Excess Reversal of CENVAT Credit on Inter-Unit Transfers Not Illegal: CESTAT

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that reversal of CENVAT credit in excess of the credit originally availed, at the time of clearance of inputs “as such” to sister units, does not amount to passing on excess credit nor does it attract recovery under Section 11A or Section 11D of the Central Excise Act, 1944. The bench of P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) has observed that once duty or credit reversal at the supplier’s end has not been set aside or refunded, the Department cannot deny credit to the recipient units. Denial of credit in such circumstances would amount to double recovery, which is contrary to the very scheme of CENVAT credit meant to avoid cascading of taxes. The appellant/assessee Yazaki India is engaged in the manufacture of automotive wiring harnesses falling under Chapter 85 of the Central Excise Tariff Act, 1985, with multiple manufacturing units at Maraimalai Nagar and Guduvancherry in Tamil Nadu. During the period July 2009 to October 2011, inputs on which CENVAT credit had been availed at one unit were transferred “as such” to other sister units of the same company. While effecting such transfers, the assessee reversed CENVAT credit using an internal accounting methodology based on average cost. In certain cases, the amount reversed exceeded the exact credit originally availed on the inputs. The Department alleged that this resulted in passing on excess credit to recipient units, in violation of Rule 3(5) of the CENVAT Credit Rules, 2004, enabling them to avail inadmissible credit. Show cause notices were issued proposing recovery of duty under Rule 14 of the CENVAT Credit Rules read with Section 11A of the Central Excise Act, invocation of Section 11D on the ground of alleged excess collection, and imposition of penalties under Rule 15. The adjudicating authority dropped the entire demand against the supplying unit (D-7 unit) but imposed a penalty of ₹1 lakh. However, demands of about ₹38.31 lakh and ₹39.07 lakh, along with interest and equal penalties, were confirmed against the recipient units (K-7 and E-8), and these were upheld by the Commissioner (Appeals). Both the assessee and the Revenue carried the matter in appeal before the Tribunal. The CESTAT observed that Rule 3(5) merely requires the manufacturer to pay an amount equal to the credit availed when inputs are removed “as such.” The rule ensures neutralisation of credit but does not prescribe a prohibition against reversal of a higher amount. The Bench noted that, in the present case, there was no allegation of short-reversal of credit. On the contrary, the reversal was more than the credit originally taken. The Tribunal held that fiscal provisions creating liability must be strictly construed and that a prohibition cannot be read into the rule by implication. It was emphasised that once the credit originally availed stands reversed, the revenue position of the Government is fully protected. Excess reversal, if any, cannot be treated as a contravention attracting recovery. Rejecting the Department’s reliance on Section 11D, the Tribunal held that the provision applies only when an assessee collects an amount from a buyer representing duty of excise and retains it, resulting in unjust enrichment. The transfers were inter-unit stock transfers within the same legal entity, involving no sale, no independent buyer, and no collection of duty from any customer. Accordingly, the essential ingredients for invoking Section 11D were absent, rendering the provision wholly inapplicable. Relying on settled judicial precedents, the Bench ruled that the credit availed by the recipient units K-7 and E-8 was lawful and could not be disallowed merely because the supplier had reversed a higher amount than required. The CESTAT also set aside the penalty of ₹1 lakh imposed on the supplying unit, holding that when the substantive demand itself fails, the penalty cannot survive. Similarly, penalties imposed on the recipient units were quashed, with the Tribunal observing that the issue involved interpretation of law and inter-unit transfers within the same company, with no allegation of fraud, suppression, or intent to evade duty. Dismissing the Revenue’s appeal in entirety, the Tribunal allowed all appeals filed by Yazaki India. All demands of duty, interest, and penalties against the assessee’s units were set aside. Case Details Case Title: M/s. Yazaki India Private Limited Versus Commissioner of GST and Central Excise Citation: JURISHOUR-193-CESTAT-2026(Che) Case No.: Excise Appeal No. 40227 of 2016 Date: 03.03.2026 Counsel For Appellant: M. Karthikeyan, Advocate Counsel For Respondent: O.M. Reena, Authorized Representative Click Here To Read Order Read More: Demand Under RCM Can’t Be Sustained If Entire Service Tax Liability Has Already Been Discharged By Service Provider: CESTAT

Excess Reversal of CENVAT Credit on Inter-Unit Transfers Not Illegal: CESTAT

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