Cenvat credit on imported capital goods allowed; Rule 9(1)(b) bar rejected, extended limitation period held inapplicable

The CESTAT held that Cenvat credit of additional and special additional customs duty on imported capital goods was not barred by Rule 9(1)(b) of the Cenvat Credit Rules, 2004, as the department failed to prove fraud, collusion, wilful misstatement, suppression of facts, or intentional contravention to evade duty. The appellant had transparently disclosed the disputed credit in ER-1 returns, giving the department full knowledge of availment. Consequently, the extended period of limitation could not be invoked, and the demand for November 2014 to June 2017 was time-barred. The impugned order was set aside and the appeal allowed, cancelling recovery, interest, and penalty.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether availment of Cenvat credit of additional duty of customs and special additional duty of customs on imported capital goods was barred by the exclusion contained in Rule 9(1)(b) of the Cenvat Credit Rules, 2004.

1.2 Whether the extended period of limitation under Section 11A(4) of the Central Excise Act, 1944 was validly invoked for recovery of the alleged inadmissible Cenvat credit and consequential interest and penalty under Rule 15(2) of the Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Bar on Cenvat credit under Rule 9(1)(b) of the Cenvat Credit Rules, 2004

Legal framework

2.1 The Court reproduced Rule 9(1)(b) of the Cenvat Credit Rules, 2004, which permits taking of Cenvat credit on the basis of a supplementary invoice or similar document evidencing payment of additional excise duty or additional duty of customs, but specifically excludes cases where the additional duty became recoverable on account of non-levy or short-levy by reason of fraud, collusion, wilful mis-statement, suppression of facts, or contravention of provisions of the Excise Act or Customs Act or rules thereunder with intent to evade payment of duty.

Interpretation and reasoning

2.2 The Court noted that the capital goods were imported under the EPCG scheme with exemption benefit and that customs duty was paid subsequently upon non-fulfilment of export obligation. The department's contention was that, as duty became payable only after detection and issuance of a customs show cause notice and penalty under the Customs Act, the exclusion under Rule 9(1)(b) applied, thereby barring Cenvat credit.

2.3 The Court held that, for the exclusion under Rule 9(1)(b) to apply, the department must establish that the additional duty became recoverable due to fraud, collusion, wilful mis-statement, suppression of facts, or contravention of statutory provisions with intent to evade payment of duty. Mere failure to fulfil EPCG obligations or delayed payment of duty does not, by itself, satisfy these requirements.

2.4 The Court found that the appellant had separately reflected the Cenvat credit on imported capital goods in the Cenvat credit table of ER-1 returns filed with the department. As these facts were on record and it was not alleged that the ER-1 disclosures were false, the department could not claim that the appellant had not informed it about availment of such credit or that there was suppression or mis-statement.

2.5 The Court observed that the burden lies on the department to prove malafide intention to evade duty, and that no material had been produced to show fraud, collusion, wilful mis-statement, suppression of facts, or contravention with intent to evade duty in relation to the customs duty on the capital goods.

Conclusions

2.6 The Court concluded that the conditions for invoking the exclusion in Rule 9(1)(b) were not satisfied. Consequently, the availment of Cenvat credit of additional duty of customs and special additional duty of customs on the imported capital goods was not barred under Rule 9(1)(b) of the Cenvat Credit Rules, 2004.

Issue 2 - Validity of extended period under Section 11A(4) and imposition of penalty

Legal framework

2.7 The Court reproduced Section 11A(4) of the Central Excise Act, 1944, which permits invocation of an extended limitation period of five years where non-levy, non-payment, short-levy, short-payment, or erroneous refund of duty is "by reason of" fraud, collusion, wilful mis-statement, suppression of facts, or contravention of statutory provisions with intent to evade payment of duty, and authorises recovery of duty with interest and penalty equivalent to the duty.

2.8 The demand and penalty in the impugned orders were founded on Section 11A(4) read with Rule 14 and Rule 15(2) of the Cenvat Credit Rules, 2004 and Section 11AC of the Central Excise Act.

Interpretation and reasoning

2.9 The Court held that the same elements (fraud, collusion, wilful mis-statement, suppression, or contravention with intent to evade duty) underpin both the exclusion in Rule 9(1)(b) and the extended period under Section 11A(4). As the department had not established any such element for purposes of Rule 9(1)(b), it likewise failed to justify invocation of Section 11A(4).

2.10 The Court emphasised that the appellant had disclosed availment of Cenvat credit in ER-1 returns, and that there was no allegation that these disclosures were incorrect. In such a situation, there could be no ground to allege wilful mis-statement or suppression of facts so as to attract Section 11A(4).

2.11 The Court relied on the decision of the jurisdictional High Court in Dynamic Industries Ltd., wherein it was held that when Cenvat credit is duly reflected in ER-1 returns and there is no material to indicate suppression, the extended period of limitation under the proviso to Section 11A (and corresponding provisions) is not available to the Revenue. The Court found the facts of the present case to be identical in principle.

2.12 On these findings, the Court held that there was no basis to allege that duty was not paid or was short-paid by reason of fraud, collusion, wilful mis-statement, suppression of facts, or contravention with intent to evade payment of duty. Accordingly, Section 11A(4) could not be invoked.

Conclusions

2.13 The Court concluded that the extended period of limitation under Section 11A(4) was not available to the department. The entire demand for the period from November 2014 to June 2017 was held to be barred by limitation.

2.14 As the substantive demand failed on limitation and the requisite mens rea was not proved, the consequential imposition of penalty under Rule 15(2) of the Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944 was also unsustainable.

2.15 The Court therefore held that the impugned order upholding demand of Cenvat credit, interest, and penalty was not legally sustainable, set it aside, and allowed the appeal.

---