Dated 26th August, 2019

 Cenvat credit of duties paid by an assessee upon de-bonding, admissible on inputs and capital goods

Cenvat credit of duties paid by an assessee upon de-bonding, admissible on inputs and capital goods


Background:

An Export Oriented Undertaking (commonly known as EOU) gets exemption from excise duties including additional duties of excise, when goods are bought in such EOU for manufacture/production on execution of bond with the prescribed autjorities1. However, at the time of de-bonding the EOU in question is liable to pay excise duty on imported/ indigenous goods lying in stock and on depreciated value in respect of capital goods existing at the time of de bonding.

Cenvat Credit Rules, 2004:

The basic idea and purpose of Cenvat Credit Rules, 2004 (CCR) is to give a set off for duties paid on inputs/ input services and to remove the cascading effect of duties. Rule 3 of the CCR, 2004 contains 11 clauses which enumerates the duties for which Cenvat credit is available. In reference to the above, the question is whether duties paid by the EOU upon de-bonding can be availed as Cenvat Credit as there is a proviso under clause 11 of the aforesaid rule which allows Cenvat credit of the amount of central excise duty paid only on the capital goods at the time of debonding.

Facts of the case:

Two2 appeals were filed against the order of CESTAT dated 14.02.17, wherein the Appellant was denied entitlement to the benefit of Cenvat Credit for excise duties paid on inputs and capital goods at the time of de-bonding. The fact of one of such case is brought out hereunder:

M/s Stanadyne Amalgamations being a 100% EOU was engaged in the manufacture of carbon brushes, such EOU status was subsequently surrendered by adopting de-bonding procedure and became a unit under Domestic Tariff Area (here-in-after referred to as “DTA”). At the time of de-bonding, appropriate duty was paid on the stock of raw materials and depreciated value of capital goods and subsequently, the Appellant claimed set off of the duty paid at the time of de-bonding against output tax liability in respect of clearance from DTA. The Hon’ble Chennai Tribunal upheld the order of the adjudicating authority and held that the benefit of Cenvat Credit was not eligible. Therefore an appeal was filed before the Hon’ble High Court of Madras.

Contention put forth by both the Appellant and Respondents:

Learned counsel for the Appellants took the plea of Rule 3(1) of the Cenvat Credit Rules, 2004 which allows manufacturer to take Cenvat credit of duties paid and also drew attention to the proviso as contained in the aforesaid Rule after the duties enumerated therein for which Cenvat Credit is admissible. In furtherance to the above one should also take a view as to the true intent of the legislature is to remove the cascading effect of duties paid by a manufacturer and thus Rule 3(1) specifically enumerates the duties for which Cenvat Credit is available. Moreover the proviso as attached below the 11th clause of the aforesaid rule only elucidates that Cenvat credit will also be admissible in relation to capital goods at the time of de-bonding and thus it cannot be interpreted that such Cenvat Credit will not be admissible in the case of Inputs at the time of de-bonding. It was also pointed out that the learned CESTAT had misinterpreted the proviso in allowing Cenvat Credit for Central Excise duty paid only on the Capital Goods at the time of de-bonding of the unit and not on inputs.

The learned counsel on behalf of the revenue contended that for allowability of Cenvat credit on inputs, the proviso is the only enabling provision and it allowed Cenvat Credit of only the excise duty paid on the capital goods at the time of de-bonding. Moreover, it was also contended that the duties were not paid through the prescribed documents.

Contentions put forth by the Hon’ble High Court of Madras:

The matter was admitted in the High Court of Madras, wherein it was observed that the provision of Cenvat credit has no intention of curtailing the credit, admissible legitimately. The Hon’ble High court stated that the proviso inserted below clause 11 of Rule 3(1) of CCR, 2004 is an error in drafting and should have appeared as an explanation or should be read as an explanation. The court in its proceedings also ruled out that unintentionally the proviso had created a restriction on availability of credit on inputs by stating admissibility of credit only on capital goods at the time of de-bonding. The court observed that the benefit of Cenvat credit was entitled to be allowed in respect of all duties paid by the Appellant at the time of de-bonding and also concluded that the proviso as contained in Rule 3 (1) of CCR, 2004 could not have restricted the Cenvat credit only in respect of Central Excise duty paid on capital goods at the time of de-bonding which in turn defeated the argument placed by the respondent stating that the proviso is the only enabling provision granting Cenvat Credit.

Judgements relied upon:

The Hon’ble High Court of Madras also observed a plethora of earlier judgments made by the Hon’ble Supreme Court and other Courts. In one of such cases the Hon’ble Tribunal of Mumbai3 relied upon the decision of the Commissioner (Appeals) and held that the appellants are entitled to Cenvat Credit of Central Excise duty paid at the time of de-bonding of the capital goods and later on the same was also given assent by the Bombay High Court, wherein the Hon’ble High Court passed the order stating that “it is clear that at the time of de-bonding, amount equal to excise duty was paid by the respondent and therefore after de-bonding the appellant would be entitled to avail credit of that amount.” Moreover, in the one of the case decision of the Hon’ble Supreme Court4 it was held that as a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment, and ordinarily, a proviso is not interpreted as stating a general rule. But, proviso is often added not as exceptions or qualifications to the main enactment but as savings clauses, in which cases they will not be construed as controlled by the section.

Final verdict given by the High Court of Madras:

The proviso inserted below clause 11 of Rule 3 of the CCR, 2004 is more of in the nature of an explanation clarifying as to what was in doubt earlier, regarding allowing of Cenvat Credit on Capital goods. There was never any ambiguity in the Cenvat credit rules as to the allowing of credit on for duties paid on raw materials/ inputs held in stock at the time of de-bonding. Moreover, the proviso inserted by a notification5 cannot be a standalone enabling power to provide such cenvat credit to the assessee. Such an interpretation would defeat the very purpose of Rule 3(1) of CCR, 2004 when an EOU gets converted into a DTA on de-bonding. Therefore, the appeal was allowed entitling the appellants to take Cenvat Credit of duties paid, under Rule 3(1) of the CCR, 2004 at the time of de-bonding.

  • Notification No. 22/2003-CE dated 31.03.2003.
  • M/s Stanadyne Amalgamations (P) Ltd Vs. Commissioner of Central Excise, Chennai and M/s Avo Carbon India (P) Ltd. Vs. Commissioner of Central Excise, Chennai
  • Commissioner of Central Excise, Pune Vs. Rajdhani Fab Pvt. Ltd. (2008(221)ELT 435)
  • Bhaskar Shrachi Alloys Ltd. Vs. Damodar Valley Corporation ((2018)8 SCC 281)
  • Notification No. 35/2008-CE on 24.09.2008.

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