The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld the recovery of CENVAT credit from an electrical equipment manufacturer, ruling that the creation of an accounting provision for partially writing off inputs triggered an immediate obligation to reverse the corresponding credit after March 1, 2011.
The bench of M. Ajit Kumar (Technical Member) has observed that a manufacturer seeking to retain or re-avail the credit on the ground that the provisioned materials were subsequently used in production must substantiate such use through proper inventory records and supporting documents.
Buy Now: 100+ Judgements On Customs Classification
The appellant/assessee is engaged in manufacturing electrical transformers, relays, switchgears and control panels.
During an audit, the Department noticed that the company had created provisions in its books for writing off raw materials during 2010-11 and 2011-12. However, it had not reversed the CENVAT credit attributable to those materials as required under Rule 3(5B) of the CENVAT Credit Rules, 2004.
The company claimed that the provisions were subsequently released proportionately whenever the materials were consumed in manufacturing. It reversed credit of ₹69.38 lakh, under protest, on the revised provision amount.
The Department found that the company had failed to produce sufficient documentary evidence showing the subsequent consumption of the materials covered by the provisions. Consequently, a show cause notice dated December 9, 2015, was issued proposing recovery of the balance CENVAT credit with interest and penalty.
The adjudicating authority confirmed a demand of ₹8,57,537 under the Central Excise Act and imposed the corresponding interest and penalty. The Commissioner (Appeals) upheld the order, following which the company approached the CESTAT.
The company submitted that it followed an accounting practice of creating provisions for inventory based on the age of the material, its consumption pattern and the availability of excess stock.
Depending on these factors, provisions ranging from 30% to 90% were created for slow-moving or excess inventory. The company argued that these were merely accounting provisions and the concerned materials were neither physically removed from the factory nor rendered unusable.
It contended that whenever the provisioned inventory was consumed, the corresponding provision was released. According to the company, credit was reversed only to the extent of inventory that was actually found to be obsolete.
The company also relied on the amendment made to Rule 3(5B) through Notification No. 3/2011-CE (N.T.) dated March 1, 2011. It argued that partial write-offs and provisions for partial write-offs were brought within the provision only prospectively. Therefore, no reversal could be demanded for partial provisions made before the amendment took effect.
It further challenged the demand as time-barred, maintaining that the dispute arose from the interpretation of Rule 3(5B) and its amendment. On this basis, it argued that the extended limitation period could not be invoked by alleging suppression of facts.
The Revenue contended that Rule 3(5B) creates an immediate obligation to reverse CENVAT credit once the value of inputs is written off or a provision for writing them off is made in the books.
Although the company claimed that the materials were subsequently used in manufacturing, it did not furnish documentary evidence connecting the release of individual provisions with the actual consumption of specific materials.
The Department pointed out that the company was asked through a letter dated May 19, 2015, to submit a point-wise reply and a certificate from its auditor. No response was allegedly furnished despite three reminders.
The company had also admitted that it was not feasible to individually track the addition or release of provisions against specific materials. According to the Revenue, this admission demonstrated that the claim of subsequent use was incapable of verification.
The Revenue further submitted that the non-reversal of credit was detected only during the departmental audit and had not been voluntarily disclosed. It consequently defended the invocation of the extended limitation period and the imposition of penalty.
The Tribunal examined the version of Rule 3(5B) applicable during the disputed period and noted the effect of the amendment made on March 1, 2011.
Before that date, the provision applied where the value of inputs was written off fully or a provision was created to write off the value fully. A partial write-off or provision for a partial write-off did not require reversal of credit under the unamended rule.
Through the 2011 amendment, the word “partially” was inserted into Rule 3(5B). Consequently, from March 1, 2011, the creation of a provision for even a partial write-off required the manufacturer to pay an amount equivalent to the CENVAT credit attributable to the affected inputs or capital goods.
The Tribunal, therefore, recognised that reversal was not legally required for partial write-offs or partial provisions created before March 1, 2011. However, such provisions attracted the reversal requirement from that date onwards.
The Tribunal observed that the proviso to Rule 3(5B) protects a manufacturer where provisioned inputs are subsequently used in manufacturing.
A manufacturer that initially reversed the credit upon creating the provision is permitted to take back the equivalent credit once the concerned inputs are subsequently used in manufacturing final products, subject to compliance with the other provisions of the CENVAT Credit Rules.
The company, however, had not followed this statutory procedure. From March 1, 2011, it was first required to reverse the credit upon creating the accounting provision. It could thereafter have re-availed the credit upon establishing the actual use of the materials.
The Tribunal rejected the contention that no reversal was necessary merely because the materials remained physically available and usable in the factory.
It referred to Supreme Court decisions holding that where a statute requires an act to be performed in a particular manner, it must be performed in that manner alone.
The Tribunal attached significance to the company’s failure to furnish the documents and auditor’s certificate sought during the proceedings.
Despite being given several opportunities, the company did not produce item-wise stores or inventory records connecting the release of the accounting provisions with the subsequent physical use of the raw materials.
The company’s admission that it was not feasible to individually track the addition and release of provisions against specific materials further weakened its case.
The Tribunal held that the claim of subsequent consumption remained unsubstantiated in the absence of documents demonstrating which materials were used, when they were used and how the corresponding accounting provisions were released.
It observed that the burden of establishing the admissibility of CENVAT credit rested upon the assessee. Where relevant documents were exclusively within the assessee’s possession, the failure to produce them justified drawing an adverse inference.
Accordingly, the contention that the credit did not have to be reversed because the materials remained usable was rejected.
The Tribunal also declined to accept the company’s limitation argument.
It acknowledged the Supreme Court’s decisions holding that mere non-payment of duty, without fraud, suppression or wilful misstatement, is insufficient to invoke the extended limitation period. The extended period ordinarily requires a positive act indicating an intention to evade the statutory obligation.
However, the Tribunal found that the circumstances of the present case satisfied that requirement. It observed that silence could amount to deception where an assessee was under a duty to furnish information sought by the Department.
The company had allegedly failed to respond adequately to the Department’s letter and repeated reminders and had not furnished the records required to verify its claim.
Applying the principle that no person can take advantage of their own wrong, the Tribunal held that the company could not claim the benefit of limitation when the delay resulted from its own non-cooperation and suppression of relevant facts.
It also ruled that no useful purpose would be served by remanding the proceedings at such a distant point of time, particularly when the company had not demonstrated a willingness to produce the required information and had confined its defence primarily to legal arguments.
The CESTAT accordingly rejected the appeal and sustained the demand of ₹8,57,537, together with applicable interest and penalty.
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.
