2018 (1) TMI 1168 - HC - Central Excise

CESTAT decision upheld by High Court: CENVAT credit need not be reversed for exempted final products

The High Court upheld the CESTAT's decision, ruling that credit once validly taken need not be reversed if the final products become exempted ... CENVAT credit - dutiable product subsequently becoming exempted product - rule 6(1) of the CCR, 2002 - Held that: - the decision in the case of Principal Commissioner of Central Excise Versus M/s. TVS Electronics Ltd. [2017 (8) TMI 827 - MADRAS HIGH COURT] is squarely applicable to the facts of the case, where it was held that If credit can be taken against excise duty on a final product manufactured on the very day, it makes it abundantly clear that there need not be co-relation between the input and the goods cleared and as a result, validly taken credit need not be reversed - appeal dismissed - decided against Revenue. Issues Involved:1. Whether the CESTAT is right in holding that credit once validly taken need not be reversed if the final products become exempted subsequently in view of Rule 6(1) of CCR, 2002 which mandates reversal of credit in respect of inputs used in exempted final products.Detailed Analysis:1. Background and Context:The case involves M/s. Wipro Ltd, Unit II, Puducherry, engaged in the manufacture of Computers and parts of Computers. Wipro was availing CENVAT credit on components/inputs used in manufacturing as per Rule 3 of the CENVAT Credit Rules, 2002 and 2004. However, with effect from 09.07.2004, a full exemption from payment of Central Excise duty was granted, making the total credit involved in the inputs, lying in stock, as such or contained in the finished goods/semi-finished goods, as on 08.07.2004, not allowable in terms of Rule 6(1) of the CCR, 2002.2. Rule 6(1) of CCR, 2002:Rule 6(1) stated, 'Cenvat credit shall not be allowed, on such quantity of input, which is used in the manufacture of exempted goods, except in the circumstances mentioned, in sub-rule (2).' This implies that CENVAT credit on inputs used in the manufacture of exempted final products is not permissible.3. Adjudicating Authority's Decision:The adjudicating authority confirmed the demand for recovery of Rs. 1,75,40,771/- from Wipro, along with interest and a penalty of Rs. 10,00,000/-, under Rule 13 of the CCR, 2002, vide Order-in-Original No.19/2005 dated 30.11.2005.4. CESTAT's Decision:Wipro appealed to CESTAT, Chennai, which set aside the adjudicating authority's order and allowed the appeal. CESTAT observed that the indefeasible right to claim CENVAT credit cannot be denied unless required by law for extinguishment of such right. The Tribunal held that the abridgment of vested rights is recognized by law from 01.03.2007, incorporating sub-rule 3(2) to rule 11 of the CENVAT Credit Rules.5. Appellant's Arguments:The Commissionerate of Central Excise, Puducherry, argued that the CESTAT's decision was not legal and proper as per the CENVAT Credit Scheme. The appellant contended that the basic object of the CENVAT Credit Scheme is to avoid the cascading effect of duties on the price of the final product. If the final product is exempt, allowing credit on inputs would mean not taxing the inputs as well as the final product, which goes against the scheme's intent.6. Legal Precedents and Interpretations:The appellant cited various legal precedents, including decisions from the Allahabad High Court and Delhi Tribunal, which supported the view that CENVAT credit must be reversed if the final products become exempt. The appellant argued that Rule 11(3) of the CENVAT Credit Rules, 2004, introduced with effect from 01.03.2007, mandates the reversal of credit for inputs lying in stock and inputs contained in exempted finished goods, reinforcing the legal position under Rule 6(1) of CCR, 2002.7. High Court's Decision:The High Court referenced a similar case (C.M.A.No.2737 of 2015) where the Division Bench held that credit once validly taken need not be reversed if the final products become exempted subsequently. The Court noted that the Supreme Court had dismissed the SLP preferred against that judgment, making it binding. Consequently, the High Court dismissed the instant Civil Miscellaneous Appeal, answering the substantial question of law in favor of the assessee and against the revenue.Conclusion:The High Court upheld the CESTAT's decision, affirming that the credit once validly taken need not be reversed if the final products become exempted subsequently, in line with the precedent set by the Division Bench in a similar case. The appeal was dismissed, and the substantial question of law was answered against the revenue.