CESTAT sets aside CENVAT credit demands under Rules 6(3) and 11(3) for scope and procedural violations

The CESTAT Ahmedabad allowed the appeal, setting aside demands under CENVAT Credit Rules. The tribunal held that the adjudication order exceeded the scope of the show cause notice by confirming demand under Rule 11(3) when the notice proposed demand under Rule 6(3). The demand for 10% of exempted goods' value was unsustainable as the appellant had already reversed the entire CENVAT credit attributed to inputs/input services used in exempted goods. The demand for balance credit lapsing under Rule 11(3) was incorrect since the appellant manufactured both dutiable and exempted goods. Additionally, capital goods were not used exclusively for exempted products as they were previously used when the same products were dutiable, making the related demand unsustainable.

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Issues Involved:
1. Whether the adjudication order traveled beyond the scope of the show cause notice.
2. Validity of the demand of 10% under Rule 6(3) of Cenvat Credit Rules.
3. Recoverability of the balance credit lying as on 07.12.2008 under Rule 11(3) of Cenvat Credit Rules, 2004.
4. Liability to reverse the cenvat credit on capital goods when the final product became exempted subsequently.

Summary:

Issue 1: Adjudication Order Beyond Scope of Show Cause Notice
The show cause notice demanded 10% under Rule 6(3) of Cenvat Credit Rules for availing cenvat credit on common input services used in both exempted and dutiable final products. However, the adjudication order confirmed the demand on the basis that the credit lying in balance as on 07.12.2008 had lapsed under Rule 11(3) of Cenvat Credit Rules, 2004. The Tribunal held that the adjudication order traveled beyond the scope of the show cause notice, rendering the demand unsustainable. This view is supported by various judgments, including Commissioner of C.Ex., Nagpur vs. Ballarpur Industries Ltd - 2007 (215) ELT 489 (SC) and Caprihans India Ltd vs. CCE - 2015 (325) ELT 632 (SC).

Issue 2: Demand of 10% Under Rule 6(3)
The demand of 10% of the value of exempted goods was based on the use of common cenvatable input services in both exempted and dutiable goods. A previous show cause notice dated 29.08.2013 had already addressed this issue, and the appellant had reversed the amount confirmed. Therefore, the Tribunal found that the basis for demanding 10% of the value of exempted goods under Rule 6(3)(b) did not exist, making the demand unsustainable.

Issue 3: Recoverability of Balance Credit Lying as on 07.12.2008
The Tribunal held that the provision for lapsing of balance credit under Rule 11(3) of Cenvat Credit Rules, 2004, is not applicable when the assessee manufactures both dutiable and exempted goods. The credit balance available as on 07.12.2008 was available for utilization for payment of duty on dutiable products. This issue is settled in judgments such as Shri Baba Exports vs. CCE, Meerut-II - 2015 (318) ELT 328 (Tri.Del) and John Deere India Pvt Ltd vs. CCE, Pune-III - 2015 (326) ELT 205 (Tri. -Mumbai).

Issue 4: Liability to Reverse Cenvat Credit on Capital Goods
The Tribunal found that the capital goods were not used exclusively for the manufacture of exempted final products. Before the final product became exempted, the same capital goods were used to manufacture dutiable goods. Therefore, the allegation that the capital goods were used exclusively for the manufacture of exempted final products was incorrect. This issue has been considered in judgments like Bannari Amman Spinning Mills Ltd- 2022 (2) TMI 57- CESTAT Chennai and Nahar Industrial Enterprise Ltd -2021 (8) TMI 799- CESTAT Chandigarh.

Conclusion:
The Tribunal concluded that the demands proposed in the show cause notice were not sustainable on multiple counts. Accordingly, the impugned order was set aside, and the appeal was allowed with consequential relief in accordance with law.

(Pronounced in the open court on 12.01.2024)

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