2023 (7) TMI 632 - HC - Central Excise

Court affirms revenue's depreciation method. Upholds Tribunal's order.

The Court upheld the Tribunal's order, dismissing the appeal in favor of the revenue. It determined that the straight-line method of depreciation should ... Reversal of credit at the time of transfer of capital goods - Determination of Depreciated value for reversal of Credit - application of law for availing the depreciation Under Section 32 of the Income Tax Act incorporated in Rule 4(4) of Cenvat Credit Rules read with Rule 3(4) of Cenvat Credit Rules, in respect of removal of used capital goods as such, during the year 2002-2003 - straight line method of depreciation effective from 13-11-2007 read with amended Rule from 27-2-2010 by Notification No.6/2010-CE(N.T) - rejection of application of Section 32 of the Income Tax Act, 1961, for depreciation used capital goods - placing the Circulars No.643/34/2002 dated 1-7-2002 read with Circular No.495/16/1993-Cus. dated 26-5-1993 without applying Section 32 of the Income Tax Act, 1961 - violation of principles of natural justice. HELD THAT:- This Court in the case of Rohini Mills Limited [2010 (10) TMI 424 - MADRAS HIGH COURT] considered the import of the phrase ‘as such’ and rejected the argument of the revenue that the reversal of credit much be total. On a conjoint reading of Rule 3(4) of the 2002 CCR, the 2002 Circular and 1993 Board Letter, the Bench concluded that the assessee was entitled to the benefit of depreciation in arriving at the assessable value of the goods - This decision has also been followed by a larger Bench of the CESTAT in the case of Navodhaya Plastic Industries Ltd [2013 (12) TMI 82 - CESTAT CHENNAI]. The Bench has, therein, noted the practice of bringing in capital goods for use for a short period and removal to another unit without reversal of CENVAT Credit availed, finding it to be an abuse of the scheme of CENVAT credit. The purpose of the scheme must thus be understood to provide a balance between the grant of credit and checking of abuse in the availment of the same. The appellant cannot be agreed upon that the above Rule would be applicable in the present case. Rule 4 sets out the preconditions for availment of credit. One of those conditions is that no credit shall be allowed in respect of that part of the value of capital goods that represents duty amount which the manufacturer claims as depreciation under the Income tax Act 1961 - This, by no means, can be understood to relate to Rule 3(4) of the methodology of valuation required thereunder. The reference to depreciation under the Income Tax Act in Rule 4(4) is in an entirely different context and has no application as urged by the Appellant. This condition has to be seen solely in the context of availment of CENVAT credit only and has no bearing on the valuation of the goods. The provision has always been at a flat rate and there has been no option extended to the assessee in regard to the manner by which the depreciation may be computed. In light of this conclusion, the judgement of the Constitution Bench in Commissioner of Central Excise, Bolpur vs. M/s. Ratan Melting and Wire Industries [2008 (10) TMI 5 - SUPREME COURT] is of no relevance. The substantial questions are answered in favour of the revenue and this appeal is dismissed. Issues Involved:1. Application of depreciation under Section 32 of the Income Tax Act in relation to Rule 4(4) of the Cenvat Credit Rules (CCR) 2002.2. Appropriateness of applying the straight-line method of depreciation for the period before its prescription.3. Rejection of Section 32 of the Income Tax Act for depreciation of used capital goods.4. Alleged violation of principles of natural justice by the Tribunal.5. Legality and propriety of the Tribunal's order.Summary of Judgment:1. Application of Depreciation under Section 32 of the Income Tax Act:The appellant argued that the 1993 Board Letter was inapplicable to the present transaction as it was issued in the context of second-hand motor vehicles and not machineries. They contended that Rule 4(4) of the CCR 2002, which refers to depreciation under the Income Tax Act, should prevail. The Department, however, insisted on applying the straight-line method prescribed by the Central Board of Excise and Customs (CBEC) under Circular No.643/34/2002-CX dated 01.07.2002.2. Appropriateness of Applying the Straight-Line Method:The Tribunal upheld the use of the straight-line method for depreciation, noting that a consistent methodology had been followed in similar cases. The appellant's claim that the straight-line method was not prescribed during the period of removal (2002-03) was rejected.3. Rejection of Section 32 of the Income Tax Act:The Court found that Rule 4(4) of the CCR 2004, which refers to depreciation under the Income Tax Act, only sets out preconditions for availment of credit and does not relate to the methodology of valuation under Rule 3(4). Therefore, the appellant's argument that depreciation under the Income Tax Act should be used for valuation was dismissed.4. Alleged Violation of Principles of Natural Justice:The appellant claimed that the Tribunal violated principles of natural justice by applying Circulars without considering Section 32 of the Income Tax Act. The Court, however, found no merit in this argument, stating that the scheme of credit over the years has provided a clear methodology for valuation through Circulars, Letters, and Rules.5. Legality and Propriety of the Tribunal's Order:The Court upheld the Tribunal's order, finding it proper and legal. The Tribunal's decision to remand the matter for recomputation of differential duty was based on the consistent application of the straight-line method for depreciation.Conclusion:The substantial questions of law were answered in favor of the revenue, and the appeal was dismissed. The Court noted that the scheme of grant/reversal of credit has always provided for a flat rate of depreciation, with no option for the assessee to choose the method of computation. The judgment of the Constitution Bench in Commissioner of Central Excise, Bolpur vs. M/s. Ratan Melting and Wire Industries was deemed irrelevant to this case.