Goods destroyed - remission granted, but reverse the Cenvat Credit - Board overrules Larger Bench.
For a recap of the issue, let's read what we reported in January 2007.
THE issue is as old as the Credit Rules themselves.
Final products are destroyed in fire & Excise duty is remitted thereon - whether Modvat/Cenvat credit availed on inputs used in manufacture is to be reversed?
If you are a factory owner and there is a fire in the factory, what would you do? Obviously, apart from seeking ways to extinguish the fire/calling the fire brigade, police personnel and ensuring that there is no loss of human life, you start figuring the losses. After the fire is extinguished and you are normal, get hold of the police/fire brigade panchanama mentioning the list of the valuable items & property destroyed in fire with an approximate value of the loss & also simultaneously inform the insurance company, obviously if you have insured the factory, machinery & the stocks [list is not exhaustive]. Ensure that everything is clearly brought on record so that your claim is honored to your satisfaction. At the same time, never forget the Central Excise authorities for this is the department you have to tackle with an ubercool attitude! "Intimate" them!
The reason being, your finished goods that were destroyed in fire need to be remitted of its duty. Simply because, Excise duty is on manufacture and payment of duty, as a facilitation measure, is allowed to be paid on removal from the factory. Make an application to the Commissioner & if he is satisfied that the goods have been destroyed or lost by natural cause or due to an unavoidable accident, he will grant remission of duty due on the said finished goods destroyed in fire. Obviously, this exercise may take some days or months or some years for that matter! It depends.
And, if you have availed credit on inputs which went into the manufacture of those "unfortunate finished goods which were reduced to ashes", just forget it (remission) because apart from the Damocles sword of being held liable to pay Excise duty on the destroyed goods, you may also be served with another notice demanding the modvat/cenvat credit contained in the said finished goods.
If at all the magnanimous Commissioner grants remission of duty as sought by you, provided of course that the Insurance company has compensated you only for the value of the finished goods minus excise duty, rest assured that the demand seeking Modvat/cenvat credit is ready for issuance by the jurisdictional Superintendent for he is governed by the limitation clause under the Act/Rules!
This Modvat issue first found its mention in the year 1996 in the Tribunal decision in Inalsa Ltd. vs. CCE, Delhi () which held that since remission of duty is not equivalent to an exemption from duty, there is no cause for seeking any Modvat reversal.
Seven years down the line, in the case of Mafatlal Industries vs. CCE, Ahmedabad, (), the West Zonal Bench agreed with the Inalsa decision that remission of duty on the finished goods cannot be equated with exemption to goods and that the inputs can be considered to have been put to the intended use of manufacturing of final products, but held as under - "The intention of the Modvat scheme is that the duty paid on inputs can be taken credit for paying duty on the finished goods to give relief against the cascading effect of excise duty. When the duty on the finished goods is being remitted, allowing credit of duty paid on inputs would confer a totally unintended benefit on the appellants. Allowing such credit when the finished goods suffer no duty would amount to allowing a cash refund as it can be utilised for paying duty on other goods. There is no provision in the Central Excise Rules to either allow refund of duty paid on inputs or to grant remission of such input duty when the finished goods made from such inputs get burnt/destroyed in fire. The Modvat scheme cannot be interpreted in a way to allow such a refund/remission of duty on the inputs which is not provided for in the Rules."
Net result was that Modvat credit was held to be recoverable in respect of the inputs which were contained in the finished goods destroyed in fire & in respect of which remission was granted.
The ever-vigilant Board which had vide its earlier Circular 650/41/2002-CX dated 07.08.2002 clarified that Modvat/Cenvat credit of duty paid on the inputs contained in finished products on which duty remission has been granted shall be admissible and reversal thereof shall not be necessary & suitably amended paragraph 2.4 of Chapter 18 of the Central Excise Manual committed a volte-face and came out with a new Circular 800/33/2004-CX dated 01.10.2004 pursuant to this decision in Mafatlal Industries.
The clarification ends thus - " In view of the decision of the Tribunal in the case of Mafatlal Industries, Board has reconsidered the issue of admissibility of Modvat/Cenvat credit on inputs used in the manufacture of finished goods on which duty has been remitted. Accordingly, Board's Circular No. 650/41/2002-CX., dated 7-8-2002 is hereby withdrawn. It is clarified that the credit of the excise duty paid on inputs used in the manufacture of the finished goods on which the duty has been remitted due to damage or destruction etc. is not permissible and the dues with interest should be recovered."
The issue once again echoed in the Tribunal in the case of Electrolux Kelvinator Ltd () when the Tribunal decision in Inalsa Ltd was followed, supported by the Board's Circular dated 07.08.2002. Needless to say, the Mafatlal decision though delivered did not find a mention in the arguments advanced before the Tribunal. Even otherwise, the Board Circular dated 07.08.2002 was still alive and kicking and was withdrawn only in October 2004.
Incidentally, in an issue concerning modvat credit in respect of inputs issued for manufacture but destroyed in fire, the Tribunal in the case of Indchem Electronics () held that modvat credit is not deniable in such a circumstance. Notably, the SLP filed by the Revenue was dismissed by the Supreme Court in the year 2003.
In view of the conflicting decisions in Mafatlal Industries & Electrolux Kelvinator, the matter came to be referred to the Larger Bench headed by the Vice President, in the case of Grasim Industries vs. CCE, Indore.
This order dated 7th August 2006, but certified and circulated only on 16 th January this year, [natural causes, that is] , after narrating the contents of the earlier rule 49 of CER, 1944 and the current rule 21 of the CER, 2002, concerning remission of duty, and the ratio contained in the decisions cited above, concludes thus - Reading of rules under which remission is granted in respect of goods which were lost or destroyed by natural cause or by natural accident, does not provide any condition regarding reversal of credit taken in respect of inputs used on such goods , hence we are unable to support the view taken in the case of Mafatlal Industries whereby it has been that assessee has to reverse the credit taken of inputs used in such goods on which remission is granted. Therefore, we approve the view of the Tribunal taken on the case of Inalsa Ltd in this regard."
So simple! See
So what does the Government do? Now they have amended the Cenvat Credit Rules to stipulate that where remission is granted, credit has to be reversed.
A graceful Board could have allowed this credit. After all it is not every day that goods get destroyed and when they do get destroyed the department should be able to share the agony and provide a little succour.
An alert Netizen wrote to us,
First circular no. 650 was issued in August 2002 based on the Kirloskar Electric Case from Bangalore Tribunal (which relied on the Inalsa case from Delhi Tribunal) to allow Cenvat credit on such inputs. Later when Mumbai Tribunal ruled in favour of the Revenue in Mafatlal case Board reversed its stand and issued a circular 800 in October 2004. In between and thereafter there were innumerable judgments on this issue which have gone in favour of the assessee.
After three years, the Ministry decides to insert a provision to recover Cenvat credit on the inputs used in the goods where remission of duty is sought which is applicable from September 7, 2007. At least from hereafter there is clarity in law and reversal is required (this rule is applicable prospectively only). Is it an end to the controversy? Not really because Board directed the field formations to recover Cenvat credit in circular 800. Now what will be the fate of demands raised post circular 800? The Board could have amended the CCR 04 at that time itself instead of waiting for three years and saved a lot in litigation.
Also see our article - CBEC: THE PHOENIX SANCTUARY!
NOTIFICATION NO. , Dated: September 7, 2007