2017 (8) TMI 515 - AT - Central Excise

Tribunal Upholds Order Denying Appeal: Rule 11(2) Violation Results in Credit Inadmissibility

The Tribunal upheld the impugned order, dismissing the appellant's appeal based on the violation of Rule 11(2) of CCR, 2004. The decision was grounded on ... SSI exemption - N/N. 8/2003 dated 1.3.2003 - CENVAT credit - department observed that during the month of August 2005, they have taken credit of duty received and used in the manufacture of final products during the year 2004-05 with a remark that these credit were not taken at the relevant period - Rule 11 (2) of the CCR - Held that: - the credit pertaining to year 2004-05 cannot be taken in year 2005-06 as the same lapses in the event of appellant's option to avail SSI exemption from the very beginning. During 2005-06 also once the appellants crosses exemption limit they can only take credit of inputs lying in stock or in process or contained in final product lying in stock on the date they started paying duty. In the present case, related inputs were admittedly received and used during 2004-05 itself. It is not the appellant's case that inputs were still lying in stock one way or the other when they graduated to payment of duty during 2005-06. The appellants have also argued that there is no time limit for taking CENVAT credit. I find that this right of the appellants can be allowed to be exercised to the extent such exercise is not inconsistent with provisions of Rule 11(2) and 3(2) of CENVAT Credit Rules, 2004. In the present situation, availment of credit as claimed by the appellants shall infringe on the operation of Rule 11(2) as well as Rule 3(2). Appeal dismissed - decided against appellant. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit in respect of inputs received and used in a financial year when final products were exempt under SSI notification can be availed in a subsequent financial year after the manufacturer ceases to be under exemption and commences paying full duty. 2. Whether the absence of an express time-limit in the CENVAT Credit Rules, 2004 for availment of credit permits retrospective or delayed availment of credit for inputs already received and used in an earlier financial year. 3. Whether availment of credit upon 'graduation' from SSI exemption is confined to credit attributable to inputs lying in stock, in process, or contained in final products on the date the assessee commences payment of duty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availment of CENVAT credit in a subsequent year where inputs were received and used in a prior year during which final products were exempt Legal framework: Rule 11(2) of the CENVAT Credit Rules, 2004 provides that any credit balance shall lapse where an option is exercised to avail SSI exemption for a financial year. Rule 3(2) addresses eligibility and utilization of credit. The interplay between the entitlement to CENVAT credit and the special SSI exemption regime governs whether previously incurred/availed credits survive when the exemption status changes. Precedent treatment: The appellant relied on authorities that recognize indefeasibility of eligible credit where the final product becomes dutiable (including a Supreme Court authority recognizing usable credit for duty payment). The Tribunal noted an earlier Final Order on an identical issue dismissing the assessee's appeal and followed the approach of the adjudicating authorities in applying Rule 11(2). Interpretation and reasoning: The Court accepted the reasoning of the Commissioner (Appeals) that where inputs were both received and used during the exempt financial year, any unavailed credit pertaining to that year would have lapsed upon exercise of the SSI exemption option for that year. The Tribunal emphasized that an assessee who was entitled to SSI exemption from the beginning of the year cannot, by subsequently deciding to pay duty in a later year, resurrect credit attributable to a year in which the exemption option caused lapse. The Court observed that the appellant did not contend that the relevant inputs were in stock, in process, or contained in finished goods at the time of transition to the duty-paying period; instead the admitted position was that inputs were received and used in the exempt year. Ratio vs. Obiter: Ratio - Where inputs were received and used in an exempt financial year and the assessee had exercised the SSI exemption option for that year, credit not availed during that year lapses under Rule 11(2) and cannot be availed in a subsequent year when the assessee commences payment of duty, absent facts showing inputs remained in stock/in process/contained in final products at the transition date. Obiter - General observations that eligible credit is a valuable right but is exercisable only consistent with CCR provisions. Conclusions: Availment of credit in the subsequent financial year was correctly disallowed because the inputs were received and used in the earlier exempt year and any unavailed credit lapsed by operation of Rule 11(2). The appeal on this ground fails. Issue 2 - Effect of absence of an express time-limit in CCR for taking CENVAT credit Legal framework: The CENVAT Credit Rules do not prescribe an express universal time-bar for taking credit; however, specific substantive rules (notably Rule 11(2) and Rule 3(2)) impose conditions and events (such as exercise of SSI exemption) that operate to extinguish or limit the right to credit. Precedent treatment: The appellant cited cases holding that eligible CENVAT credit, once lawfully accruing, is indefeasible and may be utilized when final products are dutiable. The Tribunal, however, treated those principles as subject to the statutory operation of specific rules governing lapse and eligibility. Interpretation and reasoning: The Court accepted that absence of a general time-limit does not confer an unfettered right to avail credit at any time; entitlement must be exercised in a manner consistent with express statutory provisions that curtail or extinguish credit in particular circumstances. The Commissioner (Appeals) had explicitly held that the appellant's reliance on the absence of a general time limit was misplaced so far as exercise of the right would be inconsistent with Rules 11(2) and 3(2). Ratio vs. Obiter: Ratio - Non-existence of a general time limit in CCR does not override specific provisions that cause lapse of credit (e.g., Rule 11(2)); therefore delayed availment cannot be allowed where such specific rules operate to extinguish the credit. Obiter - Remarks that inadvertent oversight in availment is not a ground to circumvent express statutory lapsing provisions. Conclusions: The argument that no statutory time-limit permits retrospective availment was rejected; availment is constrained by Rule 11(2) and Rule 3(2), and the absence of a general time limit is not determinative where those rules operate to lapse credit. Issue 3 - Scope of allowable credit upon cessation of SSI exemption and commencement of duty payment (stock/in process/final product criterion) Legal framework: The recognized rule in the context of 'graduation' from SSI exemption is that upon commencement of duty payment the assessee may take credit in respect of inputs lying in stock, in process, or contained in final products on the date duty payment begins; credit attributable to inputs received and used in a prior exempt year ordinarily cannot be taken later. Precedent treatment: The Commissioner (Appeals) and the Tribunal applied this principle to distinguish between credit legitimately taken upon transition (limited to items physically in stock/process/contained in stock) and credit relating to prior consumption that had already been used in manufacture during the exempt period. Interpretation and reasoning: The Court endorsed the Commissioner (Appeals) finding that the appellant did not claim, nor was it contended, that the inputs were present in any of the permissible categories at the date of commencement of duty payment. Because the inputs were received and used in the earlier year, no present physical stock/process/final product connection existed to justify post-facto availment of credit. Ratio vs. Obiter: Ratio - On 'graduation' from SSI exemption, availment of credit is admissible only in respect of inputs lying in stock, in process, or contained in final product on the date the assessee started paying duty; credit relating to inputs already consumed in an exempt period cannot be resurrected. Obiter - Observations explaining that allowing delayed availment would undermine Rule 11(2)'s object. Conclusions: The disallowance was justified because the claimed credit did not relate to inputs in stock, in process, or contained in final products at the transition date; therefore the claim could not be permitted upon commencement of duty payment. Overall Conclusion of the Court The Tribunal upheld the impugned order rejecting the delayed availment of CENVAT credit, agreeing with the Commissioner (Appeals) that Rule 11(2) (and Rule 3(2)) precluded the claimed credits where inputs were received and used in the exempt year and no permissible stock/process/final product nexus existed at the date of transition to duty payment. Accordingly the appeal was dismissed. The Tribunal also noted previous like-decided orders on the identical issue and found no infirmity in the impugned order.