TaxTMI 
TaxTMI 
2022 (11) TMI 1460
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....001- COM014- 18-19 15.10.2018 02/P-I/COMMR/ 2017-18 14.05.2018 1.2 By the impugned orders following has been held: A. PUN-EXCUS-001-COM-030-032-14-15 dated 20.11.2014 "ORDER 28.1 in respect of the Show Cause Notice bearing No. 02/P-I/RTGN/COMMR/ADJ/2014, dated. 04.01.2014, I determine and confirm the demand of inadmissible Cenvat credit amounting to Rs.25,33,05,174/- (Rupees Twenty Five Crores, Thirty Three Lakhs, Five Thousand, One Hundred and Seventy Four Only), attributable to the cenvat credit availed on inputs written off or in respect of which provision has been made to write off, whether fully or partially, during the period from December 2008 to December 2012, as discussed and detailed in para 24.4.3 above, under the provisions of Rule 14 of the CCR, 2004, read with Section 11A(2)/Section 11A(10) of the Central Excise Act, 1944, as the-case may be. Further, I order the assessee, M/s General Motors India Pvt. Limited, Urse, Pune, to pay the aforesaid amount forthwith. Consequently, the remaining demand of Rs.1,32,36736/- (Rs.26,65,41,910/- (as demanded in S.C.N.) minus Rs.25,33,05,174/-) is not legally sustainable for the reasons discussed in para ....
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..... 02/PI/R-TGN/COMMR/ADJ/2014, dated. 04.01.2014, I impose a penalty of Rs. 25,83,05,1741- (Rupees Twenty Five Crores, Thirty Three Lakhs, Five Thousand, One Hundred and Seventy Four Only), on M/s. General Motors India Pvt. Limited, Urse, Pune, under Rude 15(2) of the CCR, 2004, read with Section 11AC/11AC(I)(a) of the Central Excise Act, 1944, i.e. Rs.8,97,94,670/- under the provisions of Section 11AC of the Central Excise Act, 1944, for the period from December 2008 to March 2011 plus Rs.16,35,10,504/- under the provisions of Section 11AC(1)(a), ibid, for the period from April 2011 to December 2012 for contravention of provisions of Rule 3(5B) of the Cenvat Credit Rules, 2004. 28.6 However, I give an option to the assessee, under the first and second proviso to Section 11AC of the Central Excise Act, 1944, to pay 25% of the penalty amount imposed under Section 11AC, ibid, in para 28.5 above 1.. 25% of Rs.8,97,94,670/- which is equal to Rs.2.24,48,6684-), provided the assessee pays the entire amount of demand of Cenvat credit, as determined/ confirmed, in para 28.1 above, relevant to the period from December 2008 to March 2011 i.e. Rs.8,97,94,670/-, along with interest pay....
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....85190/2019 6 iv. However, I give an option to the assessee, under the Section 11AC (1) (c) of the Central Excise Act, 1944, to pay 25% of the penalty amount imposed under section 15 (2) of the CCR, 2004 read with Section 11AC (1) (c), of the Act, in sub para iii above, provided the Noticee pays the entire amount of demand of Cenvat credit, as determined/ confirmed, in sub para i above, along with interest payable thereon as ordered in sub para ii above on the said amount as well as the 25% penalty, within 30 days of the date of communication of this order. 29. This order is issued without prejudice to any other action that may be taken against the Noticee under the provisions of the Central Excise Act, 1944, and/ or the rules made thereunder and/ or any other law for the time being in force." C. PUN-EXCUS-001-COM-014-18-19 dated 15.10.2018 "Order a) I determine and confirm the demand of inadmissible Cenvat credit amounting to Rs.11,57,52,298/- (Rupees Eleven Crores, Fifty Seven Lakhs, Fifty Two Thousand, Two Hundred and Ninety Eight Only), attributable to the cenvat credit availed on inputs written off or in respect of which provision has been made to write ....
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....on of write off and subsequently the same is recredited in the next month. 2.3 As per rule 3 (5B) of the CENVAT Credit rules, 2004 as amended, even in cases, where provision to write off the inputgoods is made, CENVAT credit has to be reversed on such goods/ inputs. A manufacturer is allowed to take re-credit on such credit reversed only when these goods are used in the manufacture of final products. This indicates that before use in manufacturing, the assessee is not entitled for taking re credit of such written off Input-goods. Therefore, the practice followed by the assessed in terms of their General Motors Accounting Policy, of re-crediting (referred as "reversing by CM) the input-goods, shall not entitle them to take re-credit of Cenvat amount attributable to such input-goods that were written off or in respect of which a provision for write off, was made. 2.4 Appellant was availing the Cenvat Credit on the inputgoods both imported as well as locally procured. The Cenvat credit amount in respect of such imported goods is higher to the extent of the Special Additional Duties (SAD). Their accounting records. indicate the value of goods written-off during the relevant accou....
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....ri S D Deshpande, Special Counsel for the revenue. 3.2 Arguing for the appellant learned counsel submits that: • The accounting entries passed by the appellant are for the purpose of valuation of inventory in the books of accounts. These entries are in respect of inputs which are categorized as slow moving, in terms of schedule of requirements. So far as the inputs which are declared "obsolete" or "not usable", the appellant had written off the same from the books of accounts and had reversed the Cenvat credit availed on these inputs, • Following the above principles appellant passed a general entry at the end of every month, for the provision of slow moving stock which is automatically reversed in the subsequent month. Such entry is made for the purpose of valuation of inventory and to determine the Profit and Loss at the end of the month. It is merely a provisional entry, and no stock is reduced from the inventory account. Effectively, there is no provision been made, due to reversal of provision entry in subsequent month. • The appellant had a system in place, wherein, once the inputs have been identified and declared as obsolete and are....
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.... to 1.3.2013. for want of machinery provision. The Explanation to Rule 3(5B) which provides for recovery mechanism, in case of violation of Rule 3(5B) has been inserted with effect from 1st March, 2013. Reliance is placed on the following decisions wherein it was held that no duty could be recovered for want of machinery of the recovery provisions prior to 1.3.2013 a. Ericsson India Pvt. Ltd. Vs. CCE [2019 (3) TMI 776 - DEL] b. Heidelberg Cement India Ltd. Vs. CCT [2017 (11) TMI 1394 Bang] c. Steel Authority of India Ltd. Vs CCE [2020 (3) TMI 147 Chennai] • The recovery provision inserted by way of explanation to Rule 3(5B), only provides for recovery of Cenvat Credit. There is no machinery for recovery of interest and penalty. • The appellant has sufficient accumulated Cenvat Credit balance throughout the period from April 2008 to Feb 2017. All the facts were throughout in the knowledge of department. Hence extended period of limitation cannot be invoked. Nor there is any case for demanding the interest and imposing penalty on the appellants. 3.3 Arguing for revenue, special counsel while reiterating the findings recorded in ....
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.... is created in the SAP on the last working day of the month which is reversed in subsequent month; that inputs deemed to be slow moving in accordance with schedule, are very much capable of being used in the process of manufacture. The entry for ad-hoc provision as recorded by the Appellant. The company's accounting policy states that excess • The Appellant reverses CENVAT credit wherever there is a provision for write-off or write-off of inventory which is not consumed subsequently in the light of above accounting policy and in compliance with the US GAAP. However, in the case of subject inputs towards which a temporary creation of provision of slow moving stock is made, which is subsequently reversed in the very next month, the provisions of Rule 3(5B) are intended to cover these transactions also wherein the value of the inputs has been written off or provisionally written off from the inventory records, • It is evident from the SAP system maintained by the Appellant that they do not have a separate GL code for recording "slow moving inventory", and the same is recorded under the GL code "provision for write-off". Therefore, rule 3(5B) CCR is equall....
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....in respect of which provision has been made in their Books of Accounts whether fully or partially to write off, and on which CENVAT credit was availed by them, is required to be reversed; that if the inputs are rendered fully obsolete and written off or a provision has been made by the Appellant in their books of account for such write off, then it would signify that such inputs cannot be utilized by them in the manufacture of their final products and consequently, they would be liable to reverse the CENVAT credit availed on such inputs. • Interest payable - Under Rule 14 of CCR, 2004, read with Section 11AA of the Act, CENVAT credit taken and utilized wrongly is required to be recovered along with applicable interest. Reliance is placed on the decision of Hon'ble Bombay High Court in the case of M/s. P. V. Vikhe Patil SSK Vs. CCE, as reported in 2007 (215) ELT 023 (Bom). • Penalty imposable - Penalty under Section 11AC of the Central Excise Act, 1944, read with Rule 15 of the CENVAT Credit Rules, 2004, is imposable because the Appellant has contravened the provisions of Rule 3(5B) of the CCR, 2004 and Rule 9(5) of the CCR, 2004, as submitted above. Th....
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....ollowed by the Noticee of first making provisions for write-off of slow moving inputs and subsequently reversing the entries by way of re-credit or reversing these entries in their books of accounts in the subsequent month appeared to be in contravention of the provisions of Rule 3 (5B) of the CCR, 2004 and Rule 9(5) of the CCR, 2004. Consequently, a Show Cause Notice dated 04-01- 2014, was issued to the Noticee demanding CENVAT credit attributable to the inputs, which were written off fully or partially and/or in respect of which provision for such write off was made in their books of account, during the period from December 2008 to December 2012, under the provisions of Rule 14 of the CCR, 2004, read with the proviso to erstwhile Section 11A(1)Section 11A(4) and 11A(5) of the Central Excise Act, 1944 (hereinafter referred to as the Act'), as the case may be; demanding Interest under the provisions of Rule 14 of the CCR, 2004, read with Section 11AB /11AA of the Act, as the case may be and proposing penalty under Rule 15(2) of the CCR, 2004, read with Section 11AC/11 AC(b) of the Act, as applicable during the relevant period. Periodical Show Cause Notices/Statements of Demands....
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.... d) Provisions of Rule 3(5B) of CCR, 2004 were introduced with an objective to bar the availability of CENVAT credit on obsolete inputs or capital goods. Therefore, Rule 3(5B) of CCR, 2004 needs to be interpreted in a way that achieves the legislative object. e) The Noticee has maintained its records and books of accounts in accordance with the provisions of CCR, 2004 and there is no violation of Rule 9(5) of CCR, 2004, f) The demand needs to be re-quantified on account of multiple counting of the write-off resulting in demand of reversal at multiple occasions on the same part, on account of goods in transit and on account of credit already reversed on obsolete inputs g) Interest is not recoverable if Original Demand is not sustainable. The disputed CENVAT credit has not been utilized in the instant case and hence, interest can in no manner be recovered. h) No Penalty can be imposed in the instant case 9. From the averments made in the SOD, reply to the SOD, oral submissions during the course of personal hearing, I find that the main issues to be decided in this case, are -- (a) Whether the Noticee is liable to reverse or pay CE....
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....policy, 'excess productive materials and supplies are those factory materials that due to design changes, annual model changes, overbuys, overproduction or similar reasons are no longer required for normal usage. This means that the excessive stock booked by GML as write-off are no longer required for normal usage in the immediate future due to the design changes, annual model changes, and other reasons mentioned therein in the accounting policy. This signifies that in the short run, these inputs attain the character of temporary obsolescence. 11.3. I find that if the inputs are rendered fully obsolete and written off or a provision has been made by GMI in their books of account for such write off, then it would signify that such inputs cannot be utilized by the Noticee in the manufacture of their final products and consequently, they would be liable to reverse the CENVAT credit availed on such inputs. However, I find that the provisions of Rule 3(5B) of the CCR, 2004, also cover within its ambit inputs which have been rendered obsolete temporarily due to change in production line, introduction of new models, physical deterioration of the inputs etc., but which are cap....
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.... provisions for such write off is made in the books of account, the primary responsibility of the Noticee is to reverse the CENVAT credit availed in respect of such inputs. However, I find that the Noticee have been writing off the value of inputs in their books of accounts, without reversing the CENVAT credit involved in respect of such inputs. These facts clearly establish that the Noticee have violated the provisions of Rule 3(58) of the CCR, 2004. 11.6. Further, I find that the interpretation of the provisions of Rule 3(5B) of the CCR, 2004, as advanced by the Noticee, is not correct and proper and does not reveal the true spirit behind the incorporation of this Rule in the CCR, 2004. In this regard, it will be relevant to mention here that prior to the introduction of this Rule 3(5B) in the CCR, 2004, vide Notification No. 26/2007-CE (NT) dated 11-05 2007, the CBEC, vide Circular No.645/36/2002-CX dt. 16-07-2002, had clarified that - "In cases where the value of the inputs is partially written off/ reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of paymen....
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....the usage of such inputs at a later date, would take recredit of the amount so paid by them. 11.9. In view of the above, the Noticee's contention that Rule 3(58) of the CCR, 2004, has been introduced to deal with cases of permanent obsolescence of inputs as booked in the books of accounts and that the said Rule would not be applicable to the facts and circumstances of the present case, is not acceptable and liable to be rejected. 11.10.In this regard, I also find that the Noticee have relied upon certain case laws, namely - a. Audco India Ltd. Vs CCE 2006 (184) ELT 77 b. CCE Vs Ingersoll Rand (I) Ltd. 2014 (300) ELT 317 c. CCE Vs. Indian Petrochemicals Corporation Ltd. -2008 (226) ELT 339 (Born) d. Ultratech Cement Co. Ltd. Vs. CCE - 2009 (247) ELT 771 (Tri-Ahmd) e. Tecumseh Products India Pvt. Ltd. Vs. CCE - (2008 (221) ELT 129 (Tri Bang) f. CCE Vs Fairfield Atlas ltd. - 2008 (230) ELT 511(Tri-Mum) g. Hindustan Zinc Limited Vs. CCE - 2005 (191) ELT 724 (Tri-Bang) 11.11. The gist of these cases is that CENVAT credit will not be denied on inputs and capital goods, the value of which has bee....
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.... of account, the Noticee have not maintained records to show the CENVAT credit involved on such inputs, to show bifurcation of these inputs into imported or indigenous, reversal of credit, if any. made by them in respect of these inputs, usage of these inputs temporarily rendered obsolete, at a later date, etc. which shows their incompatible inventory management system, which is not in consonance with the provisions of CCR, 2004. I therefore hold that the assessee has failed to maintain proper accounts in respect of inputs on which they have availed CENVAT credit and hence they have violated provisions of Rule 9(5) of CCR, 2004. 11.14. I find that the Noticee contended that the demand needs re-computation on account of multiple counting of the write-off resulting in demand of reversal at multiple Occasions on the same part. In this regard, I find that the working of demand in the Statement of Demand has been done on the basis of information supplied by the Noticee themselves and not on the basis of any assumptions and presumptions and also that this issue has been in dispute since the first SCN issued to them on 04-01 2014. In this regard, I find that the Noticee have encl....
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.... on obsolete parts on 31-03-2014 to 31-01-2015 and Annexure 17 is screenshots of the said debit entries. I find that the period of demand in the instant case is from 2015-2016 (Written off entry posted on 31-03 2016) & 2016-17 (Written off entry posted on 31-03-2017). Hence the same is not relevant for the instant case. Therefore, I am unable to give them any relief on this count. 11.17. In view of the above, I conclude that the Noticee have contravened the provisions of Rule 3 (5B) of the CCR, 2004, in as much as they have failed to pay an amount equivalent to the CENVAT credit attributed in the value of inputs written off fully or partially or where the provision to write off fully or partially has been made in their books of accounts and credit availed on inputs written off at the time of such write-off and Rule 9(5) of the CCR, 2004 in as much as they have failed to maintain the proper records to prove the admissibility of CENVAT credit availed by them on the written off 'Inputs', as they have already made provision in their books of accounts. Accordingly, I hold that the Noticee GMI had failed to pay or reverse the CENVAT credit taken in respect of 'Inputs....
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....nation. - If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rules (5), (5A), and (5B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken." There is complete legislative history to explain the insertion of the rule 3 (5B). Prior to the insertion of the said rule, CBEC has is 1995 issued Circular No 101/12/96-CS dated 22.2.1995 as a direction to plug the revenue leakage in situations where assessee was writing off the material in the books of accounts, but not reversing the MODVAT credit availed on those input materials. Subsequently, the CBEC issued circular no. 615/36/2002-X dated 16.7 2002 clarifying that in situation wherein inputs had been written off, the instruction mentioned in circular dated 22.2.1995 shall apply i.e. Credit availed must be paid back. Rule 3(5B) was introduced w.e.f. 11.5.2007. The intention for insertion of Rule 3(5B), was to plug those situations, wherein the assessee is availing benefit of Cenvat Credit on the inputs which are not intended to be used and are written off or provisioned for written off in the books of accounts, but still lying in....
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.... the raw material in its excisable product. Thus it is the option of the manufacturer to declare that inputs on which he has taken the credit have become unusable or have been lost and are not available for the purpose of manufacture of finished goods which are cleared on the payment of duty. The philosophy of this observation of Hon'ble Apex Court, is what has been formally stated in Rule 3 (5B) of the CENVAT Credit Rules, 2004. 4.4 The phrase "write off" or "provision to write off", have not been defined in the Central Excise Act, 1944 or the rules made thereunder including the CENVAT Credit Rules, 2004. However the same have been explained in various dictionaries in following manner: • Dictionary of Accounting Terms (by Joel G Siegel) WRITE OFF 1. Transfer of the entire balance of an asset account into an expense or loss account. A full reduction in an asset indicates it is not worth anything (has no future benefit) due to some occurrence. An example is the destruction of a machine in a fire when the company has no insurance and the machine no salvage value. 2. elimination of a specific customer's account balance because of uncollec....
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....entory below its cost is recognized immediately as it is anticipated that the enterprise will make losses whenever it will sell..." Furthermore, the same principle is laid down in the US GAAP. The following is the text of SAB topic 5.BB, Inventory Valuation Allowance, Facts: FASB ASC paragraph 330-10-35-1 (Inventory Topic), specifies that "(a) departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as its cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market." ... Emphasis Supplied Hon'ble Supreme Court in the judgment of CIT V. British Paints India Ltd. [1991] 54 Taxman 499 (SC) has observed as follows: 8. It is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock-intrade at th....
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....ars will point out if any discrepancies exist in the actual physical stock of inventory and inventory records. Without making any reference to such financial statements can anybody conclude in respect of write off of the inputs or finished goods. Not a single case of such reference over the period from 2008 to 2017 has been put forth. 4.8 In the case of Solvay Specialties India Pvt Ltd. [2018 (12) G.S.T.L. 82 (Tri. - Ahmd.)], Ahmedabad Bench has observed as follows: "6. The short issue involved in the present case is: whether the appellants are required to reverse the credit availed on inputs alleged to have been written off in their books of account in accordance with Rule 3(5B) of Cenvat Credit Rules, 2004. Before analyzing the issue it is worth mentioning the relevant Rule 3(5B) of the Cenvat Credit Rules, 2004 as was in force during the relevant time, which reads as follows : "Rule 3(5B) : If the value of any input or capital goods before being put to use on which CENVAT credit has been taken is written off fully or partially or where any provision to write of fully or partially has been made in the books of account, the manufacturer or service provider is ....
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....alance sheet. In these circumstances, Issue No. (iii) is answered in favour of the appellant." 4.10 In case of Ingersoll Rand India Ltd. [2014 () ELT (Guj)] Hon'ble Gujarat High Court has in respect of the similar provisions under the scheme of MODVAT credit held as follows: "7. We are of the opinion that the reduction of the value of such spares (inputs) for income-tax purpose, cannot be equated with writing off of the physical stock. The accounts maintained by the manufacturer for the income-tax purpose stand on an entirely different footing and would have to follow the accounting standards prescribed under the law. If under such accounting principles, the assessee is entitled to diminish the value of a certain stock held over a period longer than the specified period, the same has no correlation with the availability of physical stock insofar as the manufacturing activity is concerned. 8. Even otherwise, the Rules of 1944 did not envisage any period within which the input must be consumed. In the case of Dai Ichi Karkaria Ltd. (supra), the Apex Court observed as under "17. It is clear from these Rules, as we read them, that a manufacturer obtains cr....
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....rule did not envisage reversal of Cenvat credit even before removal of goods. 10. With this background, we may peruse the two circulars heavily relied upon by the revenue. These circulars have been issued by the C.B.E. & C. in exercise of powers under Section 37B of the Central Excise Act, 1944 ('the Act', for short). In the circular dated 22-2-1995, it was inter alia provided as under :- "Instances have been brought to the notice of the Board where Modvat credit taken on inputs by the assessee was not reversed even after writing off of the materials on which the credit was taken. Cases have also been noticed where the credit had not been adjusted even though the write-off of the input materials had taken place three or four years ago. In such situation, it is obligatory on the part of the assessees to straight away reverse the Modvat credit taken under intimation to the Ranger Officers concerned. Utilisation of Modvat credit taken on inputs, which had actually been written off for stock account purposes, clearly will amount to mis-construction and abuse of the Modvat scheme." 11. This circular thus provided that where the credit has not been adjusted eve....