2002 (11) TMI 144 - AT - Central Excise

Cenvat credit on inputs later used for fully duty-exempt goods: recovery upheld u/rr 57AC/57AD; penalty set aside

Cenvat credit was held inadmissible where, after credit availment, the inputs were used in manufacture of finished goods wholly exempt from duty. On a ... Cenvat credit - Reversal of - finished product - Demand - Limitation - whether the Cenvat credit is to be reversed if subsequent to the availment of credit, the finished product becomes exempted wholly from payment of duty - HELD THAT:- It is also not in dispute that these inputs are being used in the manufacture of I.V. fluids which are wholly exempted from payment of duty. The Cenvat Credit Scheme is a scheme to remove the cascading effect of the Central Excise duty as the same is levied at each stage of manufacture. The credit is available only and only if the final product suffers the Excise Duty. If no excise duty is payable in respect of any final product, the question of availing the Cenvat credit does not arise as there is no duty of excise at more than one level. A harmonious reading of Rules dealing with Cenvat Scheme and particularly Rule 57AC and Rule 57AD of the Central Excise Rules, 1944 makes it very evident that Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods. We agree with the findings in the impugned Order that the decision in Premier Tyres Ltd.[2001 (2) TMI 137 - HIGH COURT OF KERALA AT ERNAKULAM] And consequently decision in Ashok Iron and Steel case [2002 (1) TMI 91 - CEGAT, NEW DELHI], is not applicable as these decisions were passed on the ground that there was no provision for reversal of credit. Now there is a specific provision in Rule 57AD which clearly provides that 'Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods.' Rule 57AH contains the provision for the recovery of Cenvat credit utilized wrongly. As the inputs have been utilized in the manufacture of wholly exempted goods credit taken in respect of such inputs is recoverable. The demand is not hit by the time limit as the recovery is related in the instant matter to utilization of inputs for manufacture of exempted goods. As the show cause notice has been issued within one year of such utilization, demand is within the time limit specified in the Act and Rules. We are, however, of the view that in the facts and circumstances of the case, no penalty is imposable on the Appellants. We order accordingly. The Appeal stands disposed of in above terms. Issues involved: Whether Cenvat credit is to be reversed if finished product becomes exempted from duty.Summary:The Appeal filed by M/s. Albert David Ltd. raised the issue of whether Cenvat credit should be reversed if the finished product becomes wholly exempted from duty after the credit is availed. The Appellants manufactured P & P medicines and availed Cenvat credit of duty paid on inputs under Rule 57AA of the Central Excise Rules, 1944. The Deputy Commissioner confirmed a demand and imposed a penalty, stating that Cenvat credit is not available for inputs used in the manufacture of exemption goods. The Commissioner (Appeals) upheld this decision, citing Rule 57AD which disallows credit on inputs used in the manufacture of exempted goods.Shri D. Chitlangia argued that the credit was validly taken before the exemption of the finished product, relying on legal provisions and court decisions. He contended that no provision exists for reversing legitimately availed credit when finished goods are later exempted from duty. On the other hand, Shri R.D. Negi argued that once the final product becomes exempted, claiming that inputs were used in relation to dutiable goods is irregular. He emphasized Rule 57AD(1) which prohibits credit on inputs used in the manufacture of exempted goods, citing a decision of the Allahabad High Court to support this stance.The Tribunal considered both arguments and concluded that as the inputs were used in the manufacture of wholly exempted goods, the Cenvat credit taken for those inputs is recoverable. The demand was found to be within the time limit specified in the Act and Rules, and no penalty was imposed on the Appellants. The decision clarified that the specific provision in Rule 57AD disallows credit on inputs used in the manufacture of exempted goods, leading to the recovery of wrongly utilized credit in such cases. The Appeal was disposed of accordingly.