2022 (11) TMI 1001 - AT - Central Excise

Tribunal clarifies Cenvat credit rules on inventory adjustments, overturns demand

The Tribunal held that Rule 3(5)(B) of CCR, 2004 applies when inventory is fully or partially written off, not when a general provision is made without ... Reversal of CENVAT Credit - removal of inputs as such - provision for slow/non-moving inventory made - whether the provisions of Rule 3(5)(B) of CCR, 2004 are attracted in case of making a general provision in the books of account for slow moving/non moving inventory, without reducing the value of such inventory? HELD THAT:- The appellant have only created a general provision for slow/non-moving inventory and have admittedly not written of the inventory from the inventory or the asset account. In actuality, such provision have been made by appropriation in the profit and loss account, without writing of any amount/value from the asset/inventory account - Rule 3(5B) of CCR is attracted only when the value of the asset and/or inventory is written off fully or partially or wherein any specific provision to write off a fully or partially has been made in the books of account - In the facts of the present case, the appellant have made a general provision, which is not attributable to any particular asset/inventory. Admittedly, revenue have not been able to identify the details of inventory or asset, for which the general provision has been made. It is further evident that the appellant have demonstrated that such provision has been made year to year by way of increasing or reducing the provision, depending on the usage of inventory as required. The impugned order is set aside - The ground of limitation raised is left open - appeal allowed. Issues Involved:Interpretation of Rule 3(5)(B) of CCR, 2004 regarding provision for slow moving/non-moving inventory without reducing inventory value.Analysis:1. The appeal addressed whether making a general provision in the books of account for slow moving/non-moving inventory, without reducing the value of such inventory, attracts the provisions of Rule 3(5)(B) of CCR, 2004. The appellant, engaged in manufacturing various products, had created provisions for slow moving/non-moving inventory as a managerial tool without altering the value of inventory. This provision was made annually following accounting principles without writing off any inventory value.2. The dispute arose when the revenue alleged that the appellant should reverse Cenvat credit availed on the provision for non/slow moving inventory, as per Rule 3(5)(B) of CCR. The appellant argued that mere creation of provision in compliance with accounting standards does not equate to writing off inventory. They maintained that the inventory was still usable and reflected at net realizable value as per accounting standards.3. The revenue issued a Show Cause Notice (SCN) demanding reversal of Cenvat credit, interest, and penalty. The appellant contested the SCN, emphasizing that no inventory was written off, only the value was adjusted in the books. They provided explanations from the statutory auditor and highlighted compliance with accounting standards, emphasizing no loss or reduction in original cost.4. The Commissioner (Appeals) partially allowed the appeal, confirming a reduced demand for reversal of Cenvat credit. The appellant then appealed to the Tribunal, citing precedents where similar issues were decided in favor of the assessee.5. The Tribunal analyzed previous judgments and held that Rule 3(5)(B) applies when the value of the asset/inventory is written off fully or partially, not when a general provision is made without specific identification. As the appellant had not written off any inventory, only adjusted values in the books, the demand for Cenvat credit reversal was deemed unsustainable.6. The Tribunal concluded that the appellant's general provision for slow/non-moving inventory did not trigger Rule 3(5)(B) as no inventory was written off. The appeal was allowed, setting aside the demand. The issue of limitation was left open for further consideration.In conclusion, the Tribunal's judgment clarified the application of Rule 3(5)(B) in cases of provisions for slow moving/non-moving inventory, emphasizing the distinction between writing off inventory and making general provisions in compliance with accounting standards.