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Issues: (i) Whether cenvat credit availed on inputs whose value is "written down" in the books of account under accounting standards is required to be reversed under Rule 3(5B) of the CENVAT Credit Rules, 2004; (ii) Whether demands for periods prior to introduction of the recovery mechanism under Notification No. 3/2013-CE (N.T.) dated 01.03.2013 or prior to introduction of the "partial write off" reversal provision are sustainable, including invocation of extended period of limitation.
Issue (i): Whether 'writing down' of input inventory value for accounting purposes attracts reversal of cenvat credit under Rule 3(5B) of the CENVAT Credit Rules, 2004.
Analysis: The accounting exercise involves periodic identification of slow moving inputs and reducing their book value while the physical inputs remain in factory stock and are available for future use. Where items are identified as obsolete and written off physically from inventory, proportionate reversal is undertaken. The distinction between a book 'write down' (provision to reflect reduced value) and an actual 'write off' (removal of the item as unusable) is central to the application of Rule 3(5B). Relevant judicial authorities have held that mere reduction in book value under accounting standards does not constitute writing off for the purposes of Rule 3(5B) where inputs remain available for use.
Conclusion: 'Writing down' of inputs for accounting purposes does not attract reversal of cenvat credit under Rule 3(5B) of the CENVAT Credit Rules, 2004; reversal is required only when inputs are actually written off and are not available for use. This conclusion is in favour of the assessee.
Issue (ii): Whether demands for the period April 2010 to March 2013 and demands prior to the introduction of the partial write-off reversal provision are sustainable, including applicability of extended period of limitation.
Analysis: The reversal provision for partial write-off under Rule 3(5B) was introduced with effect from 01.03.2011, while the statutory recovery mechanism under Notification No. 3/2013-CE (N.T.) came into force on 01.03.2013. Demands falling in periods before the existence of a recovery mechanism are not sustainable. Further, where particulars were declared in statutory returns and the demand arises from audit objections without evidence of suppression or positive concealment, invocation of the extended period of limitation is not justified.
Conclusion: Demands for periods prior to the applicability of the recovery mechanism and demands based on audit objections without suppression are unsustainable. This conclusion is in favour of the assessee.
Final Conclusion: The impugned orders confirming demands under Rule 3(5B) are set aside insofar as they relate to inputs merely written down in the books and insofar as they relate to periods prior to the availability of a recovery mechanism; appeals relating to such demands are allowed while ancillary proceedings dependent on the set-aside demands may be rendered infructuous.
Ratio Decidendi: A book 'write down' of inventory value under accounting standards, without removal of inputs from stock or loss of usability, does not constitute a 'write off' under Rule 3(5B) of the CENVAT Credit Rules, 2004 and therefore does not mandate reversal of cenvat credit; additionally, recovery of cenvat credit requires the statutory recovery mechanism to be in force.
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