Input credit not reversible in case of remission of duty on destroyed goods

Brief of the case:

The Hon’ble Madras High Court in the case of M/s Joy Foam P. Ltd held that the input credit of inputs need not to be reversed even in case the payment of duty has been ordered to be remitted under Rule 49 of Central Excise Rules, 2002. It is why because neither such reversal is a pre-condition for remission nor the remission can be considered as exemption.

Facts of the case:

• A fire broke out it in the factory of assessee as a result of which the stock of manufactured goods, raw materials, work-in-progress and the returned goods were destroyed. The assessee reversed the credit availed on stock of raw materials, returned goods and inputs contained in semi-finished goods, which destroyed in the fire accident.
• Assessee applied for remission of the duty , which was accepted conditionally by Commissioner on the direction to pay/reverse Cenvat credit of inputs contained in stock of finished goods got destroyed by fire.
• Assessee aggrieved by the order of Commissioner approached to CESTAT which held that the credit in respect of inputs contained in destroyed finished goods need not to be reversed by relying on the decision of Larger Bench of CESTAT New Delhi in the case of Inalsa Ltd.
• Aggrieved by the said decision of the CESTAT , the department is before High Court.

Contention of the Revenue:

• The Department relied upon the decision of CESTAT, Ahmedabad in the case of Mafatlal Industries Ltd. wherein it was held that input credit as attributable to finished goods destroyed should be reversed in case remission of duty is claimed under Rule 49 of the Central Excise Rules.
• The department also pleaded that on remission of duty on finished goods, the same partake the character of exempted/nil rated goods and the input credit is not allowable in respect of inputs used in manufacture of such exempted or nil rated goods.
  

Contention of the Assessee:

• The assessee relied upon the decision of the CESTAT, New Delhi in the case of Inalsa Ltd. wherein the tribunal decided the case in favour of assessee that goods destroyed due to natural cause cannot be considered at par with exempted goods.
• Inputs one used for manufacture of finished goods qualify for claiming cenvat credit and subsequent damage to finished goods won’t make the claim of already claimed Cenvat credit reversible in the absence of any specific restriction provided on the law.
  

Decision of the Hon’ble High Court:

Rule 49 of Central Excise Rules, 1944 and Rule 21 of Central Excise Rules, 2002 which provides for remission of duty in respect of goods lost or destroyed by natural cause or by unavoidable accidents or in case goods become unfit for consumption does not provide reversal of credit in respect of inputs used in the manufacture of such goods.

Further, the destroyed finished goods on which duty has been remitted cannot be equated with exempted or nil rated goods because the exemption is a benefit allowed which is general is nature whereas the goods being waived off from duty in case of remission is because of damage caused to them and fulfilling certain conditions as to nature of damage.

On the basis of above findings, the court concluded that the input credit in respect of destroyed goods is not reversible.

Author’s Comment:

This ruling is not applicable as of today because the Rule 21 of Central Excise Rules , 2004 along with the Rule 3(5C) of the Cenvat Credit Rules allows the remission of duty in damaged goods on the pre-condition that the Cenvat credit of inputs as attributable to such goods must be reversed or paid for.

Further, it need to be noted that even if the duty is remitted, the credit of input service tax (f any taken) need not to be reversed.