The Calcutta High Court has dismissed the Revenue’s appeals challenging the CESTAT order that granted relief to a biscuit manufacturer in a dispute concerning reversal of CENVAT credit attributable to exempted goods.
The bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar observed that where an assessee has exercised an option available under Rule 6 of the CENVAT Credit Rules, 2004, the Department cannot unilaterally substitute that option with a more onerous percentage-based mechanism merely because it disputes the manner in which the assessee complied with the chosen procedure.
The case concerned the period from financial years 2010-11 to 2015-16, when the respondent was engaged in manufacturing biscuits. Some biscuits were dutiable, while packaged biscuits having a retail sale price not exceeding ₹100 per kilogram were exempt from central excise duty under Notification No. 12/2012-CE.
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Since common inputs and input services were used in manufacturing both dutiable and exempted biscuits, Rule 6 of the CENVAT Credit Rules became relevant. The statutory framework required an assessee using common inputs for both categories of products either to maintain separate accounts or to follow one of the mechanisms prescribed under Rule 6(3), including payment of the prescribed percentage of the value of exempted goods or proportionate reversal of credit in accordance with Rule 6(3A).
The Department’s audit subsequently alleged that the company had not maintained separate accounts as required under Rule 6(2). Although the company claimed that it had reversed proportionate credit attributable to exempted goods, the Revenue alleged that such reversals were not properly reflected in the statutory ER-1 returns for most of the disputed period.
The Department also alleged non-compliance with procedural requirements under Rule 6(3A), including the requirement to intimate the jurisdictional Superintendent regarding payments and adjustments within the prescribed period.
Following the alleged defaults, the Department issued two Show Cause-cum-Demand notices dated April 28, 2015 and April 26, 2016, demanding ₹21,95,15,813 and ₹5,78,83,997 respectively, along with applicable interest and penalties. The adjudicating authorities subsequently confirmed the demands through orders dated August 30, 2016 and October 26, 2017.
The dispute ultimately reached the CESTAT, Kolkata. By its common order dated June 5, 2024, the Tribunal allowed the company’s appeals after finding that the disputed credit had either not been availed in respect of exempted goods or that proportionate credit attributable to exempted goods had been reversed. The Revenue thereafter approached the High Court under Section 35G of the Central Excise Act, 1944.
Before the High Court, the Revenue contended that the Tribunal had failed to appreciate the mandatory statutory scheme governing CENVAT credit where common inputs were used for dutiable and exempted goods.
According to the Department, once the manufacturer failed to maintain separate accounts under Rule 6(2), it was required to follow one of the options specifically prescribed under Rule 6(3). The Revenue argued that the respondent could not devise its own mechanism for reversing credit based on internal calculations.
The Department further maintained that the procedural requirements under Rule 6(3A) were mandatory. It pointed to the absence of corresponding reversals in ER-1 returns for substantial portions of the disputed period and the alleged failure to furnish timely intimation to the jurisdictional authorities.
The Revenue also argued that the assessee bore the burden of establishing its entitlement to CENVAT credit and had failed to produce sufficient documentary evidence. It highlighted alleged deficiencies in Chartered Accountant certificates and their reconciliation with statutory records.
The company, however, disputed the Revenue’s interpretation and maintained that it had substantially complied with Rule 6.
According to the respondent, total credit of ₹95,88,077 had been availed on common inputs and input services during the relevant period, out of which ₹68,78,976 had been reversed in accordance with the formula under Rule 6(3A). The remaining net credit was stated to be ₹27,09,101.
The company also relied on intimation letters furnished at the beginning of the relevant financial years and Chartered Accountant certificates issued subsequently to substantiate the computation and reversal.
A major contention of the respondent was that the Department’s demand of approximately ₹27.74 crore was disproportionate because it was calculated by applying a fixed percentage to the value of exempted goods rather than determining the actual credit attributable to exempted goods.
The respondent argued that the Department could not move from the proportionate-reversal mechanism chosen by the assessee to the percentage-based mechanism under Rule 6(3)(i) simply because it disputed the assessee’s compliance with Rule 6(3A).
The High Court rejected the Revenue’s approach.
One of the central findings of the Court was that the choice between the options provided under Rule 6(3) rests with the assessee. The Department does not have statutory authority to select or impose a particular option on the assessee.
The Court held that even where the Revenue believes that an assessee has incorrectly applied the formula under Rule 6(3A), the Department’s remedy is to examine the computation under that very mechanism and determine the correct amount, rather than automatically shifting the assessee to the more punitive percentage-based liability under Rule 6(3)(i).
The Court therefore drew an important distinction between challenging the correctness of an assessee’s proportionate reversal and substituting the assessee’s chosen statutory option with another option carrying a substantially higher liability.
The Court also took note of the disproportion between the credit involved and the demand sought to be recovered.
The records showed that the respondent had availed total common credit of ₹95,88,077 and had reversed ₹68,78,976. Against this background, the Revenue sought to impose a demand exceeding ₹27 crore by applying the percentage-based mechanism to the value of exempted goods.
The Court observed that the proposed demand was roughly 28 times the total common credit actually availed by the respondent. It found that such a demand would effectively transform a compensatory mechanism under the CENVAT scheme into an arbitrary penal measure, contrary to the legislative purpose of the credit rules.
The High Court further held that the Revenue’s objections concerning disclosure of reversals in ER-1 returns could not, in the circumstances of the case, justify denial of substantive relief.
The Court considered the documentary material placed before it, including Chartered Accountant certificates and intimation letters covering the relevant period. It concluded that the evidence provided sufficient factual support for the finding that the required reversals had in fact been calculated and made.
The Court emphasized that where the substantive objective of the statutory provision has been fulfilled and that compliance can be independently verified through records and audit material, technical defects in the manner in which the information was disclosed in tax returns should not automatically result in denial of a substantive entitlement or imposition of a disproportionate liability.
Another important aspect of the judgment concerned the scope of the High Court’s jurisdiction under Section 35G of the Central Excise Act.
The High Court noted that the CESTAT had examined the records and reached a factual conclusion that the respondent had either not availed the disputed credit attributable to exempted goods or had reversed the proportionate credit.
According to the Court, findings of the Tribunal concerning compliance with Rule 6 were essentially findings of fact. Unless such findings were shown to be perverse, there was no substantial question of law warranting interference under Section 35G.
The Court accordingly found the Revenue’s appeals devoid of merit and upheld the Tribunal’s order.
The substantial question admitted in the appeals was whether the CESTAT’s order dated June 5, 2024, subsequently rectified on August 7, 2024, was contrary to Rule 6(3) and Rule 6(3A) of the CENVAT Credit Rules, 2004.
The High Court ultimately answered the substantial question against the department, dismissed both appeals and disposed of the connected applications. There was no order as to costs.
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