2023 (10) TMI 425 - AT - Central Excise

Tribunal Overturns Department's Demand; Appellant Entitled to Cenvat Credit Refund Under Rule 6(3) with Interest

The Tribunal allowed the Appeal, setting aside the department's demand. The Appellant, engaged in manufacturing polyester spun yarn, was directed to ... Reversal of CENVAT Credit - exempt turnover - requirement of reversal under clause (i) or (ii) of sub- Rule (3) of Rule 6 of CCR? - wrong maintenance of records - Clearance of both taxable and exempted finished goods - ratios of inputs were skewed - Suppression of facts - extended period of limitation - HELD THAT:- Rule 6(3) categorically starts with the words – Notwithstanding anything contained in sub-rule (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, which, inter alia, include option to pay an amount equal to the specified percentage of value of exempted goods or exempted services, along with other option of reversing the proportionate amount under sub-rule (2) or maintain separate accounts for the receipt consumption in the inventory of inputs, as provided in clause (a) of subrule (2) and take credit only on inputs under sub-clause (ii) and (iv) of the said clause (a), and pay an amount as determined under sub-rule (3A) in respect of the input services. Once it is the case that proper records have not been maintained with regard to receipt of inputs and its utilization, sub-rule (3) gives option to the Assessee, and thus, Revenue cannot enforce any of the option(s) under sub-rule (3). Thus, Appellant is entitled to reverse the amount of credit as per option in clause (i) of sub-rule (3) of Rule 6 i.e., pay an amount equal to the specified percentage (5% or 6%) of the value of exempted goods, in the facts of the present case. Appellant shall be entitled to consequential benefits, in accordance with law. As the Appellants have admittedly paid the amount of Rs.1,28,95,173/- during audit/ investigation under protest, they shall be entitled to refund of the same with interest as per Rules - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a manufacturer who has not maintained separate accounts for inputs used in manufacture of dutiable and exempt goods is required to reverse Cenvat credit on exempt turnover under clause (i) (payment of specified percentage) or clause (ii) (proportionate reversal under Rule 6(2)) of sub-rule (3) of Rule 6 of the Cenvat Credit Rules. 2. Whether Revenue can compel a particular option under Rule 6(3) when the assessee has not maintained proper records as required by the Rules. 3. Whether amounts paid under protest during audit are refundable with interest when the appellate forum holds the payment was not required. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicable mode of reversal of Cenvat credit where separate accounts are not maintained - payment of specified percentage under Rule 6(3)(i) versus proportionate reversal under Rule 6(2)/(3)(ii). Legal framework: Rule 6(1)-(3) of the Cenvat Credit Rules govern availment and reversal of credit where inputs are used partly in manufacture of exempt goods. Sub-rule (3) begins with a non-obstante clause providing options to a manufacturer 'opting not to maintain separate accounts,' including (i) payment of a specified percentage of value of exempted goods, (ii) reversal of proportionate credit under sub-rule (2), or (iii) maintenance of separate accounts and restricted credit as specified. Precedent treatment: The Court refers to the statutory text and structure of Rule 6(3) rather than distinguishing or overruling external case law; treatment follows the plain-text interpretation of the Rule as providing alternatives to assessee not maintaining separate accounts. Interpretation and reasoning: The non-obstante opening of Rule 6(3) makes the listed options available to a manufacturer who has not maintained separate accounts. Where records are not properly maintained as to receipt and utilization of inputs between dutiable and exempt clearances, Rule 6(3) supplies the available modes of compliance. The Revenue's contention that the assessee should obligatorily reverse proportionate credit under Rule 6(2) is inconsistent with the express options in Rule 6(3). Thus, the absence of separate account maintenance does not mandate a single method of reversal; instead the assessee may elect any one of the options in sub-rule (3), including payment of the specified percentage under clause (i). Ratio vs. Obiter: Ratio - The Court's binding legal conclusion is that, where separate accounts are not maintained, the assessee is entitled to choose the option under Rule 6(3)(i) (payment of specified percentage) and Revenue cannot unilaterally enforce the proportionate reversal under Rule 6(2). Obiter - Observations about record-keeping practices and audit findings that do not alter the statutory choice mechanism are incidental. Conclusions: The assessee, having not maintained proper records, was entitled to elect to pay the specified percentage (5%/6% as applicable) on value of exempted goods under Rule 6(3)(i) rather than being compelled to reverse proportionate credit under Rule 6(2)/(3)(ii). Revenue could not insist on a different option merely because of discrepancies in ratios found at audit. Issue 2: Whether Revenue can compel a particular option under Rule 6(3) when records are deficient; effect of separate record maintenance indicative of intention to avail an option. Legal framework: The Explanation to Rule 6(3) and the structure of Rule 6 contemplate restraints on permutations of account maintenance and option exercise. Rule 6(3) explicitly addresses the situation where separate accounts are not maintained. Precedent treatment: The Court relies on statutory construction rather than external precedents to resolve conflict between Revenue's contentions and the text of Rule 6(3). Interpretation and reasoning: The Department argued that maintenance of separate records by the assessee indicated an intention to maintain separate accounts and thus precluded use of the Rule 6(3) option; further that mis-maintenance or skewed ratios evidenced suppression warranting proportionate reversal. The Court held that the existence of incorrect or separately maintained records does not deprive the assessee of the statutory options under sub-rule (3) where the assessee has not complied with the required mode of separate accounting. The non-obstante provision grants the assessee choice; Revenue cannot force a particular option where the statutory condition (not maintaining separate accounts) applies. Ratio vs. Obiter: Ratio - Revenue cannot enforce a specific mode of reversal in preference to the statutory options under Rule 6(3) merely because the assessee's records are deficient or maintained differently. Obiter - Comments on the quality of record-keeping or the correctness of ratios at audit are auxiliary. Conclusions: The Department's contention that maintenance of separate records necessarily indicates exercise of the separate accounts route and precludes the Rule 6(3)(i) option is rejected; the statutory options in Rule 6(3) govern and permit the assessee to opt for payment of the specified percentage when separate accounts are not properly maintained. Issue 3: Invocation of extended period of limitation for subsequent period based on differing errors and allegation of suppression. Legal framework: Extended period of limitation is available where there is suppression or fraud as per the relevant provisions; allegations must be supported by materials showing suppression or concealment amounting to a different kind of error for the later period. Precedent treatment: The Court did not rest its decision on a detailed limitation analysis or on recharacterisation of the audit findings as suppression warranting extended limitation; it confined decision to interpretation of Rule 6(3). Interpretation and reasoning: The Revenue alleged suppression and sought to invoke extended limitation for subsequent periods given different errors. The Court's reasoning focused on the assessee's entitlement under Rule 6(3) once proper separate accounts were not maintained; it did not find that the audit record justified overriding the statutory options by invoking extended limitation doctrine in the appeal's outcome. The absence of a finding of actionable suppression sufficient to sustain extended limitation within the adjudicatory outcome is implicit in allowing the appeal on Rule 6(3) grounds. Ratio vs. Obiter: Obiter - Observations on extended limitation and suppression remain incidental to the principal holding on Rule 6(3); no definitive ratio on limitation was laid down. Conclusions: The appeal decision rests on Rule 6(3) interpretation; invocation of extended period of limitation by Revenue was not sustained in a manner that altered entitlement to choose the Rule 6(3)(i) option. Issue 4: Refund and interest where amounts were paid under protest during audit but later held not payable. Legal framework: Principles permit refund of amounts paid where payments are found to be not due, with interest as per applicable rules governing restoration of sums paid in error or under protest. Precedent treatment: The Court applied statutory refund principles; no separate precedent discussion was necessary. Interpretation and reasoning: The assessee had paid a specified amount during audit under protest and subsequently asserted entitlement to payment of the specified percentage under Rule 6(3)(i) rather than reversal of credit. Having allowed the appeal and set aside the impugned order, the Court held that amounts paid under protest are refundable with interest in accordance with law and rules governing such refunds. Ratio vs. Obiter: Ratio - Where amounts paid under protest are found to have been not due, the payer is entitled to refund with interest as per the rules. Obiter - Details of calculation or interest rate application are procedural and not adjudicated in substance. Conclusions: The amount paid under protest during audit is refundable with interest in accordance with law, consequent to the Court's finding that the assessee was entitled to elect the Rule 6(3)(i) option and not liable for the demand upheld by Revenue.