2025 (3) TMI 260 - AT - Central Excise

CENVAT credit rules don't apply to inventory provisions made for accounting purposes without actual write-offs

M/s. Heavy Engineering Corporation Limited Versus Commissioner of Central Excise and Service Tax Ranchi-I Commissionerate

CESTAT Kolkata held that Rule 3(5B) of CENVAT Credit Rules, 2004 does not apply to provisions for slow-moving inventory that are not written off. The ... Reversal of CENVAT Credit under Rule 3(5B) of the CENVAT Credit Rules, 2004, due to provisions made in the books for slow-moving inventory - invocation of extended period of limitation - HELD THAT:- The appellant had not written off the obsolete items. They only reduced the value of the slow-moving items, at the end of each financial year, if such inputs were lying in stock for a specified period. It is intended to determine the profit & loss at the end of the year. It is based on the principle of conservatism and to comply with the Accounting Standards, which was never with an intention to write off any portion of inventory in the Books of Accounts. Since it is not concerned with obsolete items, which are unusable, we hold that the provision of Rule 3(5B) of the CENVAT Credit Rules was not applicable. The issue is no more res integra as the issue has been decided by this Tribunal in the case of M/S. STEEL AUTHORITY OF INDIA LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE, DURGAPUR NOW COMMISSIONER, CGST & CX, BOLPUR COMMISSIONERATE [2024 (12) TMI 1538 - CESTAT KOLKATA], wherein it has been held that the provisions of Rule 3(5B) of the CENVAT Rules are not applicable in such cases. Extended period of limitation - HELD THAT:- The appellant is a wholly owned Govt. of India undertaking whose complete set of records were maintained and whose accounts were audited by statutory auditors appointed by CAG as well as supplementary audit by representatives of CAG-New Delhi. The appellant did not suppress any information from the Department and in fact maintained all the statutory documents, records/registers and accounts and filed the statutory returns. Thus, it is observed that the conditions precedent for invoking longer period of limitation under proviso to Section 11A(4) of the Central Excise Act are not satisfied in the present case and hence the demand confirmed by invoking the extended period of limitation is not sustainable. Conclusion - i) Rule 3(5B) of the CENVAT Credit Rules, 2004, does not apply to provisions for slow-moving inventory that are not written off. ii) The demand, interest, and penalty set aside as unsustainable. iii) The extended period of limitation under Section 11A(4) was not applicable due to the appellant's transparent and audited practices. The demands confirmed in the impugned order set aside - appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe primary issues considered in this judgment are:Whether the appellant was required to reverse the CENVAT Credit under Rule 3(5B) of the CENVAT Credit Rules, 2004, due to provisions made in the books for slow-moving inventory.Whether the demand for duty, along with interest and penalty, was sustainable given the appellant's accounting practices and the nature of the provisions made.Whether the extended period of limitation under Section 11A(4) of the Central Excise Act was applicable in this case.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Rule 3(5B) of the CENVAT Credit Rules, 2004Relevant legal framework and precedents: Rule 3(5B) requires reversal of CENVAT Credit if the value of inputs or capital goods is written off fully or partially, or if a provision to write off is made in the books of account. The appellant cited precedents including M/s. Steel Authority of India Ltd. and General Motors Pvt. Ltd., which held that mere provisions for slow-moving inventory do not trigger this rule.Court's interpretation and reasoning: The Tribunal noted that the appellant had not written off the inventory but merely reduced the value of slow-moving items for accounting purposes. This practice was in line with accounting standards and did not equate to writing off the inventory.Key evidence and findings: The appellant's balance sheets and accounting policies were examined, showing that provisions were made for slow-moving items without writing them off. The Tribunal found that the appellant's practice of writing back values when items were used supported their claim.Application of law to facts: The Tribunal applied the legal framework to the appellant's accounting practices and concluded that Rule 3(5B) was not applicable as the inventory was not written off.Treatment of competing arguments: The Tribunal considered the Revenue's argument that the provisions indicated a write-off but found the appellant's evidence and precedents more persuasive.Conclusions: The Tribunal concluded that the provisions of Rule 3(5B) were not applicable, and thus, no reversal of CENVAT Credit was required.Issue 2: Sustainability of the Demand, Interest, and PenaltyRelevant legal framework and precedents: The appellant argued that the demand was unsustainable based on precedents that distinguished between provisions for slow-moving inventory and actual write-offs.Court's interpretation and reasoning: The Tribunal relied on precedents and the appellant's accounting practices to determine that the demand was not sustainable. The Tribunal emphasized that the inventory was not obsolete and continued to be used.Key evidence and findings: The Tribunal found that the appellant's records showed continued use of the inventory, negating the need for penalty or interest.Application of law to facts: The Tribunal applied the legal principles from relevant cases to conclude that the demand, interest, and penalty were not justified.Treatment of competing arguments: The Tribunal dismissed the Revenue's argument for sustaining the demand, citing lack of evidence of actual write-off.Conclusions: The Tribunal set aside the demand, interest, and penalty, finding them unsustainable.Issue 3: Applicability of the Extended Period of LimitationRelevant legal framework and precedents: The extended period under Section 11A(4) applies in cases of suppression or misstatement. The appellant argued that their practices were transparent and audited.Court's interpretation and reasoning: The Tribunal found no evidence of suppression or misstatement, noting that the appellant maintained comprehensive records and was audited by government-appointed auditors.Key evidence and findings: The Tribunal noted the appellant's compliance with statutory requirements and lack of evidence of intent to evade duty.Application of law to facts: The Tribunal concluded that the conditions for invoking the extended period were not met.Treatment of competing arguments: The Tribunal rejected the Revenue's reliance on the extended period, citing the appellant's transparency and compliance.Conclusions: The Tribunal held that the extended period of limitation was not applicable, rendering the demand time-barred.3. SIGNIFICANT HOLDINGSThe Tribunal held that Rule 3(5B) of the CENVAT Credit Rules, 2004, does not apply to provisions for slow-moving inventory that are not written off.The demand, interest, and penalty were set aside as unsustainable, with the Tribunal emphasizing that the inventory was not obsolete and continued to be used.The Tribunal concluded that the extended period of limitation under Section 11A(4) was not applicable due to the appellant's transparent and audited practices.The Tribunal cited the case of M/s. Steel Authority of India Ltd. to support its conclusion that Rule 3(5B) was not applicable in similar circumstances.The Tribunal emphasized the distinction between provisions for slow-moving inventory and actual write-offs, drawing from precedents to support its reasoning.