2018 (7) TMI 850 - AT - Central Excise

Tribunal Clarifies Cenvat Credit Rule 11(3)(ii) on Exemptions: Legal Analysis & Ruling

The Tribunal held that Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 does not mandate the lapsing of balance credit in all exemption situations. The ... Transitional provisions - CENVAT Credit - requirement of reversal of credit while opting exemption - Department took the view that even this cenvat credit balance amount should lapse in view of the provisions of Rule 11 (3) (ii) of Cenvat Credit Rules, 2004 Held that:- Sub-rule (3) (i) ibid will apply when the assessee opts for an exemption from the whole of duty of excise leviable under a notification issued under Section 5A of the Central Excise Act, 1944. Sub-rule (3) (ii) ibid will be attracted only to those assessees who are confronted with absolute exemption in respect of final product/s manufactured by them, in which case the entire balance of cenvat credit lying in his account shall lapse and the same shall not be allowed to be utilized for payment of duty for home consumption or for export - in sub rule 3 (i) ibid, the assessee has to ‘opt‛ for the exemption whereas in sub-rule 3 (ii) ibid, there is no such option available to the assessee and the absolute exemption that may have been brought forth under Section 5A ibid would apply unilaterally to the related final product manufactured by the assessee. It is important to note that the law makers have not incorporated the requirement of payment of cenvat credit equivalent to credit taken by the assessee in respect of inputs lying in stock or in process in sub rule 3 (ii) ibid. This is because once the entire cenvat credit account is reduced to naught, there will be no CENVAT credit that will be available whatsoever, under sub-rule 3 (ii) ibid, for the assessee to avail. The impugned order then cannot sustain and will require to be set aside - appeal allowed - decided in favor of appellant. Issues:1. Interpretation of Rule 11 (3) (ii) of Cenvat Credit Rules, 2004 regarding lapsing of balance credit in cenvat account upon opting for exemption.2. Applicability of Rule 11 transitional provisions to both sub-rules 3 (i) and 3 (ii).Analysis:1. The case involved manufacturers of cotton textile fabrics and made-ups who opted to clear goods claiming exemption under Notification No.30/2004-CE. Upon exemption, they reversed cenvat credit but still had a balance credit in their account. The dispute arose when the Department contended that this remaining credit should lapse as per Rule 11 (3) (ii) of Cenvat Credit Rules, 2004. The original authority upheld this view, imposing a penalty. The Commissioner (Appeals) set aside the penalty but confirmed the credit lapse. The core argument by the appellant was that Rule 11 (3) (ii) applies only to final products exempted absolutely under Section 5A of the Act, not to conditional notifications like the one in this case.2. The Tribunal analyzed the transitional provisions of Rule 11, specifically sub-rules 3 (i) and 3 (ii). The key contention was whether both sub-rules should be subject to the same treatment. The Tribunal emphasized the use of semicolon and the disjunctive 'or' between the sub-rules, indicating distinct alternatives. The legislative intent was deemed clear that sub-rules 3 (i) and 3 (ii) are separate and independent, each with specific conditions. Sub-rule 3 (i) applies when an assessee opts for an exemption notification, requiring payment equivalent to cenvat credit. In contrast, sub-rule 3 (ii) pertains to absolute exemption cases under Section 5A, where the entire balance of cenvat credit lapses without an option for the assessee. The absence of a requirement for payment under sub-rule 3 (ii) upon absolute exemption was highlighted, as the credit account would be reduced to zero in such cases.3. The Tribunal concluded that the lower appellate authority's interpretation, suggesting lapsing of balance credit in all situations, was not legally sound. The impugned order was set aside, and the appeal was allowed with consequential benefits as per the law. This detailed analysis clarified the distinct application of Rule 11 (3) (ii) and the legislative intent behind the transitional provisions, providing clarity on the lapsing of cenvat credit in different exemption scenarios.