2025 (8) TMI 994 - AT - Central Excise

Cenvat credit limited to inputs for dutiable goods upheld; Rule 6(3)(i) inapplicable to exempted removals to SEZs/EOUs

M/s Mylan Laboratories Ltd Versus Commissioner of Central Excise & Service Tax, Visakhapatnam - I

M/s Mylan Laboratories Ltd Versus Commissioner of Central Excise & Service Tax, Visakhapatnam - I - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the practice of availing and utilising Cenvat credit only to the extent attributable to inputs/services actually used in the manufacture of dutiable final products (while not availing credit at the input stage for inputs/services also used for exempted products) is lawful under the Cenvat Credit Rules, 2004. 2. Whether clearances of excisable goods that are otherwise exempt under notification but made to specified categories (including SEZ and 100% EOU) must be treated as dutiable clearances for the purpose of reversal of credit under Rule 6(3)(i) of the Cenvat Credit Rules, 2004, or whether Rule 6(6) excludes the applicability of Rule 6(3) to such removals. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of taking Cenvat credit only to the extent attributable to dutiable production Legal framework: The Cenvat Credit Rules, 2004 govern availment, utilisation and reversal of credit in respect of inputs, input services and capital goods. Rule 6(3)(i) prescribes reversal of credit in specified circumstances where inputs are used for manufacture of exempted goods; general principles permit apportionment of credit where inputs/services are used for both dutiable and exempted supplies. Precedent Treatment: The Tribunal has previously examined and upheld the same practice in multiple earlier decisions involving the same appellant group and related companies; those Tribunal decisions were relied upon and in at least one instance were not found to raise substantial questions of law by the High Court when the Department challenged the Tribunal's conclusion. Interpretation and reasoning: The Court found the appellants followed a structured procedure where credit was not initially availed for inputs/input services at source but credit was taken only to the extent that such inputs/services actually went into dutiable final products. This practice effectively results in apportionment/attribution of credit to dutiable manufacture and avoids appropriation of credit for exempted clearances. The Tribunal accepted that such an attribution methodology is consistent with the objective of CCR, 2004 to permit credit for inputs/services used in taxable operations while preventing credit benefit for exempted operations. Ratio vs. Obiter: The holding that a taxpayer may lawfully avail credit proportionate to usage in dutiable manufacture (by not availing credit at source and claiming only attributable credit) is stated as ratio and determinative of the dispute on this point. Observations regarding administrative convenience or factual descriptions of the procedure are obiter and ancillary to the ratio. Conclusion: The practice of taking credit only in respect of that amount of input/input service which has gone into dutiable products is lawful and was upheld by the Tribunal on identical facts; therefore demands based solely on the premise that such practice is improper are not tenable. Issue 2: Whether clearances to SEZ/EOU (though otherwise exempt) trigger reversal under Rule 6(3)(i) or are excluded by Rule 6(6) Legal framework: Rule 6(3) of the Cenvat Credit Rules, 2004 prescribes reversal of credit where inputs are used in exempted manufacture/clearances; Rule 6(6) provides that where excisable goods are removed without payment of duty to certain categories (expressly including SEZ and EOU), the provisions of sub-rules (1) to (4) (which include Rule 6(3)) shall not apply for such removals. Precedent Treatment: The Tribunal has decided in an identical factual matrix that clearances to SEZ/EOU are governed by Rule 6(6) and therefore are not subject to reversal under Rule 6(3); that conclusion was followed in subsequent decisions and relied upon by the appellant. Interpretation and reasoning: The Tribunal interpreted Rule 6(6) as a clear legislative carve-out: removals of excisable goods without payment of duty to specified categories are excluded from the reversal mechanism set out in sub-rules (1)-(4). Consequently, although such clearances may be 'exempted' under notification for duty purposes, they are not to be treated as triggering reversal under Rule 6(3) by virtue of Rule 6(6). The plain language of Rule 6(6) was held to be decisive; treating such removals as dutiable for reversal purposes would contravene the statutory exemption created by sub-rule (6). Ratio vs. Obiter: The determination that Rule 6(6) precludes applicability of Rule 6(3) to removals to SEZ/EOU is expressed as the ratio for the issue of reversal of credit on such clearances. Ancillary discussion of broader policy considerations or factual differences in other cases is obiter. Conclusion: Reversal of Cenvat credit under Rule 6(3)(i) is not permissible in respect of clearances of exempted goods to SEZ and 100% EOU because Rule 6(6) expressly exempts such removals from the applicability of Rule 6(3); demands predicated on reversing credit in respect of such clearances are legally untenable and liable to be set aside. Cross-reference The conclusions on Issue 1 and Issue 2 are interrelated: the lawfulness of attributing credit to only that portion used in dutiable production (Issue 1) together with the exclusion of SEZ/EOU removals from reversal under Rule 6(6) (Issue 2) jointly negate the basis for the adjudicating authority's demand for reversal and penalty in the facts of the present matter.