The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that refund of accumulated Cenvat credit under Rule 5 of the Cenvat Credit Rules, 2004 could not be denied merely for want of a one-to-one correlation between individual inputs and exported goods.
The bench of Ajayan T.V. (Judicial Member) has observed that an earlier finding that repayment of drawback removed the bar to refund had attained finality since the Department had not challenged that finding.
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The appellant/assessee is a manufacturer of readymade garments for export, had availed Cenvat credit on inputs. Since its finished goods were fully exported, the accumulated credit could not be utilised domestically. The assessee therefore claimed a refund of ₹42,25,734 under Rule 5 of the Cenvat Credit Rules, 2004, by letter dated 30 May 2005.
The original refund claim was rejected in its entirety in 2006. The Department cited several grounds, including absence of certain proof of export, non-fulfilment of Notification No. 11/2002-CE (NT), lack of the required input-output ratio, limitation for part of the claim, and simultaneous availment of duty drawback.
The matter subsequently went through several rounds of appellate and remand proceedings.
In 2007, the Appellate Authority held ₹9,03,190 ineligible on account of erroneous input documents but remanded the balance for verification. Importantly, it also held that repayment of the entire drawback restored the assessee to the position of a person who had never availed the drawback, relying upon the Supreme Court’s decision in Chandrapur Magnet Wires (P) Ltd. v. Collector of Central Excise, Nagpur. The Department did not challenge this order.
The assessee thereafter challenged the denial of ₹9,03,190 before CESTAT. By Final Order No. 1214/2009 dated 8 September 2009, the Tribunal set aside that denial and directed that the entire refund claim be considered afresh on the issues relating to Notification No. 11/2002-CE (NT) and the effect of drawback or rebate. That order was also not challenged further by either side.
The assessee submitted additional documents. The Range Officer examined the purchase orders, designs, input documents and export documents and issued verification reports certifying eligibility of the claim for ₹28,66,198.
The adjudicating authority sanctioned ₹28,66,198 through Order-in-Original No. 1/2008 (Denovo) dated 26 February 2008. The amount excluded ₹8,289 relating to two instances of short shipment, while ₹9,03,190 remained outside the denovo sanction because the issue was then sub judice.
The Department subsequently issued a show cause notice proposing recovery of the sanctioned ₹28,66,198 as an erroneous refund. The notice was initially placed in the call book pending the Department’s appeal against the refund sanction.
The Department’s appeal against the refund sanction was allowed in 2010. The appellate authority found fault with the refund on several grounds, including absence of a specific finding on the input-output ratio, lack of proof that the exported goods were manufactured from Cenvat-credit-availed inputs rather than CT-2 procured inputs, alleged non-fulfilment of Notification No. 11/2002-CE (NT), distinction between duty-paid and non-duty-paid materials, and absence of one-to-one item-wise correlation.
The matter again reached CESTAT. In 2015, the Tribunal set aside the appellate order because the Range Officer’s report had not been furnished to the assessee for rebuttal, and remanded the matter for fresh consideration after supplying the report.
After the report was furnished and cross-objections were filed, the Commissioner (Appeals) nevertheless upheld the Department’s position in Order-in-Appeal No. 181/2016. The appellate authority continued to rely upon the alleged deficiencies and also declined to treat the earlier finding concerning repayment of drawback as concluded.
Meanwhile, the Department proceeded with the show cause notice proposing recovery of the sanctioned refund. The assessee requested that the proceedings be kept in abeyance because its appeal against the appellate order was pending before CESTAT.
The adjudicating authority rejected the request, observing that mere pendency of an appeal without a stay did not justify keeping the proceedings in abeyance. By Order-in-Original No. 29/2017-Rf dated 30 March 2017, it confirmed recovery of ₹28,66,198 under Section 11A(1) along with interest under Section 11AB.
The Commissioner (Appeals) subsequently upheld the recovery order through Order-in-Appeal No. 85/2018 dated 13 August 2018, leading to the second appeal before CESTAT.
Before CESTAT, the assessee argued that Rule 5 of the Cenvat Credit Rules read with Notification No. 11/2002-CE (NT) did not require a one-to-one correlation between particular inputs and particular exported goods.
The assessee relied upon decisions including Commissioner of Central Excise, Bangalore III Commissionerate v. Motherson Sumi Electric Wires and Commissioner of Central Excise, Ludhiana v. Vardhman Spinning and General Mills. It was submitted that extensive documentary material, including invoices, shipping bills and bills of lading, had been produced and that the Range Officer had subsequently verified the relevant records.
The Department, on the other hand, maintained that the absence of specific findings regarding input-output ratio, use of Cenvat-credit-availed inputs, Notification No. 11/2002-CE (NT), duty-paid material and item-wise correlation went to the root of the refund eligibility.
CESTAT rejected the Department’s approach on the first issue.
The Tribunal noted that the legal position had already been settled against the Department. Referring to Motherson Sumi, it observed that an assessee seeking refund of accumulated Cenvat credit under Rule 5 read with Notification No. 11/2002-CE (NT) was not required to establish a direct one-to-one correlation between individual duty-paid inputs and the goods actually exported.
According to the Tribunal, it was sufficient that the inputs were used in manufacturing goods that were actually exported and that the credit consequently became incapable of utilisation. The Tribunal also relied upon Vardhman Spinning, where it had been held that the governing provisions did not require separate records demonstrating exclusive use of particular inputs.
The Tribunal therefore found that the deficiencies relied upon in Order-in-Appeal No. 181/2016 were based on a requirement for item-wise correlation that the applicable law did not impose.
CESTAT further noted that the Range Officer’s report was not silent on the matters relied upon by the Department.
The report recorded verification of purchase orders, designs, input documents and export documents. Apart from two isolated instances of short shipment—which had already been excluded from the sanctioned amount—the verification did not disclose discrepancies. The original sanction order also recorded that the assessee had furnished input-output norms, correlated purchase orders with shipping bills and distinguished duty-paid inputs from CT-2 procured inputs.
The Tribunal referred to its earlier decision in Xomox Sanmar Limited v. Commissioner of CGST and Central Excise, Trichy, observing that where a jurisdictional officer submits a verification report confirming the facts he was tasked to verify, it would be inappropriate to simply disbelieve the report. If there was doubt, clarification could be sought rather than rejecting the report outright.
The Tribunal separately examined whether the Department could reopen the issue concerning drawback.
CESTAT noted that the 2007 appellate order had expressly held that full repayment of drawback removed the bar against refund under Rule 5, relying on Chandrapur Magnet Wires. Crucially, the Department had not appealed against that finding.
The Tribunal applied the principle that findings recorded at an earlier stage of the same proceeding and not carried further cannot ordinarily be reopened at a later stage of the same litigation. It referred to Satyadhyan Ghosal v. Deorajin Debi and the Supreme Court’s 2026 decision in Kishorilal (Dead) through LRs v. Gopal.
According to CESTAT, the fact that the earlier order was a remand order did not mean that every finding contained in it remained perpetually open for reconsideration. The remand concerned documentary verification of the quantum and did not leave the separate legal question concerning repayment of drawback unresolved.
The Tribunal therefore held that denial of refund on the drawback ground could not be sustained.
The Tribunal also addressed the separate amount of ₹9,03,190.
It noted that Final Order No. 1214/2009 had already held the denial of this amount unsustainable and directed consideration of the entire claim afresh. Since that order had not been challenged further, its finality had to be respected.
CESTAT clarified that it was not reopening the merits of the ₹9,03,190 claim. Rather, the issue was implementation of the earlier final order, subject to any necessary verification of quantum and residual requirements under Section 11B consistent with that order.
On the fourth issue, however, CESTAT did not find fault with the Department’s decision to proceed with the recovery proceedings merely because the assessee’s appeal was pending.
The Tribunal accepted the settled principle that mere filing of an appeal, without an order of stay, does not suspend the operation of the order under challenge. It therefore found no jurisdictional infirmity in the Deputy Commissioner proceeding with adjudication or in the Commissioner (Appeals) declining to interfere with that course.
However, the Tribunal held that the recovery itself could no longer survive because it was entirely dependent upon the finding that the ₹28,66,198 refund was erroneous. Since CESTAT had now held that the refund was correctly sanctioned, the foundation of the recovery demand disappeared. Consequently, the associated interest demand also could not survive.
It held that the ₹28,66,198 refund sanctioned through Order-in-Original No. 1/2008 (Denovo) was correctly allowed, and the demand for recovery of that amount along with interest under Section 11AB was liable to be set aside.
CESTAT further directed that consequential effect be given to Final Order No. 1214/2009 concerning ₹9,03,190, to the extent the earlier order had not already been implemented. Both appeals were accordingly allowed with consequential reliefs in accordance with law.
The Tribunal also observed that greater restraint in proceeding with the call-book show cause notice while the underlying order remained under challenge before CESTAT could have avoided another round of litigation for the assessee.
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