The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that an assessee converting a 100% Export Oriented Unit (EOU) into a Domestic Tariff Area (DTA) unit is entitled to avail CENVAT credit of eligible duties actually paid at the time of de-bonding on inputs and capital goods. 

The bench of P. Dinesha (Judicial Member) and M. Ajit Kumar  (Technical Member) rejected the Revenue’s allegation that the assessee had deliberately exited the EOU scheme to avail inadmissible credit and obtain rebate.

Buy Now: 100+ Judgements On Customs Classification

The appellant/assessee was engaged in manufacturing 100% cotton terry towels classifiable under CSH 6302 9000 of the Central Excise Tariff Act, 1985. The goods were cleared for domestic consumption as well as export on payment of duty under the self-assessment scheme, while the assessee availed CENVAT credit under the CENVAT Credit Rules, 2004.

The unit had earlier operated as a 100% EOU. After achieving positive Net Foreign Exchange (NFE), it was permitted by the Development Commissioner, MEPZ, to exit the EOU scheme through an order dated June 22, 2011. The assessee paid the applicable customs and excise duties on the imported and indigenous capital goods, inputs, consumables, semi-finished goods and finished goods lying with the unit at the time of de-bonding.

Following the exit from the EOU scheme, the unit continued manufacturing from the same premises as a DTA unit under Central Excise registration. The assessee transferred the duties paid at the time of de-bonding to the DTA unit as CENVAT credit. 

The Department noticed that the assessee had availed CENVAT credit of Rs. 3,19,26,833/- towards CVD and AED in June 2011 on the de-bonded goods.

In relation to capital goods, the assessee had paid duties of Rs. 63,32,532/-. Out of this, credit of Rs. 1,16,214/- pertaining to imported machinery spares was considered ineligible by the Department, leaving Rs. 62,16,318/- as eligible capital-goods credit according to the Department’s calculation.

The disputed credits were subsequently utilised for payment of duty on finished goods, which were predominantly exported. The assessee claimed rebate amounting to Rs. 3,74,43,884/-. The Department alleged that the assessee had deliberately exited the EOU scheme and availed inadmissible CENVAT credit with the intention of obtaining the rebate. 

A show cause notice dated July 6, 2016, proposed disallowance of Rs. 3,19,26,834/- under Rule 3 of the CENVAT Credit Rules, 2004, along with Rs. 1,16,214/- relating to imported machinery spares. Interest and penalty under Rule 15(2) of the CENVAT Credit Rules read with Section 11AC of the Central Excise Act were also proposed.

The Commissioner ultimately allowed CENVAT credit of Rs. 2,16,53,205/- but disallowed credit aggregating Rs. 1,03,89,840/-, comprising Rs. 1,02,73,626/- and Rs. 1,16,214/-, along with interest and equal penalty. 

The assessee challenged the disallowance, while the Department filed an appeal against the portion of credit allowed by the Commissioner.

The central question before the Tribunal was whether an assessee, after de-bonding from the status of a 100% EOU and commencing manufacture as a DTA unit, could avail CENVAT credit of duties paid at the time of de-bonding on raw materials, inputs and capital goods lying with the unit. 

The Tribunal noted that the assessee had surrendered its EOU status after obtaining the requisite permission, paid the assessed duties on the goods lying with the unit at the time of de-bonding and thereafter commenced manufacturing as a DTA unit.

Importantly, the Revenue did not dispute the payment of duty at the time of de-bonding. 

CESTAT observed that the issue was no longer res integra in view of the Madras High Court’s decision in Stanadyne Amalgamations (P) Ltd. v. CCE and AVO Carbon (India) Pvt. Ltd. v. CCE, reported at 2019 (8) TMI 572.

In those proceedings, the High Court had considered whether duties paid by an EOU at the time of de-bonding on imported and indigenous raw materials and capital goods could be availed as CENVAT credit.

The High Court held that, having regard to the object and scheme of Rule 3 of the CENVAT Credit Rules, the duties paid upon de-bonding were eligible for CENVAT credit. It further held that the proviso inserted in Rule 3(1) by Notification No. 35/2008-CE(NT) could not be interpreted as restricting the substantive entitlement to credit only in respect of Central Excise duty paid on capital goods. 

The High Court had emphasised that the purpose of CENVAT credit was to provide set-off of duties paid on inputs and capital goods and thereby prevent cascading of duties. It held that the proviso to Rule 3(1) could not be interpreted in a manner that defeated the basic purpose of the CENVAT scheme when a 100% EOU converted into a DTA unit. 

The department had challenged the Commissioner’s order primarily on the ground that the Commissioner had not followed the Tribunal’s earlier decision in AVO Carbon (India) Pvt. Ltd. v. CCE, Chennai-II, reported at 2017 (357) ELT 1057 (Tri.-Chennai).

However, CESTAT noted that the said decision had subsequently been overruled by the Madras High Court in Stanadyne Amalgamations and AVO Carbon. Therefore, the earlier Tribunal ruling could no longer be relied upon by the Revenue to deny the credit. 

The Tribunal also referred to its subsequent Final Order Nos. 41131-41132/2024 dated August 26, 2024, in AVO Carbon India Pvt. Ltd. v. Commissioner of GST & Central Excise, Chennai. In that case, CESTAT had recognised the eligibility of CENVAT credit on inputs consequent upon de-bonding.

The Tribunal had held that CENVAT credit lying in the books of a 100% EOU as on the date of de-bonding could be transferred to the DTA unit and utilised by it. 

Applying these principles, the Chennai Bench held that the relevant consideration was the position after de-bonding.

The fact that the goods had originally been procured or held without payment of duty while the assessee was operating as an EOU did not, by itself, disentitle the assessee from claiming credit of the duty subsequently paid at the time of de-bonding.

The Tribunal observed that after de-bonding and payment of the assessed duty, the goods became duty-paid goods available to the assessee as a DTA manufacturer. Consequently, the subsequent credit was referable to the duty actually paid at the time of de-bonding and not to the earlier duty-free procurement under the EOU scheme. 

The Tribunal further explained the relationship between Rule 3 and Rule 9 of the CENVAT Credit Rules, 2004.

According to CESTAT, Rule 3 is the substantive provision governing the duties in respect of which CENVAT credit can be taken, while Rule 9 prescribes the documents on the basis of which such credit can be availed.

Therefore, eligibility under Rule 3 and compliance with the documentary requirements under Rule 9 have to be considered together. Where the duty paid at de-bonding is an eligible duty under Rule 3 and the prescribed documentary requirements are satisfied, credit cannot be denied merely because the goods had earlier been held by the assessee as an EOU. 

The Tribunal held that the assessee had paid the applicable duty at the time of de-bonding and thereafter used those goods in its DTA manufacturing activity.

The credit was therefore of the duty actually paid on the inputs and not of the duty that had been foregone when the goods were originally procured under the EOU scheme. The earlier EOU status could not, by itself, constitute a valid ground for denying the credit. 

The Tribunal reached the same conclusion in relation to capital goods. It relied upon the Madras High Court’s decision in Stanadyne Amalgamations and held that the proviso to Rule 3(1), inserted through Notification No. 35/2008-CE(NT), could not be treated as an independent or exclusive source of entitlement in a manner that restricted otherwise available credit under Rule 3(1). 

A significant aspect of the ruling was the Tribunal’s rejection of the Department’s allegation that the assessee had deliberately exited the EOU scheme to avail inadmissible credit and obtain rebate.

CESTAT held that the denial of credit merely because the goods had earlier been procured or held by the assessee as an EOU could not be sustained.

The Tribunal specifically observed that how an assessee conducts its business falls within its commercial interests and that the Department cannot speculate about such commercial decisions so long as there is no blameworthy conduct. 

Thus, the mere fact that the assessee’s change from EOU to DTA status subsequently enabled it to avail CENVAT credit and utilise such credit for payment of duty could not, in the absence of blameworthy conduct, be treated as sufficient evidence of an intention to improperly obtain rebate.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: CESTAT Upholds Rejection of Ocean Freight Service Tax Refund as Time-Barred