Department cannot raise demand without examining the reversal of Cenvat credit and calculating proportional credit

The CESTAT, Ahmedabad in Sanofi India Limited v. C.C.E. & S.T.- SURAT-II [Excise Appeal No. 10583 of 2013 in Final Order No. A/10115-10117/2023 dated January 25, 2023] has held that, once the assessee had reversed the proportionate credit attributed to the exempted goods, no demand of 10% of the value of goods can be raised by the Revenue Department. Further held that, reversal of Cenvat credit is one of the option provided and it is upon the assessee to avail such option and the Revenue Department cannot arbitrarily choose any particular option and impose on the assessee. Remanded the matter back due to failure in examining the reversal of Cenvat credit and non-calculation of the proportionate credit. Moreover, set aside the personal penalty in the matter.

Facts

Sanofi India Limited ("the Appellant") is engaged in manufacturing of excisable goods falling under Chapter 29 & 30 of the Schedule to Central Excise Tariff Act, 1985 ("the Central Excise Act") and is availing the benefit of exemption on Insuman, Lantus, Campto Injection and Granocyte Injection ("the goods") and is also clearing some goods at nil rate of duty. Further, the Appellant started availing Cenvat credit on various input services from March, 2005.

The Revenue Department ("the Respondent") alleged that, since the Appellant is availing the Cenvat credit in respect of common input services, they are liable to pay 10% of the value of exempted goods or goods attracting nil rate of duty in terms of Rule 6(3) of the Cenvat Credit Rules, 2004 ("the Cenvat Credit Rules"). Further, imposed the personal penalty on the Appellant.

However, the Appellant submitted that they have reversed the entire credit of common input services used in the manufacture of dutiable as well as exempted goods, therefore, the demand of 10% of the value of the exempted goods in terms of Rule 6(3) of the Cenvat Credit Rules will not sustain. Further, the demand was raised for the period March, 2005 to January, 2007, whereas, the Show Cause Notice ("SCN") was issued on February 26, 2010, therefore, the entire demand is beyond limitation and further as per the Rule 6 of the Cenvat Credit Rules, the Appellant is required to reverse the proportionate credit attributed to the exempted goods and the Appellant has reversed entire credit on the common input service therefore, the amount over and above the proportionate credit may be adjusted against the liability of interest, if any arise. 

Issue

Whether the Appellant is liable to pay the demand, even after reversal of the entire Cenvat credit on common input service?

Held

The CESTAT, Ahmedabad in Excise Appeal No. 10583 of 2013 in Final Order No. A/10115-10117/2023 held as under:

• Noted that, the Appellant as per the provision is required to reverse the proportionate credit attributed to the exempted goods and as against the proportionate credit the Appellant have reversed much more amount i.e. entire credit on the common input service amounting to INR 22,18,585/-.
• Observed that, once the assessee has reversed the proportionate credit attributed to the exempted goods, therefore, no demand of 10% of the value of goods can be raised by the Department. 
• Stated that, reversal of Cenvat credit is one of the option provided under Rule 6(3) of the Cenvat Credit Rules therefore, it is upon the Appellant that which option needs to be availed and the Respondent cannot arbitrarily choose any particular option and impose on the Appellant.
• Noted that, the Respondent straight away demanded 10% of the value of exempted goods and neither examined the reversal of Cenvat credit made by the Appellant nor even calculated the proportionate credit.
• Stated that, it needs to be reconsider whether the excess amount of Cenvat credit can be adjusted against the interest.
• Opined that, the demand of personal penalty on the Appellant is not prima facie sustainable. Further, since the issue relates to the interpretation of Rule 6 of the Cenvat Credit Rules, malafide intention of the present employee with the Appellant cannot be attributed, therefore, the personal penalty imposed on the Appellant is not sustainable.
• Set aside the personal penalty imposed on the Appellant and remanded the matter back to the Respondent.

Relevant Provisions

Rule 6 of the Cenvat Credit Rules

"Conditions for allowing CENVAT credit -

(1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the job worker, in case goods are sent directly to the job worker on the direction of the manufacturer:
Provided that the manufacturer shall not take CENVAT credit after one year of the date of issue of any of the documents specified in sub- rule (1) of rule 11.

(2) (a) The CENVAT credit on inputs shall be allowed even if any inputs as such or after being partially processed are sent to a job worker and from there subsequently sent to another job worker and likewise, for further processing, testing, repairing, re-conditioning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer taking the CENVAT credit that the inputs or the products produced therefrom are received back by the manufacturer, within one hundred and eighty days of their being sent from the factory:

Provided that credit shall also be allowed even if any inputs are directly sent to a job worker without their being first brought to the premises of the manufacturer, and in such a case, the period of one hundred and eighty days shall be counted from the date of receipt of the inputs by the job worker;

(b) if the inputs are not received back within the time specified under sub-clause (a) by the manufacturer, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to the inputs, by debiting the CENVAT credit or otherwise, but the manufacturer may take the CENVAT credit again when the inputs are received back in the factory.

(3) The Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of the manufacturer of the final products who has sent the input or partially processed inputs outside his factory to a job-worker may, by an order, which shall be valid for three financial years, in respect of removal of such input or partially processed input, and subject to such conditions as he may impose in the interest of revenue including the manner in which duty, if leviable, is to be paid, allow final products to be cleared from the premises of the job-worker.

Explanation I.- The amount mentioned in this rule, unless specified otherwise, shall be paid by the manufacturer of goods by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation II. - If the manufacturer of goods fails to pay the amount payable under this rule, it shall be recovered, in the manner as provided in rule 16, for recovery of CENVAT credit wrongly taken.

Explanation III.- In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year, the expressions, "following month" and "month of March" occurring in Explanation I shall be read respectively as "following quarter" and "quarter ending with the month of March."