2025 (10) TMI 389 - AT - Central Excise

Appeal allowed: duty, interest and penalties vacated; exports under Duty Drawback/DEPB and Notification No.30/2004 not require CENVAT reversal

M/s. Sri Shanmugavel Mills (Ltd.) Versus Commissioner of GST and Central Excise, Madurai

CESTAT CHENNAI - AT allowed the appeal, setting aside the impugned order and vacating the demand of duty, interest and penalties. The Tribunal held that ... Reversal of CENVAT Credit under Rule 6(3A) of CCR,2004 - non-inclusion of value of the final products exported without payment of duty under N/N.30/2004-CE dt.09.07.2014 - value of clearances for export made by the appellant under Duty drawback scheme and DEPB Scheme for which the exemption under N/N. 30/2004 has been availed has to be included for reversal of credit or not - inclusion of Clearances without payment of duty under N/N. 30/2004 for manufacture of fabrics on job work basis - value Clearance of yarn waste without payment of duty can be included for reversal of Credit or not - invocation of extended period of limitation. Whether the value of clearances for export made by the appellant under Duty drawback scheme and DEPB Scheme for which the exemption under Notification No. 30/2004 has been availed has to be included for reversal of credit? - HELD THAT:- In the case of Sri Velayutham Spinning Mills (P) Ltd. Versus Commissioner of GST & Central Excise, Madurai [2024 (8) TMI 1207 - CESTAT CHENNAI] it has been held that 'it was held that even if the exempted goods are exported, credit is eligible.' - the first question is answered in favour of the Appellant. Whether the Department is correct in including the Clearances without payment of duty under Notification No. 30/2004 for manufacture of fabrics on job work basis? - HELD THAT:- The Appellant has relied upon the case of Shri M/s. Sri Velayuthaswamy Spinning Mills (P) Ltd., (Unit-II) Versus The Commissioner of G.S.T. & Central Excise [2019 (6) TMI 362 - CESTAT CHENNAI] it has been held that 'The argument of the Ld. AR for the Department that the appellants are manufacturing waste cannot be accepted. The appellants are not consciously manufacturing waste and it is merely a refuse or waste which is not dutiable, as held by the Hon’ble Supreme Court in various decisions.' - thus, the value of waste Yarn cannot be included in the value of Exempted turnover and thus, the second question framed is answered in favour of Appellant. Whether value Clearance of yarn waste without payment of duty can be included for reversal of Credit? - HELD THAT:- Appellant have already included the value of the goods so cleared under the category of 'exempted goods' for working out the quantum of credit to be reversed. Therefore, to include the value of goods cleared for job work would tantamount to double jeopardy and is not sustainable in law. The ER-1 returns submitted by them also shows the Job work turnover - thus, Job work turnover cannot be included in the value of Exempted goods and this question framed is answered in favour of the Appellant. Whether extended period of limitation is invokable in this case? - HELD THAT:- It is found that time and again, it has been held by various courts including the Supreme Court that invocation of larger period is a draconian provision and has to be invoked with caution. This is a case of reversal of Common credit involving interpretation of Rule 6(3A) of CCR 2004 which is contested on both the sides. So, it is not justified to allege any suppression/misstatement on the part of the assessee warranting invocation of larger period - the demand is barred by limitation since the SCN does not adduce any evidence of any positive act of wilful suppression or misstatement of facts with intent to evade Central Excise Duty - the Department should not have invoked the extended period of limitation and the Appellants plea, that extended period of limitation ought not to have been invoked and equivalent penalty ought not to have been imposed, merits acceptance. Thus, when the order itself fails to sustain both on merits and limitation, the demand of Central Excise Duty (Credit short reversed) and interest thereon and all the consequent penalty imposed stands vacated. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the value of clearances for export made under Duty Drawback and DEPB schemes, for which exemption under Notification No.30/2004-CE was availed, must be included for reversal of CENVAT credit under Rule 6(3A) of the CENVAT Credit Rules, 2004. 2. Whether clearances made without payment of duty under Notification No.30/2004-CE for goods manufactured on job-work basis must be included in the exempted turnover for purposes of reversal under Rule 6(3A). 3. Whether the value of yarn waste cleared without payment of duty is includible in the exempted turnover and hence requires reversal of CENVAT credit. 4. Whether the extended period of limitation (and consequential penalty under Rule 15(2) CCR read with Section 11AC) is invokable where alleged short reversal of credit arises from an interpretative issue and returns/ER-1 worksheets were regularly filed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Inclusion of export clearances under Duty Drawback/DEPB (Notification No.30/2004) for reversal of CENVAT credit Legal framework: Rule 6(3A) of the CENVAT Credit Rules, 2004 prescribes reversal methodology for common input services used in manufacture of exempted goods; Rule 6(6)(v) provides a substantive carve-out where procedural requirements (bond/LUT) are concerned; Notification No.30/2004-CE exempts specified clearances from duty. Precedent Treatment: The Tribunal and High Court decisions cited (including Drish Shoes/High Court analysis and multiple CESTAT Chennai Bench decisions) hold that credit on inputs/input services used in manufacture of exempted goods which are exported may be admissible; execution of bond/LUT is treated as procedural and not to disentitle bona fide availment where export is established. Interpretation and reasoning: The Tribunal examined whether non-execution of letter of undertaking (bond) negates the substantive entitlement where exports occurred under departmental supervision and export proofs were not disputed. The Court recognizes Notification No.42/2001 which removed bond requirement as procedural; absence of LUT was a procedural lapse and did not establish that inputs/input services were not used for export. Judicial discipline and binding precedents require following High Court and Tribunal decisions which answered analogous legal questions in favour of the assessee. Ratio vs. Obiter: Ratio-where exports are physically effected and documentary proof exists, mere non-execution of bond/LUT (procedural lapse) does not disentitle the assessee from claiming credit/refund or prevent exclusion of such export turnover from reversal calculation under Rule 6(3A). Obiter-observations on specific policy rationales for LUT/bond being procedural. Conclusion: Export clearances under Duty Drawback/DEPB for which exemption under Notification No.30/2004 was availed are not to be included for reversal of CENVAT credit in the facts of the case; issue answered in favour of the assessee. Issue 2: Inclusion of yarn waste cleared without payment of duty in exempted turnover Legal framework: CENVAT credit admissibility principles and departmental instructions (paragraph 3.7 of Supplementary Instructions) which state that credit is admissible on inputs contained in waste, refuse or by-product; Rule 6(3A) reversal principle for common input services. Precedent Treatment: Tribunal decisions (including Eveready Industries and Sri Velayuthaswamy Spinning Mills) hold that credit attributable to inputs contained in waste need not be reversed; waste/refuse is not treated as a manufactured dutiable product for reversal where inputs are used in manufacture of final products. Interpretation and reasoning: The Court adopts the departmental instruction and consistent Tribunal authority that waste is incidental and credits attributable to inputs contained in such waste remain admissible; appellants did not consciously manufacture waste as a dutiable product. Hence, including waste turnover in exempted turnover for the purpose of Rule 6(3A) reversal is inappropriate. Ratio vs. Obiter: Ratio-inputs contained in waste/refuse are eligible for CENVAT credit and need not be reversed as part of exempted turnover; Obiter-policy observations on the nature of waste and non-dutiability in specific manufacturing contexts. Conclusion: Value of yarn waste cleared without payment of duty cannot be included in the exempted turnover for reversal of CENVAT credit; issue answered in favour of the assessee. Issue 3: Inclusion of turnover of goods sent for job work in exempted turnover (double counting concern) Legal framework: Rule 6(3A) reversal depends on identifying exempted turnover components; job work provisions (Notification No.214/86-CE and related ER-1 reporting) and principles preventing double counting in turnover computations. Precedent Treatment: Tribunal practice recognizes that where job-work turnover has been declared and included within exempted turnover for reversal computations, subsequently adding job-work clearances again results in double jeopardy; courts require verification of returns/records before imposing additional demands. Interpretation and reasoning: Appellant produced ER-1 returns and ACES records showing job-work turnover declared monthly; Tribunal noted that lower authorities failed to seek verification from range officers earlier and no documentary basis was produced by revenue to reject inclusion. Including job-work values in addition to already-declared exempted turnover would amount to double counting and is unsustainable. Ratio vs. Obiter: Ratio-where returns/records show job-work turnover already included in exempted turnover, that turnover cannot be again included for reversal calculation; Obiter-criticisms of departmental verification lapses. Conclusion: Job-work turnover cannot be separately included in the exempted turnover for reversal of CENVAT credit where it has already been declared; issue answered in favour of the assessee. Issue 4: Invokability of extended period of limitation and imposition of penalty under Rule 15(2)/Section 11AC Legal framework: Section 11AC prescribes penalties for fraud, collusion, wilful misstatement or suppression with intent to evade duty; Rule 15(2) CCR applies penalty where CENVAT credit has been wrongly availed by reason of fraud, collusion, wilful misstatement or suppression. Extended limitation period requires evidence of suppression or positive malfeasance. Precedent Treatment: Apex Court authority and binding precedent (e.g., Uniworth Textiles and Chemphar Drugs) require positive evidence of suppression or mala fide to invoke extended limitation; mere non-payment or interpretative disputes do not sustain extended period or equal-to-duty penalty; burden of proving mala fide rests on Revenue. Interpretation and reasoning: The Tribunal examined record showing ER-1 returns and worksheets filed monthly, department supervision of exports (stuffing), and the interpretative nature of disputed reversal components. No evidence of fraud, collusion or wilful suppression emerged; invocation of extended period was therefore disproportionate and unjustified. The Court emphasized that extended period is a draconian provision to be invoked cautiously and that Revenue failed to discharge burden of proof of suppression with intent to evade duty. Ratio vs. Obiter: Ratio-extended limitation and the equal-duty penalty under Section 11AC cannot be invoked absent evidence of fraud, collusion or wilful suppression; interpretative disputes disclosed in filed returns do not constitute suppression; Obiter-observations on departmental duties regarding scrutiny of returns under self-assessment regime. Conclusion: Extended period of limitation and consequent penal action are not invokable on the facts; demand and penalty cannot be sustained on limitation grounds and therefore the demand is barred. Overall Conclusion The issues concerning inclusion of export clearances (Duty Drawback/DEPB), job-work turnover, and yarn waste in exempted turnover for reversal under Rule 6(3A) are answered in favour of the assessee; the alleged short reversal is not established. The invocation of extended limitation and penalty under Rule 15(2)/Section 11AC is unjustified for lack of evidence of suppression or mala fide. Consequently, the demand of duty, interest and penalty is vacated.