Demand of cenvat credit by way of reversal not justified for mere provision in books

Hindustan Zinc Ltd. Vs Commissioner of Central Goods & Service Tax (CESTAT Delhi)

The issue involved in this appeal by the assessee is whether the demand of cenvat credit by way of reversal is justified, under the provisions of Rule 3(5B) of Cenvat Credit Rules, under the fact that the appellant has made provision in the books of accounts on account of Non-Moving Inventory, without reducing the value of inventory.

Rule 3(5B) of the CCR is attracted only when the value of the asset and or inventory is written off fully or partially, or wherein any specific provision to write off fully or partially has been made in the books of accounts. Admittedly, in the facts of the present case, the appellant has made only a ^‘general provision’, which is not attributable to any particular capital asset/input. Admittedly, Revenue has not been able to identify the details of inventory or any asset, for which the general provision has been made. I also find that the show cause notice is erroneous as the amount of Rs.57,52,999/- is for stores and spares provision appearing in the Trial balance as on 31.03.2017 ( a Credit Balance) whereas the amount of Rs.20,04,324/-is debit balance of ‘stores and spares expenses’. The two being different account heads, have been wrongly taken together, making the show cause notice vague and misconceived.

 Accordingly, in view of my findings, the impugned order is set aside. The appellant is entitled to consequential benefits in accordance with law. The appeal is allowed.

FULL TEXT OF THE CESTAT DELHI ORDER

The issue involved in this appeal by the assessee is whether the demand of cenvat credit by way of reversal is justified, under the provisions of Rule 3(5B) of Cenvat Credit Rules, under the fact that the appellant has made provision in the books of accounts on account of Non-Moving Inventory, without reducing the value of inventory.

2. The appellant is engaged, inter alia, in the manufacture of Lead and Zinc Concentrates falling under Chapter 26 of the First Schedule to the Central Excise Tariff Act, 1985 and is also availing Cenvat Credit on various inputs, capital goods and input services in terms of the provisions of the Cenvat Credit Rules, 2004 (Credit Rules).

3. The appellant had made provision in the books of accounts in respect of non/slow moving inventory, as a managerial tool to take decision for maintaining lowest possible inventory stock. The aforesaid entry (provision from profit) in the books of account does not change the value of inventory in any manner. This accounting entry had been made as per the established accounting principles. These values are being reviewed on regular basis and provision are renewed (re-adjusted) on monthly basis, in accordance with utilisation of inventories.

4. The department had issued show cause notice dated 11.4.2018 proposing reversal of Cenvat credit for the period from April, 2016 to June, 2017 (“relevant period”) along with interest and penalty, on the ground that the appellant had not paid or reversed the Cenvat Credit of Rs.9,69,666/- in respect of the capital goods/inputs for which provision for alleged write-off was made during the period of dispute, as was required under Rule 3(5B) of Cenvat Credit Rules. In the show cause notice, the aforesaid demanded amount has been computed by assuming the ^„provision for non-moving inventory‟ appearing in trial balance, as write off value.

5. Prior to the issue of show cause notice, Superintendent requested the appellant to submit the details of provisions made for non-moving inventory of store items (capital goods/inputs) in the books of accounts for the financial year 2016-2017 and upto June 2017. The appellant in reply by their letter dated 26.03.2018 submitted that they have reversed the provisions made of non-moving inventory (NMI) in the financial year 2014-2015, 2015-2016 and 2016-2017. Provision for non-moving inventory is made in the books of accounts to reflect profitability on conservative principles of accounting. The value of inventory in the store ledger is kept at full value, and on consumption of the inventory, the cost is booked at full value. It is lump sum provision, where management is called to provide for inventory, which are not getting frequently used in the course of manufacture, but are used at a lower rate/pace. This helps in managerial decision making to keep the lower possible inventory of stock. Further, such NMI are not obsolete, which can be termed as not usable in the process, and the provision on inventories are renewed on regular basis or monthly basis. In case, when some inventories are found unuseable, then the management’s approval is obtained for write off, and accordingly cenvat credit is reversed. It is, therefore, quite a distinct provision from write off in concept and logic behind making the provision for NMI, which is totally different and mainly only general provision. The different concept principles and requirements on which these are created, does not equate to removal of inventory attracting the provisions of Rule 3(5B) of CCR. It is further submitted that in the facts, the provisions made for non-moving inventory do not reduce the value of inventory in the ^„price store ledger’. Further, such provision does not reduce the value of inventory, as appearing in the trial balance (final accounts). Even after making the provisions for non-moving inventory, whenever such item or inventory is issued for use in plant, its full value is charged to ^„stores and spares expenses’. It is further observed in para 6 of the show cause notice – since no itemwise details of the cenvat credit taken on the store items was provided by the assessee, therefore, the value of the provisions made for non-moving inventory has been taken from the trial balance furnished by the assessee and the rate of duty was adopted as applicable during the relevant period, and further, the details of provisions in the books have been taken as follows:-

Table

6. Accordingly, the show cause notice demanded reversal of cenvat credit, as aforementioned with proposal to impose interest and penalty.

7. The appellant contested the show cause notice, inter alia, submitting that the appellant was not required to reverse the cenvat credit as the value of the inventory has not been written off. Further, it has been erroneously assumed by the Revenue that the provisions made for non/slow-moving inventory is equal to write off of the inventory. Such non/slow-moving inventory are not obsolete. Further, admittedly, the appellant has kept the inventory in their ^„price store ledger‟ at full value and upon consumption, in regular course of business, the cost of inventory is booked at full value. Thus, there is no writing off of the value of the inventory, admittedly. The show cause notice was adjudicated by the Superintendent, who was pleased to confirm the demand along with interest and penalty of Rs.96,967/- under Rule 15(1) of CCR read with Section 11 AC of the Act.

8. Being aggrieved, the appellant preferred appeal before the Commissioner (Appeals) on the aforementioned grounds taken in reply to the show cause notice, they also placed reliance on the ruling in the case of Molex (India) Pvt. Ltd. Vs. CCE (Tribunal-Bangalore) – 2013 (297) ELT 266 (T-Bangalore). It was urged that computation of cenvat credit to be reversed is incorrect and arbitrary. The Commissioner (Appeals) was pleased to dismiss the appeal observing that whenever the capital goods/inventory have been written off, or even if the provisions have been made for partial writing off, the appellant is liable to reverse the cenvat credit availed on such goods, and take re-credit whenever they utilise these goods later. Further, the Commissioner (Appeals) found error in the calculation of credit to be so reversed, and observed that reversal has to be on actual credit taken at the time of receipt of the inventory. But further observing that, as the appellant did not provide the details of cenvat credit taken, therefore, there is no reason to interfere with the order-in-original.

9. Being aggrieved, the appellant is before this Tribunal.

10. Counsel for the appellant reiterating the grounds taken before the court below demonstrates before me, with respect to para-6 of the show cause notice by producing the extract of the trial balance, relevant extract of ledger account, extract of the expenditure ledger, screen shot of the sample journal voucher for the provision made on 1.5.2017, and reversal of the same provision on 1.6.2017.Thus, the appellant under the accounting principles of conservation creates the provision at the end of each month and reverses the said provisions on the first day of the next month. It is further demonstrated that the amount of Rs.57,52,999/- is a credit balance of ^„store and spare reserve‟ for the financial year 2016-2017 taken from the Trial balance as on 31.03.2017, whereas the amount of Rs.20,04,325 as on 30.06.2017 is a debit balance of ^„store and spares expenses‟. Thus, there is patent error, which is evident on the face of the record, and thus, the show cause notice is wholly mis-conceived and fit to be quashed. It is further urged that the Revenue have failed to notice that there is no change in the value of the inventory/capital goods in the books of accounts, and thus, it cannot be assumed that any value of the inventory/capital goods has been written off either fully or partially. Admittedly, there is no adjustment in the accounts for inventory/capital goods or in the provision made in the books of accounts. Thus, in the facts and circumstances, Rule 3(5B) of CCR is not attracted.

11. Further, reliance has been placed on the ruling of the Hon‟ble Supreme Court in the case of Reliance Energy Ltd. Vs. Maharastra State Road Development Corporation – (2007) 8 SCC 1, wherein it has been observed that the concept of ^„provision for doubtful debts‟ is different from the concept of ^„write off‟. The ^„provisions for doubtful debts‟ cannot be equated to “write off”.

12. Reliance is also placed on the ruling of the Hon‟ble Gujarat High Court in the case of CCE Vs. Ingersoll Rand (India) Ltd. – 2014 (300) ELT 347, wherein it has been held that, writing down the inputs for Income Tax purposes cannot be equated with ^„writing-off‟ of the inputs under Rule 3(5B) of the CCR.

13. Authorised Representative for the Department relies on the impugned order.

14. Having considered the rival contentions, I find that Rule 3(5B) of the CCR is attracted only when the value of the asset and or inventory is written off fully or partially, or wherein any specific provision to write off fully or partially has been made in the books of accounts. Admittedly, in the facts of the present case, the appellant has made only a ^„general provision‟, which is not attributable to any particular capital asset/input. Admittedly, Revenue has not been able to identify the details of inventory or any asset, for which the general provision has been made. I also find that the show cause notice is erroneous as the amount of Rs.57,52,999/- is for ^„stores and spares provision appearing in the Trial balance as on 31.03.2017 ( a Credit Balance) whereas the amount of Rs.20,04,324/-is debit balance of “stores and spares expenses‟. The two being different account heads, have been wrongly taken together, making the show cause notice vague and misconceived.

15. Accordingly, in view of my findings, the impugned order is set aside. The appellant is entitled to consequential benefits in accordance with law. The appeal is allowed.

[Operative portion of the order already pronounced in open court]