2015 (12) TMI 234 - HC - Central Excise

Court rules in favor of Brake Shoe Castings manufacturer in Cenvat credit case

The Court found in favor of the appellant, a manufacturer of Brake Shoe Castings, in a case concerning the eligibility of Cenvat credit on furnace oil. ... Entitlement to Cenvat credit and recredit by reversal under Rule 9 of the Cenvat Credit Rules, 2004 - Inapplicability of Section 11B refund procedure to mere reversal of accounting entries - Invalidity of recovery action under Rule 14 read with Section 11A where recredit is validly taken - Quashing of show cause notice and order of demand where procedural premise is erroneousEntitlement to Cenvat credit and recredit by reversal under Rule 9 of the Cenvat Credit Rules, 2004 - Inapplicability of Section 11B refund procedure to mere reversal of accounting entries - Quashing of show cause notice and order of demand where procedural premise is erroneous - Appellant was entitled to recredit the Cenvat entries earlier reversed by it and the show cause notice and demand based on alleged wrongful recredit were unlawful. - HELD THAT: - The appellant had originally availed Cenvat credit on furnace oil and had the necessary invoices; the entries were subsequently reversed in the books but the appellant, having satisfied itself of admissibility, intimated the department by letter dated 25th April, 2005 enclosing original invoices and details before recrediting the account. Rule 9 permits taking Cenvat credit on the basis of prescribed documents and, on the admitted facts, the appellant complied with that procedure. The show cause notice proceeded on the incorrect premise that no permission was taken and that documents were not filed; in fact the department was informed and furnished the invoices and particulars, and if there were objections it should have sought clarification. The matter concerned an internal accounting recredit and not a refund requiring proceedings under Section 11B; there was no outflow of funds necessitating a refund application. Reliance on the Madras High Court decision in ICMC Corporation Ltd. supports that Section 11B is not applicable where there is merely recredit of entries. For these reasons the Tribunal's upholding of demand and interest was unsustainable and the show cause notice and consequent adjudication were quashed.Recredit by the appellant was valid; the show cause notice and the order demanding Cenvat credit and interest are set aside and quashed, and amounts deposited shall be refunded within three months on production of certified copy of this order.Final Conclusion: The Court allowed the appeal, holding that the appellant validly recredited Cenvat entries in accordance with Rule 9, Section 11B was inapplicable to the accounting reversal, and the departmental demand and interest based on the show cause notice were quashed with direction for refund. Issues:Claim of Cenvat credit on furnace oil, legality of recrediting entries, applicability of Rule 14 and Rule 15, demand of Cenvat credit and interest, entitlement to recredit amount previously reversed.Analysis:The case involved a manufacturer of Brake Shoe Castings who availed Cenvat credit on furnace oil but faced disallowance during a departmental audit. The appellant reversed the credit entries but later realized their eligibility for the credit based on furnace oil being an input as per the Rules. The appellant informed the department, enclosed necessary documents, and intended to recredit the amount. The department issued a show cause notice alleging unauthorized recrediting without proper permission or documents under Rule 9. However, the Court found that the appellant had initially followed the procedure correctly by filing proper invoice bills, and the subsequent reversal and recrediting were justified as per the Rules.The Court noted that the show cause notice was based on incorrect premises as the appellant had intimated the department and submitted required documents. The contention that a refund application under Section 11B was necessary was dismissed as it was not a refund case but an account entry reversal. Citing a Madras High Court judgment, the Court emphasized that Section 11B did not apply in such scenarios where there was no outflow of funds requiring a refund claim. Therefore, the appellant's actions of reversing and recrediting the entry were within the ambit of Rule 9, and Section 11B was deemed inapplicable.Consequently, the Court held that the appellant's recrediting of the amount was lawful, and the show cause notice, demand, and interest imposed by the department were deemed illegal and set aside. The appellant was entitled to a refund, and the department was directed to refund the amount within three months. The judgment clarified the procedural correctness of the appellant's actions and the invalidity of the department's demand based on incorrect assumptions regarding the recrediting of Cenvat credit entries.