Blue Mount Textiles Vs Commissioner of GST & Central Excise (CESTAT Chennai)
Summary: CESTAT Chennai held that a 100% Export Oriented Unit (EOU), after de-bonding and commencing manufacture as a Domestic Tariff Area (DTA) unit, was entitled to avail CENVAT credit of eligible duties actually paid at the time of de-bonding on inputs and capital goods. M/s. Blue Mount Textiles had availed CENVAT credit of duties paid while exiting the EOU scheme. The Commissioner partly allowed the credit but disallowed ₹1,03,89,840, while Revenue challenged the credit of ₹2,16,53,205 allowed by the Commissioner.
The Tribunal held that the issue stood covered by the Madras High Court decision in Stanadyne Amalgamations (P) Ltd. and AVO Carbon (India) Pvt. Ltd., which held that duties paid upon de-bonding were eligible for CENVAT credit and that the proviso inserted in Rule 3(1) by Notification No. 35/2008-CE(NT) could not restrict the substantive entitlement under Rule 3(1). The Tribunal explained that once the assessed duty was paid at de-bonding, the goods became duty-paid goods available to the assessee as a DTA manufacturer. Their earlier duty-free procurement or holding under the EOU scheme could not by itself disentitle the assessee from credit.
Eligibility under Rule 3 and documentary compliance under Rule 9 of the CENVAT Credit Rules, 2004 had to be considered together. It also rejected Revenue’s allegation that the assessee deliberately exited the EOU scheme to obtain rebate, observing that an assessee was free to manage its business in its own interest where no blameworthy conduct was involved. The assessee’s appeal was allowed with consequential relief, Revenue’s appeal was rejected and the cross-objection was disposed of.
Cases Discussed
- Stanadyne Amalgamations (P) Ltd. Vs CCE and AVO Carbon (India) Pvt. Ltd. Vs CCE [2019 (8) TMI 572 – Madras High Court] — Followed; duties paid by an EOU at the time of de-bonding on imported and indigenous raw materials and capital goods were eligible for CENVAT credit, and the proviso to Rule 3(1) could not restrict the substantive entitlement.
- M/s Avo Carbon (India0 Pvt. Ltd. Vs CCE, Chennai-II [2017 (357) ELT 1057 (Tri-Chennai)] — Revenue relied upon this decision; the Tribunal noted that it stood overruled by the Madras High Court in Stanadyne Amalgamations and AVO Carbon.
- Annur Cotton Mills Vs CCE, Coimbatore [2023 (6) TMI 1106] — Relied upon by the assessee regarding admissibility of credit on finished goods.
- Mideast Integrated Steels Ltd. Vs CCE [2026 (1) TMI 1508] — Relied upon by the assessee regarding admissibility of credit on finished goods.
- Avo Carbon India Pvt. Ltd. Vs Commissioner of GST & Central Excise, Chennai, Final Order Nos. 41131-41132/2024 dated 26.08.2024 — Followed; recognised eligibility of CENVAT credit consequent upon de-bonding.
- Technocraft Industries (India) Ltd Vs CCE — Referred to in the reproduced Avo Carbon order for the principle that CENVAT credit lying in balance on de-bonding of a 100% EOU and conversion to DTA could be transferred to and utilised by the DTA unit.
FULL TEXT OF THE CESTAT CHENNAI ORDER
The assessee and Revenue have filed these appeals against the Order Sl. No. 02/2018-Commr. dated 23.01.2018 passed by the Commissioner of GST & Central Excise, Coimbatore. The assessee has also filed a cross objection against the Revenue’s appeal.
Factual Matrix
2. The Appellant is engaged in the manufacture of 100% cotton terry towels, classifiable under CSH 6302 9000 of the Central Excise Tariff Act 1985 (CETA 1985). The goods are cleared for home consumption and export on payment of duty under the self-assessment scheme availing the CENVAT credit procedure under the CENVAT Credit Rules 2004 (CCR 2004). The assessee was earlier a 100% EOU manufacturing the same goods. Upon achieving positive NFE, it was permitted to exit the EOU scheme by the Development Commissioner, MEPZ, vide order dated 22.06.2011, on payment of applicable customs and excise duties on the imported/indigenous capital goods, inputs, consumables, semi-finished goods and finished goods. The unit thereafter became a DTA unit at the same premises and continued manufacture under Central Excise registration. The duties paid on debonding were transferred by the assessee to the DTA unit as CENVAT credit. It was noticed by the department that the assessee availed Rs.3,19,26,833/- as CENVAT credit (CVD + AED) in June 2011 on the debonded goods. Of the duties of Rs.63,32,532/- paid on capital goods, credit of Rs.1,16,214/- relating to imported machinery spares was considered ineligible by the department, leaving Rs.62,16,318/- as eligible capital-goods credit. The disputed credits were utilized for payment of duty on finished goods, predominantly exported, on which the assessee claimed rebate. Since the total rebate claimed was Rs.3,74,43,884/-, the department alleged that the assessee had deliberately exited the EOU scheme and availed inadmissible credit with the intention of obtaining rebate. Accordingly, SCN dated 06.07.2016 proposed disallowance of Rs.3,19,26,834/- under Rule 3 of the CCR, 2004 and Rs.1,16,214/- relating to imported machinery spares, together with interest and penalty under Rule 15(2). Upon adjudication, the Commissioner allowed credit of Rs.2,16,53,205/- and disallowed credit aggregating Rs.1,03,89,840/- (Rs.1,02,73,626/- + Rs.1,16,214/-), with interest and equal penalty under Section 11AC of the Central Excise Act, 1944. Thus, Appeal No. E/41038/2018 has been filed by the assessee against disallowance of credit of Rs.1,03,89,840/- while Appeal No. E/41603/2018 has been filed by the department challenging the allowance of credit of Rs.2,16,53,205/-, since the ld. Commissioner has not followed the Tribunals decision in the case of M/s Avo Carbon (India0 Pvt. Ltd. Vs CCE, Chennai – II [2017 (357) ELT 1057 (Tri-Chennai)].
3. The Ld. Advocate Shri S. Durairaj appeared for the appellant-assessee and Ld. Authorized Representative Smt. O.M. Reena appeared for the respondent-department.
Submissions made by the Appellant
3.1 Shri S. Durairaj the ld. Advocate for the Appellant submitted that:
A. The duty payable at the time of de-bonding was duly assessed by the departmental officers and paid through challans. On the basis thereof, the department issued the ‘No Due’ Certificate, pursuant to which the Development Commissioner, MEPZ, passed the final exit order. The appellant thereafter availed CENVAT credit on the strength of the said challans in terms of Rule 9 of the CCR, 2004. There was no statutory requirement to either obtain prior permission or inform the department before taking such credit. Since all material facts, including payment of duty, were within the knowledge of the department, there was no suppression with intent to evade duty. The invocation of the extended period and imposition of penalty under Rule 15(2) of the CCR, 2004 read with Section 11AC of the Central Excise Act, 1944 were therefore not sustainable. Reliance was placed on the decision of the CESTAT, Kolkata cited by the appellant.
B. The appellant further submitted that the observation in paragraph 16C of the impugned order did not concern the admissibility of CENVAT credit but related to refund of 5% customs duty paid in excess at the time of de-bonding. The said refund had already been allowed by the Tribunal vide Final Order No. 40178-40180/2023 dated 17.03.2023.
C. As regards the Rs.1,02,73,626/- pertaining to finished goods and Rs.1,16,214/- relating to imported machinery spares, the appellant submitted that the denial of credit was unsustainable. Insofar as imported spares were concerned, the reliance on the decision in AVO Carbon (supra), was misplaced, as the said decision stood overruled by the Hon’ble Madras High Court in Stanadyne Amalgamations (P) Ltd. Vs CCE and AVO Carbon (India) Pvt. Ltd. v. CCE [2019 (8) TMI 572], wherein credit was held admissible on both imported and indigenous inputs/capital goods. The Revenue’s appeal and the consequential demand relating to imported spares were therefore liable to be rejected.
D. With regard to credit on finished goods, reliance was placed on the decisions of the Tribunal in Annur Cotton Mills Vs. CCE, Coimbatore, 2023 (6) TMI 1106 and Mideast Integrated Steels Ltd. Vs CCE, 2026 (1) TMI 1508, wherein such credit was held admissible.
E. In view of the above, the ld. Counsel submitted that the entire demand was unsustainable and, consequently, the demand of interest and imposition of penalties were also liable to be set aside.
Submissions made by the Respondent-Revenue
3.2 Smt. O.M. Reena, Ld. Authorized Representative took us through the Appeal Memorandum filed by the department and stated that the ld. Commissioner has not followed the Tribunals decision in the case of M/s Avo Carbon (supra) and hence the order merits to be set aside.
4. We have considered the submissions made by both sides and perused the records.
Question for Consideration
5. The issue for determination is whether the appellant, upon de-bonding from its status as a 100% Export Oriented Unit (EOU) and commencing manufacture as a Domestic Tariff Area (DTA) unit, was entitled to avail CENVAT credit of the duties paid at the time of de-bonding on the raw materials/inputs and capital goods lying with the unit.
Discussion and Analysis
6. It is not in dispute that the appellant surrendered its EOU status, obtained the requisite permission for exit from the EOU scheme and paid the duty assessed on the goods lying with the unit at the time of de-bonding. The payment of duty is not contested by Revenue. Thereafter, the appellant commenced manufacture as a DTA unit and availed CENVAT credit of the duty so paid.
7. The issue is no longer res integra. In Stanadyne Amalgamations (P) Ltd. Vs CCE and AVO Carbon (India) Pvt. Ltd. Vs CCE [2019 (8) TMI 572 – MADRAS HIGH COURT], the Hon’ble Madras High Court considered the eligibility of CENVAT credit of duties paid by an EOU at the time of de-bonding on imported and indigenous raw materials and capital goods. Relevant portion of the judgment is reproduced below:
2. The facts are illustratively taken from C.M.A. No. 2280 of 2017 (M/s. Stanadyne Amalgamations v. Commissioner of Central Excise), which, in brief, are as under :-
The assessee, M/s. Stanadyne Amalgamations started (sic) its 100% Export Oriented Unit (EOU) for manufacture of Carbon Brushes, but, subsequently, they surrendered their EOU status on 23-2-2012 by adopting De-bonding procedure and became a Domestic Tariff Area (DTA) Unit. At the time of De-bonding, the appellant/assessee paid appropriate duty and Countervailing Duty (Additional Excise Duty) on the imported/indigenously procured raw materials lying in stock and capital goods on depreciated value as per Rules which were procured and imported without payment of duty when it was 100% EOU and after De-bonding on 23-2-2012, it became liable to pay such duties in accordance with Notification No. 22/2003-C.E. (N.T.), dated 31st March, 2003.
3. The question involved in the present cases is as to whether such duties paid by the assessee upon De-bonding can be availed as Cenvat credit under Rule 3(1) of Cenvat Credit Rules, 2004 against its Output Duty liability, or not in terms of para 8 of Notification No. 22/2003, dated 31-3-2003.
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11. There is also no dispute that the duties in question were paid by the assessee on such De-bonding on 23-2-2012, however, not adopting the procedure for payment through TR 6 Challan Forms. A careful reading of Rule 3 would establish that the purpose of giving Cenvat credit for which various duties paid as enumerated in 11 Clauses of Rule 3 is to give set off for the duties paid on Inputs or Input Services including the Duties, Taxes or Cess as enumerated in 11 Clauses is to remove the cascading effect of duties which concept is at the bottom of Cenvat Credit Rules, 2004.
12. We are of the opinion that the insertion of the Proviso which is below the 11 clauses of Rule 3(1) is also a Draftsman’s slip and error as the said Proviso appears to be more in the form of an Explanation which was inserted later on with effect from 24-9-2008 and not to curtail the benefit of Cenvat credit, but to clarify the situation that the Cenvat credit should be allowed in respect of duties paid on Inputs or capital goods received in the factory for manufacture or Input Services received by the manufacturer. The said Proviso, in our opinion, should have been inserted as an Explanation or at least now deserves to be read as one. In the last part of such Proviso, it seems that unintentionally, a restrictive language was used in the said Proviso and all the types of duties and Cess described in clauses (i) to (xi) of Rule 3(1) which included the Excise Duty and other duties and Countervailing Duties or Educational Cess, etc., paid on the purchase of Inputs from foreign countries or domestic market which were intended to be allowed to be given a Cenvat credit were restricted to capital goods. The emphasis on the Cenvat credit is based upon these duties ‘paid on’ in Rule 3(1) on any Inputs or capital goods received in the factory. Therefore, just before the words ‘paid on’ the insertion of the Proviso vide Notification No. 35/2008, dated 24-9-2008 appears to be a Draftsman’s slip which has resulted in the erroneous view on the part of the Tribunal as well as the Adjudicating Authority in the present case.
13. Obviously since the Tribunal could not examine the validity of the said Proviso nor in the writ jurisdiction, the same has been challenged before us, therefore, we are not called upon to examine the validity or legality of the said Proviso but, upon a harmonious consideration of the said Proviso with the object and purport of Rule 3 of the said Rules, we are of the clear view that the benefit of Cenvat credit was entitled to be allowed in respect of all the duties including Excise Duty, Educational Cess, Countervailing Duty paid by the assessee on De-bonding. The said Proviso could not have restricted the Cenvat Credit only in respect of the amount equal to Central Excise paid on capital goods at the time of De-bonding. We cannot accept the said contention of the Learned Counsel for the Revenue that the Proviso is in fact only an enabling provision to allow Cenvat Credit or rather the only provision for that purpose.
14. The whole of Rule 3(1) is the enabling provision for giving such Cenvat credit and the Proviso therein inserted later on by Notification No. 35 of 2008, dated 24-9-2008 cannot be said to be a standalone enabling power to provide such Cenvat credit to the assessee. Such a novel and out of context interpretation of the said Proviso, which, we feel is not only not happily worded, but also, placed at the wrong place in Rule 3(1), cannot be accepted to defeat the very purpose of Rule 3(1) upon an 100 EOU, when converted upon De-bonding to a DTA.
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18. There is no dispute or quarrel on the legal proposition on how to interpret a later on inserted Proviso in an enactment. But, what we are looking at is the insertion of Proviso in Rule 3 of Cenvat Credit Rules, 2004 which we find it to be more in the nature of an Explanation clarifying what was in doubt earlier viz., about allowing of Cenvat credit in respect of capital goods earlier. The allowing of Cenvat credit on raw material was never in doubt whether on de-bonding or otherwise on procurement of raw material. Rule 3 does not make any such distinction. Therefore, these judgments cited at Bar do not deflect the position of the Proviso inserted in Rule 3 by Notification No. 35/2008 on 24-9-2008.
19. In view of the aforesaid legal position, we are of the view that the Learned Tribunal has erred in denying such benefit of Cenvat credit to the assessee in the present cases and therefore, the present appeals filed by the assessee deserve to be allowed. Accordingly, they are allowed and the impugned order passed by the Assessing Officer as well as the Appellate Authority below are set aside. No order as to costs. The connected Miscellaneous Petitions are closed.”
(emphasis added)
7.1 The Court held that, having regard to the object and scheme of Rule 3 of the CENVAT Credit Rules, 2004, the duties paid upon de-bonding were eligible for CENVAT credit and that the proviso inserted in Rule 3(1) by Notification No. 35/2008-CE(NT) could not be construed as restricting the substantive entitlement under Rule 3(1) only to the Central Excise duty paid on capital goods.
7.2 Further the reliance on the decision of this Tribunal in AVO Carbon (supra), by Revenue in their appeal, stood overruled by the above-mentioned Hon’ble Madras High Court in Stanadyne Amalgamations and AVO Carbon.
8. The same principle has been followed by the Tribunal in Avo Carbon India Pvt. Ltd. Vs Commissioner of GST & Central Excise, Chennai, Final Order Nos. 41131-41132/2024 dated 26.08.2024, wherein the Tribunal, recognised the eligibility of CENVAT credit on inputs consequent upon de-bonding. It held:
“5. We have carefully considered the submissions advanced by both sides and perused the records. The short point involved in the present appeal for consideration is whether CENVAT Credit lying in balance in the books of account of 100% EOU as on the date of de- bonding, could be transferred to the DTA unit. We find that the issue has been considered by this Tribunal in series of judgments viz. Technocraft Industries (India) Ltd Vs CCE (supra), Tecumseh Products India P. Ltd. Vs CC,CE&ST (supra), Hyderabad-IV, John Deere India Pvt. Ltd Vs CCE(supra), Pune- III and CCE, Thane-I Vs Sequent Scientific Ltd(supra). It has been consistently held by the Tribunal in all these cases that the CENVAT Credit lying in balance as on the date of de-bonding of 100% EOU and conversion to DTA unit, could be transferred to the DTA unit and be utilised by the said unit.
Following the principle consistently laid down by the Tribunal in aforesaid cases, we do not find merit in the impugned order, which is contrary to the said precedents.
6. Consequently, the same is set aside and the appeal is allowed with consequential relief, if any, as per law.”
(emphasis added)
9. In the light of the above decisions, the eligibility to credit has to be examined with reference to the position obtaining after de-bonding. The circumstance that the goods had originally been procured or held without payment of duty while the appellant was operating as an EOU does not, by itself, disentitle the appellant from taking credit of the duty subsequently paid at the time of de-bonding. Upon de-bonding and payment of the assessed duty, the goods became duty-paid goods available to the appellant as a DTA manufacturer. The subsequent availment of credit is therefore referable to the duty actually paid at the time of de-bonding and not to the earlier duty-free procurement of the goods under the EOU scheme.
10. Rule 3 of the CENVAT Credit Rules, 2004 is the substantive provision governing the duties in respect of which CENVAT credit may be taken. Rule 9 prescribes the documents on the basis of which such credit is to be taken and also contains provisions relating to the particulars to be contained in such documents. Thus, eligibility under Rule 3 and compliance with the documentary requirements of 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, as in this case, credit cannot be denied merely because the goods had earlier been held by the appellant as an EOU.
11. In respect of raw materials/inputs, the appellant had paid the applicable duty at the time of de-bonding and thereafter used the goods in its DTA manufacturing activity. The credit so availed is consequently of the duty actually paid on the inputs and not of the duty foregone at the time of their original procurement as an EOU. The objection that such goods were earlier held by the appellant as an EOU therefore cannot, by itself, constitute a valid ground for denial of credit.
12. The position in respect of capital goods also follows from the aforesaid statutory scheme and the decision of the Hon’ble Madras High Court in Stanadyne Amalgamations (supra). The proviso to Rule 3(1), inserted by Notification No. 35/2008-CE(NT), cannot be read as an independent or exclusive source of entitlement so as to deny the credit otherwise available under Rule 3(1). The Hon’ble High Court has specifically held that the proviso cannot be construed to restrict the credit only to the amount of Central Excise duty paid on capital goods at the time of de-bonding.
13. We therefore hold that, upon de-bonding and commencement of manufacture as a DTA unit, the appellant was entitled to avail CENVAT credit of the eligible duties actually paid at the time of de-bonding on the inputs and capital goods, as per the provisions of Rule 3 read with Rule 9 of the CENVAT Credit Rules, 2004.
14. The impugned order, to the extent it denies the credit merely on the ground that the goods had earlier been procured or held by the appellant as an EOU, cannot be sustained. The denial of credit on such ground is liable to be set aside. The departments allegation that the assessee had deliberately exited the EOU scheme and availed inadmissible credit with the intention of obtaining rebate is without merit. How an assessee conducts its business is within the realm of its best interest and not for the department to speculate about, so long as no blame worthy conduct is involved. The department’s allegation that the assessee deliberately exited the EOU scheme to unjustly claim credit and obtain a rebate is without merit. An assessee is free to manage its business in its own best interest, and the department cannot speculate on these commercial decisions, so long as no blame worthy conduct is involved.
Conclusion
15. Considering the discussions above, the appeal filed by M/s. Blue Mount Textiles is allowed with consequential relief, if any, in accordance with law. The appeal filed by Commissioner of GST & Central Excise, Coimbatore, is rejected. The appeals are disposed of accordingly along with the cross-objection.
(Order pronounced in open court on 18.09.2026)
