared to have a valid limitation defence based on the department's prior audit knowledge and the delayed issuance of the show-cause notice, it did not decide the limitation issue finally because the substantive entitlement on merits disposed the appeal in favour of the appellant. Additional procedural/remedial conclusions The impugned demand (duty, interest and penalty) was set aside and the appeal allowed on the merits, with the Tribunal relying on the statutory scheme of Rules 3(5) and 4(5)(a) and applicable higher-court authority to conclude that the manufacturer's actions were permissible.