The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has upheld the recovery of ₹7.20 lakh in central excise duty from a manufacturer after finding that the company had wrongly utilized CENVAT credit that was not legally available as on June 30, 2017.
The bench of Dr. Rachna Gupta (Judicial Member) affirmed that an appeal filed against a recovery letter was not maintainable before the Commissioner (Appeals).
The controversy arose from an audit conducted between March 20 and March 26, 2018. During the audit, the department observed that Kesar Ispat Ltd. had declared central excise duty liability of ₹53.01 lakh for June 2017 but had discharged only ₹45.81 lakh, leaving a balance liability of ₹7.20 lakh.
According to the department, only ₹1.41 lakh, along with applicable interest, was subsequently paid in cash, while the remaining ₹5.78 lakh was discharged through entries in the CENVAT credit register. Authorities alleged that the credit used for this purpose was not available as on June 30, 2017 and, therefore, its utilization violated the provisions of the CENVAT Credit Rules, 2004.
The department initiated recovery proceedings under Rule 8(4) of the Central Excise Rules, 2002 read with Section 11 of the Central Excise Act, 1944, without issuing a show cause notice, treating the amount as recoverable government dues.
The company contended that there was no default in payment of duty and that it was entitled to avail CENVAT credit amounting to ₹5.78 lakh in respect of service tax paid under the Reverse Charge Mechanism (RCM). It argued that denial of utilization of such credit was unjustified.
The appellant further submitted that the department had sought recovery without issuing a show cause notice and that its appeal before the Commissioner (Appeals) had been wrongly rejected as not maintainable. It also maintained that utilization of available CENVAT credit for payment of excise duty was legally permissible.
The department argued that the unpaid duty constituted arrears of revenue recoverable under Section 11 of the Central Excise Act. It relied upon CBIC clarifications stating that such recoverable amounts could be pursued without issuance of a show cause notice.
Revenue authorities further contended that the credit utilized by the appellant was not available on June 30, 2017 and therefore could not be used for discharging the excise duty liability for that month.
The Tribunal identified two central questions:
- Whether the appeal before the Commissioner (Appeals) was maintainable.
- Whether the appellant had wrongly availed and utilized CENVAT credit while discharging its June 2017 excise duty liability.
On the first issue, the Tribunal held that Section 85 of the Finance Act, 1994 permits appeals only against a decision or order passed by an adjudicating authority subordinate to the Commissioner (Appeals).
The Tribunal noted that the document challenged by the appellant was merely a recovery letter issued by the Deputy Commissioner proposing recovery of government dues and not an adjudication order. Since no appeal lies against such a communication, the Commissioner (Appeals) was justified in rejecting the appeal as non-maintainable.
Addressing the substantive dispute, the Tribunal observed that Rule 3(4) of the CENVAT Credit Rules, 2004 allows utilization of credit only to the extent available on the last day of the relevant month or quarter.
After examining the records and the appellant’s ST-3 returns, the Tribunal found that the company had only ₹58,939 as available credit on June 30, 2017. Despite this, it utilized ₹5.78 lakh towards payment of duty. The Tribunal held that such utilization was clearly impermissible under the statutory framework.
The company’s contention that the credit would eventually accrue because service tax was payable under the Reverse Charge Mechanism was also rejected. The Tribunal referred to Rule 4(7) of the CENVAT Credit Rules, which permits availment of credit on reverse charge services only after payment of the underlying service tax.
Since the appellant failed to establish that the corresponding service tax had been paid before June 30, 2017, the Tribunal concluded that the credit could not have been lawfully availed or utilized for discharging June 2017 excise duty liability.
The Tribunal also took note of findings recorded by the Commissioner (Appeals) regarding the appellant’s TRAN-1 filing. The appellate authority had observed that while the company claimed to have utilized the disputed credit for payment of pre-GST excise duty, it simultaneously sought to carry forward substantially the same amount into the GST regime through TRAN-1.
According to the appellate findings, such conduct could potentially result in loss to the government exchequer by both avoiding payment of excise duty and claiming transitional credit under GST. The Tribunal found no infirmity in these observations.
Dismissing the appeal, CESTAT upheld the recovery action initiated by the department and affirmed the findings of the Commissioner (Appeals).
The Tribunal held that the appellant had wrongly utilized CENVAT credit that was not available as on June 30, 2017 and that the appeal against the recovery letter was not maintainable in law. However, it clarified that the appellant remained free to pursue any appropriate remedy concerning credit that may have accumulated subsequently.
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