2025 (10) TMI 1260 - HC - Central Excise

Revenue appeal dismissed; reversal of CENVAT credit entries not permitted - assessee entitled to credit under Rule 3

HC dismissed the revenue's appeal, holding that reversal of CENVAT credit entries was not permitted under the applicable rules and that the assessee was ... Non-availment of CENVAT credit of duty paid on the inputs within the meaning of condition stipulated vide Notification No. 30/2004-CE dated 9.7.2004 - credit availed of by the respondent under Rule 3 of Cenvat Credit Rules, 2004 and the reversal thereof - HELD THAT:- This Court has referred to and relied upon the decision of the Hon’ble Apex Court in the case of Chandrapur Magnet Wires (P) Ltd., vs. Collector of Cen. Excise, Nagpur, [1995 (12) TMI 72 - SUPREME COURT], wherein also the case of the department was that reversal of credit entries is not permitted by the rules and the assessee is not entitled to remove the goods without payment of duty since the credit of duty paid on the inputs used in the manufacture of the goods had already been taken in accordance with Rule 57A. The appeal is devoid of any merit in view of the settled legal position and the question of law is answered in favour of the assessee and against the revenue - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether, in the facts and circumstances, reversal of cenvat credit after initially availing it has the legal effect of non-availment of such credit for the purpose of qualifying for an exemption notification that conditions exemption on non-availment of credit on inputs. 2. Whether maintenance (or non-maintenance) of separate accounts for inputs used in manufacture of dutiable and exempt goods is a condition precedent to claim benefit of an exemption notification permitting relief where credit on inputs has not been availed. 3. Whether a departmental circular permitting concurrent availment of two different exemption notifications (with requirement of separate accounts) and allowing both benefits independently can be read so as to deny exemption where credit was earlier availed and subsequently reversed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal effect of reversal of cenvat credit on entitlement to exemption Legal framework: Exemption notification grants relief subject to the condition that credit of duty on inputs has not been availed. Cenvat Credit Rules permit taking and accounting of credit and contain provisions for debit entries/reversals in appropriate circumstances. The statutory scheme contemplates the interplay between availing credit under cenvat rules and claiming exemption under executive notifications. Precedent treatment: Higher court authority has held that reversal of input credit entries has the effect of treating the credit as not having been availed; consequently, where credit is reversed before removal/clearance, the manufacturer may still claim the exemption. The tribunal relied on an earlier departmental and judicial line holding similar proposition; a High Court decision applying Supreme Court reasoning reached the same conclusion and that decision was not sustained by further leave proceedings. Interpretation and reasoning: The Court follows the principle that if a registrant originally avails credit and subsequently makes an appropriate reversal/debit entry such that, in accounting terms, no net credit remains for the inputs in question, the legal effect is equivalent to non-availment. The reasoning recognizes that the scheme aims to ensure that exemption applies when inputs are not ultimately benefited by credit and allows accounting reversals to cure earlier entries. The Court treats reversal as operative to negate the earlier credit for the specific purpose of meeting the exemption condition. Ratio vs. Obiter: Ratio - reversal of cenvat credit amounts to non-availment for the specific legal condition in the exemption notification; this is applied as the decisive principle. Obiter - ancillary commentary on administrative practice and policy implications is not relied upon as decisive. Conclusion: The Court concludes that reversal of credit, where effectively carried out so that no credit remains on inputs, satisfies the condition of non-availment in the exemption notification and supports entitlement to exemption. Issue 2 - Requirement of separate accounts as condition precedent to claim exemption Legal framework: Notifications and an administrative circular contemplated that where a manufacturer chooses between or avails benefits under multiple notifications, separate records may be required; the Cenvat Credit Rules also address maintenance of separate accounts and provide alternative compliance routes where separate accounts are not maintained. Precedent treatment: Judicial precedents have considered whether absence of segregated records defeats an exemption claim where reversal of credit is effected; the controlling view in the authorities applied by the Court holds that lack of initial segregation is not necessarily fatal where law/rules/circulars permit debit/reversal and where subsequent accounting adjustments render credit as not availed. Interpretation and reasoning: The Court notes the administrative circular required separate books when availing both notifications but places primary reliance on the rule-based and judicial position that permitting reversal/debit entries - and relevant rule provisions allowing alternative compliance where separate accounts are not maintained - means that maintenance of separate accounts is not an absolute, inflexible condition precedent to exemption. The Court emphasizes that the statutory and rule provisions (including express sub-rules allowing manufacturers not maintaining separate accounts to follow specified conditions) must govern; mere non-maintenance of separate registers will not automatically negate entitlement if the reversal operation achieves the legal result of non-availment. Ratio vs. Obiter: Ratio - non-maintenance of separate accounts, by itself, is not necessarily a bar to claiming the exemption if reversal/debit entries are made in accordance with rules and the legal effect is non-availment. Obiter - discussion of practical account-keeping methods and administrative preferences. Conclusion: The Court holds that requiring separate accounts at the initial stage cannot be treated as an absolute condition precedent; compliance options under the Cenvat Credit Rules allow a manufacturer to claim exemption where reversal/debit entries have the legal effect of non-availment despite lack of initial segregation. Issue 3 - Effect of departmental circular permitting concurrent availment of two notifications and its interplay with reversal doctrine Legal framework: The departmental circular clarified that two different notifications (one prescribing an optional duty and another prescribing full exemption) are independent and could be availed simultaneously, subject to maintenance of separate accounts for availing benefits under each notification. Precedent treatment: Courts have interpreted departmental circulars in light of statutory rules and higher court decisions on reversal; where circulars impose procedural expectations, those do not override the substantive legal effect of lawful reversals recognized by higher judicial precedent. Interpretation and reasoning: The Court treats the circular as administrative guidance that does not supplant the legal effect of reversals recognized by rule and precedent. Where the legal apparatus permits reversal such that credit is treated as not availed, application of the circular's procedural expectation (separate books) cannot defeat the substantive entitlement. The Court thus gives primacy to rule-based and precedent-backed legal effect over a circular's procedural prescription when the circular does not, by itself, alter the statutory or rule position. Ratio vs. Obiter: Ratio - administrative circulars cannot negate the legal effect of reversal recognized by statute/rules and higher judicial authority; procedural non-compliance under a circular will not defeat exemption where the substantive condition of non-availment is satisfied by reversal. Obiter - remarks regarding the desirability of maintaining separate accounts for administrative transparency. Conclusion: The Court concludes that the circular's requirement for separate accounts does not prevent the benefit of the exemption where reversal of credit effectively results in non-availment; therefore, simultaneous availment, followed by lawful reversal, can satisfy the notification condition. Overall Conclusion The Court answers the substantial question in favour of the assessee and against the revenue: reversal of cenvat credit that effectively results in no net credit on inputs operates as non-availment for the purpose of qualifying for the exemption notification; absence of separate accounts or prior segregation is not an absolute bar where rules permit alternative compliance and reversal achieves the legal result required by the notification; administrative circulars cannot displace the legal effect of such reversals.