2024 (1) TMI 817 - AT - Central Excise

Revenue appeal dismissed as Cenvat Credit adjustment allowed when repacking reclassified from trading to manufacturing activity

CESTAT Ahmedabad dismissed revenue's appeal regarding Cenvat Credit adjustment. The appellant initially treated repacking and resale of adhesive solution ... Process amounting to manufacture - affixing the MRP on the containers of Adhesive solution falling under Chapter 35 of Central Excise Tariff Act, 1944 - Cenvat Credit for making adjustment against the Excise Duty on the manufactured goods - HELD THAT:- The appellant treated their activity of repacking and resale of the goods as trading activity. Accordingly, under the dealer registration, they have issued dealer invoice in respect of the Cenvat Credit of CVD paid in respect of imported goods, later on when the department raised contention that this re-packing is amount to manufacture appellant admittedly paid an amount over and above the Cenvat Credit. The issue to be decided in the revenue’s appeal is that whether the appellant is entitled for Cenvat Credit for making adjustment against the Excise Duty on the manufactured goods. In the present case on the same transaction the department has demanded the Excise Duty considering as manufactured goods. Therefore, obviously whatever Cenvat Credit involved with the goods needs to be adjusted against the total duty liability. The contention of the revenue is that since they have already passed credit of CVD through dealer invoice the same cannot be adjusted is absolutely incorrect for the reason that the CVD was not Passed on twice. It is the same CVD was passed on. Therefore, the contention of the revenue in this regard absolutely absurd and not acceptable. From the decision in COMMISSIONER OF CENTRAL EXCISE & ST, BHAVNAGAR VERSUS GUJARAT HEAVY CHEMICALS LIMITED [2023 (5) TMI 188 - CESTAT AHMEDABAD], it can be seen that the facts are absolutely identical that in respect of the consignment sold as trading activity by passing on the credit under dealer invoice. Subsequently, when the department has sought to consider the activity as manufacture and demanded Excise Duty Cenvat Credit was allowed to be adjusted. The impugned order is upheld - Appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether Cenvat credit (including CVD/SAD paid on imported goods) that was passed on to customers by issuance of dealer invoices can be adjusted against a subsequently raised Central Excise duty demand when the department contends that the activity of repacking/labeling amounts to manufacture. 2. Whether the passage of credit by a dealer invoice precludes adjustment of that same credit against an excise demand arising from reclassification of the same transaction as a manufacture/clearance. 3. Whether the principle of revenue neutrality applies where imported goods were duty-paid and a reconciliation of input Cenvat credit vis-à-vis output duty has not been carried out. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to adjust Cenvat credit against excise demand when activity is treated as manufacture Legal framework: The statutory scheme permits adjustment of available Cenvat credit against output duty liability. Where goods are imported with duty (CVD/SAD) paid, such duty forms part of the Cenvat credit pool available for adjustment against any subsequent excise liability arising on those goods. Precedent Treatment: The Tribunal relied on prior decisions addressing identical factual matrices which recognize that when goods imported duty-paid are subsequently treated as manufactured/cleared and duty is demanded, the Cenvat credit attributable to those goods can be adjusted against the demand, subject to reconciliation. Interpretation and reasoning: The Court reasoned that the substance of the transaction controls - the same CVD cannot be treated as passed on twice nor can a procedural variation (dealer invoice instead of excise invoice) defeat the right to adjust the credit. Where the department on the same transaction seeks to demand excise duty, the input credit associated with those goods is logically and legally available to be set off against the duty liability. The Tribunal emphasized that the adjustability depends on reconciliation of procurement, Cenvat involved, and sale/clearance attracting duty. Ratio vs. Obiter: Ratio - Where imported goods are duty-paid and the same transaction is later treated as manufacture/clearance attracting excise duty, the Cenvat credit attributable to those goods is available to adjust the excise demand; procedural issuance of a dealer invoice does not oust that right. Obiter - Observations on detailed reconciliation procedure and timelines for reconsideration are procedural directions ancillary to the ratio. Conclusion: The appellant/respondent is entitled to have the Cenvat credit adjusted against the excise demand arising from treating the activity as manufacture, subject to reconciliation of inputs and outputs. Issue 2 - Effect of passing Cenvat credit to buyer via dealer invoice on availability of credit for adjustment Legal framework: Credit passed on in the chain of trade by means of an invoice does not ipso facto extinguish the underlying input tax claim; the statutory adjustment principles look to the availability and application of input credit against output tax liabilities. Precedent Treatment: The Tribunal treated earlier decisions which accepted that passing credit by way of invoice does not amount to double discharge of the same duty and does not prevent adjustment where the department later classifies the transaction as a dutiable clearance. Interpretation and reasoning: The Tribunal found the revenue's contention-that passing credit via dealer invoice precludes adjustment-absurd because the same CVD amount was not paid or passed twice. The decisive factor is whether the credit exists against the goods on which duty is being demanded; mere issuance of a dealer invoice to the buyer does not change that principle. The Court emphasized substance over procedural form; if the same transaction is being recharacterized, adjustment is appropriate to preserve revenue neutrality. Ratio vs. Obiter: Ratio - Issuance of a dealer invoice passing on Cenvat credit does not bar adjustment of that credit against a subsequently assessed excise duty on the same goods. Obiter - The characterization of the dealer invoice as improper procedure does not, by itself, create additional recoverable duty where adjustment neutralizes the claim. Conclusion: Passing Cenvat credit by dealer invoice to the purchaser does not preclude adjustment of that credit against an excise duty demand on the same goods. Issue 3 - Application of revenue neutrality principle and requirement of reconciliation Legal framework: Revenue neutrality operates where input duty paid/imported duties available as credit offset any output duty liability, resulting in no net revenue shortfall. Proper application requires reconciliation between inputs (procurement and Cenvat) and outputs (sales/clearances attracting duty). Precedent Treatment: The Tribunal applied prior orders which directed that where imported goods are duty-paid, and if on reconciliation input credit suffices to cover the demanded duty, the matter is prima facie revenue neutral and further demand cannot be sustained without reconciliation results. Interpretation and reasoning: The Tribunal noted absence of proper reconciliation in the adjudicating record and held that the adjudicating authority should perform a reconciliation exercise correlating procurement, Cenvat, and sale of goods. If reconciliation shows input Cenvat suffices to discharge the output duty, the demand is extinguished. The Tribunal remanded for reconsideration with directions to verify details and pass a fresh order in light of revenue neutrality considerations. Ratio vs. Obiter: Ratio - Where duty-paid inputs exist and reconciliation shows available Cenvat equals or exceeds output duty on goods later treated as manufacture, the case is revenue neutral and the demand will not sustain. Obiter - Specific procedural timelines for reconciliation are practical directions rather than foundational legal principles. Conclusion: The principle of revenue neutrality applies; absence of prior reconciliation necessitates remand for verification. If reconciliation establishes sufficiency of Cenvat, no further demand can be sustained. Final disposition and principle The Tribunal upheld the adjudicating authority's order permitting adjustment of Cenvat credit against the excise demand and dismissed the revenue appeal, endorsing the view that procedural issuance of dealer invoices passing credit does not prevent adjustment and that revenue neutrality through reconciliation must be examined before sustaining additional demand. The holding is a binding ratio on the entitlement to adjust input Cenvat against reassessed output duty where the same goods were originally imported duty-paid and later classified as manufactured/cleared.