2008 (10) TMI 54 - AT - Central Excise

Cenvat credit legally taken and used on dutiable products need not be reversed after products became exempt - Rule 12/57-I/57AH

HMT Versus COMMISSIONER OF CENTRAL EXCISE, PANCHKULA

CESTAT, NEW DELHI - AT held for the appellant and against the Revenue that Cenvat credit legally taken and utilized on dutiable final products need not be ... Liability to reverse the proportionate Cenvat Credit in respect of inputs lying in stock as such or contained in finished product, while availing the exemption benefit under Notification No. 23/2004-C.E - violation of the provisions of Rule 6(1) - Availing Cenvat Credit on inputs and capital goods - manufacture of Tractors, Tractors Parts and Engines - By Notification No. 23/2004-C.E., Tractors were exempted from payment of whole of excise duty - Whether the Order dated 23-11-2006 passed by the CESTAT, Bangalore enunciates the correct position of law and hence the input credit taken, when the final product was dutiable, need not be reversed on the final product becoming exempt from payment of duty w.e.f. 9-7-2004? HELD THAT:- In the present case, there is no objection of the Revenue whatsoever credit taken by the Appellants and its utilisation at the clearance of the dutiable final products. So, the taking of credit and its utilisation were correct. The Hon'ble Supreme Court in the case of Dai Ichi Karkaria Ltd. [1999 (8) TMI 920 - SUPREME COURT (LB)] decided that when the credit was legally taken and utilised, cannot demanded unless there is specific provision. It is settled that there is no one to one co-relation of utilisation of credit and use of inputs in the Modvat/Cenvat Scheme. So, it cannot be said that that the Appellants utilised the credit wrongly and the provisions of Rule 12 of Rules 2002 equivalent to Rule 57-I, Rule 57AH of Rules 1944 would not apply. On perusal of the Rule 6 of Rules and the corresponding Rules, as mentioned, we are of the view that the Appellants had correctly taken the credit and utilised, when the final product was dutiable and there is no requirement to reverse the credit on final product becoming exempt and such credit cannot be recovered under Rule 12 of Rules 2002 corresponding to Rule 57-I, 57AH of Rules 1944. We hold that when the input-credit legally taken and utilised on the dutiable final products, need not be reversed on the final product becoming exempt subsequently w.e.f. 9-7-2004. The decision of the Bangalore Bench in the case of TAFE Ltd. (Tractor Division) v. CCE, Bangalore - [2006 (11) TMI 48 - CESTAT, BANGALORE] enunciated the correct position of the law. The issue is thus, answered in favour of the assessee and against the Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether input/Cenvat credit legally taken and utilised when the final product was dutiable must be reversed when the final product subsequently becomes exempt from excise duty w.e.f. 9-7-2004. 2. Whether Rule 6(1) of the Cenvat Credit Rules, 2002 and the recovery provision (Rule 12 of Rules 2002 / corresponding provisions in earlier Rules) permit recovery of legitimately taken and utilised credit solely because of subsequent exemption of the final product. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reversal of legally taken and utilised input/Cenvat credit on subsequent exemption of final product Legal framework: The question arises under the Modvat/Cenvat regime as embodied in successive rules (Rules 1944, Rules 2001, Rules 2002, Rules 2004). Key provisions considered are the prohibition on availing credit for inputs used in manufacture of exempted final products (Rule 57C / corresponding rules including Rule 6(1) of Rules 2002) and provisions for recovery where credit has been taken or utilised wrongly (Rule 57-I / Rule 57AH / Rule 12 of Rules 2002 / corresponding earlier provisions). Precedent treatment: The Court examined (a) a Five-Member Bench decision holding that legitimately taken and utilised Modvat/Cenvat credit need not be reversed on subsequent exemption, (b) a Division Bench that considered later amendments and held the opposite, and (c) the Supreme Court decision which observed that there is no provision in the Rules for reversal of credit except where it has been illegally or irregularly taken. Various High Court decisions and tribunal benches were also considered; some follow non-reversal (indefeasibility) while others adopt reversal where specific recovery provisions are read to apply. Interpretation and reasoning: The Court analysed (i) the principle that under the Modvat/Cenvat scheme a manufacturer, once entitled and having validly taken credit when the final product was dutiable, acquires an indefeasible right to utilise that credit unless the credit was irregular or illegal; (ii) there is no one-to-one correlation requirement between specific raw material and a final product under the scheme; (iii) recovery provisions (Rule 57-I / Rule 12) apply to credit taken or utilised wrongly, not to credit validly taken and utilised when the product was dutiable; and (iv) subsequent exemption of the final product does not retroactively render previously lawful availment and utilisation of credit wrongful in absence of a specific statutory provision to that effect at the relevant time. Ratio vs. Obiter: Ratio - where credit was lawfully taken and lawfully utilised at the time the final product was dutiable, such credit is not liable to reversal solely because of a subsequent exemption of the final product unless there is a specific statutory provision permitting such reversal. Obiter - observations on subsequent amendments and transitional provisions (e.g., insertion of sub-rule providing reversal in later rules/notifications) were noted but not decided on the merits because the reference did not require adjudication of retrospective effect. Conclusions: The Court concluded that input/Cenvat credit legally taken and utilised when the final product was dutiable need not be reversed upon subsequent exemption of the final product w.e.f. 9-7-2004; recovery under Rule 12 of Rules 2002 (equivalent to Rule 57-I / Rule 57AH) is not available in such circumstances absent illegality or a specific recovery provision operative at the relevant time. Issue 2 - Applicability of Rule 6(1) (prohibition) and Rule 12 / recovery provisions to legitimately taken credit Legal framework: Rule 6(1) of Rules 2002 (corresponding to earlier Rule 57C etc.) restricts availing credit for inputs used in manufacture of exempted goods; Rule 6(2) / related provisions (e.g., Rule 57CC / Rule 57AD(2)) provide mechanisms for adjustment/separate accounts. Recovery provisions (Rule 57-I / Rule 57AH / Rule 12) address recovery where credit is taken or utilised wrongly. Precedent treatment: Some benches have interpreted amended recovery provisions as enabling reversal where inputs were in stock or in process when exemption crystallised; others have held that those recovery provisions target wrongful or irregular availment not bona fide, lawfully taken credit. Interpretation and reasoning: The Court distinguished between (a) prohibition at the time of entitlement (i.e., credit cannot be taken if at that time the final product is exempt or liable to nil rate), and (b) subsequent contingencies (a later exemption) which do not vitiate a previously valid entitlement. The Court emphasised textual and purposive reading: recovery provisions apply to wrongly taken/ utilised credit; there was no contemporaneous statutory provision that rendered lawful credit taken earlier unlawful merely because of a later exemption. Administrative circulars and later notifications inserting explicit reversal provisions were considered clarificatory/transitional and not operative to affect rights before their enactment; however the Court refrained from deciding issues of retrospective effect since not referred. Ratio vs. Obiter: Ratio - Rule 6(1) prohibits taking credit where on the date of entitlement the end product is exempt; it does not operate to nullify previously valid credit because of later exemption. Recovery rules apply to wrongful/irregular take/ utilization; they do not automatically authorize recovery of validly taken and utilised credit solely due to subsequent exemption. Obiter - comments on Board circulars, later rule insertions, and their prospective/clarificatory character; the Court did not decide retrospective applicability of later amendments. Conclusions: The Court held Rule 6(1) is inapplicable to reverse credit validly taken and utilised when the final product was dutiable; recovery under Rule 12 (and corresponding earlier provisions) is not permissible in the absence of illegality or specific enabling provision at the relevant time. The tribunal benches following non-reversal were held to reflect the correct position of law. Cross-references and final determination 1. The decision aligns with the view that the Supreme Court's observation - no provision for reversal except where credit was illegally or irregularly taken - is determinative for the period in question. 2. The Court approved earlier tribunal benches and High Court decisions that sustained the indefeasibility of lawfully taken and utilised credit upon subsequent exemption, and answered the reference accordingly in favour of non-reversal of credit.