Introduction: In a recent ruling by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Kolkata, the issue of reversing CENVAT credit on capital goods due to wear and tear was addressed. The case of M/s East India Holding Pvt. Ltd. vs. Commissioner of CGST & Central Excise revolved around the alleged irregular availment of CENVAT credit by the appellant concerning old and used Cast Iron (C.I.) Moulds, which were considered capital goods. The allegation was that these Moulds were clandestinely removed without the payment or reversal of CENVAT credit. The impugned order confirmed a demand for irregular CENVAT credit, and a penalty was imposed under Rule 15 of the CENVAT Credit Rules, 2004. This article provides a detailed analysis of the case and its implications.
Background of the Case: M/s East India Holding Pvt. Ltd. is engaged in the manufacture of excisable goods, including M.S. Ingots and Billets. The show cause notice issued to the appellant alleged irregular availment of CENVAT credit due to the clandestine removal of 556.780 metric tons of old and used C.I. Moulds, which were classified as capital goods, without the payment or reversal of CENVAT credit. This allegedly occurred under the guise of captive use during the period from 2006-07 to 2008-09.
Appellant’s Position: The appellant argued that all the Moulds purchased during the relevant period were indeed put into use during that period. After utilizing the C.I. Moulds, they became damaged and were consumed within the factory. The C.I. Moulds Register maintained by the appellant documented the receipt and consumption of these Moulds. The Range Superintendent periodically verified this register, and no objections were raised.
Revenue’s Stand: The Revenue’s stance was that the Moulds mentioned in the Mould Register were not physically available for verification during the course of the audit. They alleged that these Moulds were clandestinely removed and insisted on the reversal of CENVAT credit availed on these capital goods.
CESTAT Kolkata’s Ruling: The CESTAT Kolkata reviewed the case and noted that the demand was confirmed based on the belief that the appellant, although receiving the C.I. Moulds and availing CENVAT credit, had clandestinely cleared them under the guise of captive consumption. However, the tribunal observed that the Mould Register maintained by the appellant accounted for the receipt and consumption of C.I. Moulds.
CENVAT Credit and Capital Goods: The tribunal acknowledged that the appellant had used the C.I. Moulds for the manufacture of their finished goods, such as MS Ingots, and that these Moulds were exhausted in the process. In light of this, the CESTAT stated that there is no provision in the CENVAT Credit Rules, 2004, to reverse the credit availed on capital goods after they have been put into use, even if they become damaged due to wear and tear.
Lack of Evidence for Clandestine Removal: The CESTAT pointed out that the Revenue had not presented any concrete evidence to substantiate the allegation of clandestine removal. Non-availability of the Moulds in stock or their physical absence could not be the sole basis for such allegations.
Setting Aside the Impugned Order: In light of the above analysis, the CESTAT Kolkata set aside the impugned order and allowed the appeal filed by the appellant. The tribunal ruled that the appellant was not required to reverse the CENVAT credit availed on the capital goods (C.I. Moulds).
Conclusion: The CESTAT Kolkata’s ruling in the case of East India Holding Pvt. Ltd. vs. Commissioner of CGST & Central Excise brings clarity to the treatment of CENVAT credit on capital goods that have been put into use and subsequently become damaged due to wear and tear. According to this decision, there is no provision in the CENVAT Credit Rules, 2004, for the reversal of CENVAT credit in such scenarios. This ruling provides relief to manufacturers who rely on capital goods for their production processes, as they will not be penalized for the wear and tear of these essential assets. It emphasizes the importance of maintaining accurate records and the lack of concrete evidence when alleging clandestine removal of goods.
FULL TEXT OF THE CESTAT KOLKATA ORDER
M/s East India Holding Pvt. Ltd., Durgapur, are engaged in manufacture of excisable goods M.S.Ingots, Billets etc. in their factory. A Show Cause Notice dated 27.01.2011 was issued to the Appellant alleging irregular availment of Cenvat Credit of Rs.80,22,363/-, owing to clandestine removal of 556.780 MTs of old and used C.I. Moulds (capital goods) without payment/reversal of Cenvat credit, in the guise of captive use during the period from 2006-07 to 2008-09. The Notice was adjudicated by the Commissioner vide the impugned Order-in‑ original dated 20.07.2011, wherein he confirmed the demand of irregular Cenvat Credit of Rs.80,22,363/- and imposed penalty equivalent to the irregular credit under Rule 15 of the CCR 2004, read with Section 11AC of the Central Excise Act, 1944. Aggrieved against the impugned order, the Appellant has filed the present appeal.
2. Briefly stated facts of the case are that during the course of audit of the records of the Appellant, it was noticed that the Appellant has received 434.644 MT of C.I.Mould during the period 2006-07 to 2008- 09 and 122.136 MT remained as opening balance. The Appellant claimed that the entire quantity of C.I Mould were converted into scrap in course of time and the said scrap was consumed in their furnace for manufacture of M.S.Ingot. As there was no mention of consumption of C.I.Mould scrap in their Daily Production cum Consumption slip and computerized monthly production register, the Notice alleged that the total quantity of 556.78. MT of C.I. Mould was removed clandestinely and the irregular credit of Rs.80,22,363/- availed on the said C.I. Moulds was proposed to be demanded in the Notice along with interest and penalty.
3. In their submissions, the Appellant contented that all the moulds purchased during the material period were put into use during the relevant period. They submitted that after the use of C.I. Moulds, the same become damaged and accordingly consumed in their factory by melting the same along with other raw materials for the manufacture of their finished goods. They further submitted that the receipt and consumption of C.I. Moulds had been duly accounted by them in their factory in the C.I. Moulds Register. The C.I. Moulds Register is periodically verified by the Range Superintendent and no objection was ever raised by the Superintendent. The Appellant submitted that the demand notice was issued alleging removal of 556.780 MT of CI Moulds clandestinely without payment of duty. There is no iota of evidence establishing the removal of such goods from the factory premises without payment of duty. They categorically submitted that whatever moulds were received, consumed and used, were duly accounted for/reflected in their Mould Register. Even though the said Register had been referred to in the impugned order, the Ld. Adjudicating Authority has not considered the same and confirmed the demand.
4. The Appellant stated that the finished goods cannot be manufactured without the use of the Ingot Moulds. In absence of physical presence of such moulds in the factory, the department alleged that those were cleared by them clandestinely. They contended that these mould were capital goods on which Cenvat credit has been Non availability of the moulds in the stock or physical absence of goods, cannot be a reason to allege clandestine removal . Accordingly, they prayed for setting aside the impugned order confirming the demands.
5. The Ld. AR for the Revenue submitted that the Adjudicating Authority in his finding has considered the said Register and recorded that the entries made in the said Register cannot be relied upon, inasmuch as at the time of visit of audit officers, the applicant could not produce any evidence regarding the quantity of C.I. Moulds consumed/used and available on stock. Accordingly, he supported the findings in the impugned order.
6. Heard both sides and perused the records.
7.We find that the entire demand is confirmed against the Appellant on the ground that the Appellant, though received the C.I. Moulds and availed the Cenvat credit, but cleared the same clandestinely in the guise of captive consumption. We find that the applicant were maintaining the Mould Register, wherein receipt/consumption of the CI Moulds were duly entered. From the Mould register, we find the Appellant has received 434.644 MT of C.I.Mould during the period 2006- 07 to 2008-09 and 122.136 MT remained as opening balance. The Appellant contented that all the moulds purchased during the material period were put into use during the relevant period. They submitted that after the use of C.I. Moulds, the same become damaged and accordingly consumed in their factory by melting the same along with other raw materials for the manufacture of their finished goods. We observe that the receipt and consumption of C.I. Moulds had been duly accounted by them in their factory in the C.I. Moulds Register. The C.I. Moulds Register is periodically verified by the Range Superintendent and no objection was ever raised by the Superintendent.
8. We find force in the submission of the Appellant that after receipt of the Moulds, the same were utilized in the manufacture of finished goods namely, MS ingots and in the process of manufacture, the C.I. moulds were exhausted, and ultimately, the same were melted along with other raw materials for manufacture of the finished goods. We also observe that the finished goods cannot be manufactured by the Appellant without the use of the Ingot Moulds. Hence, the C.I.Moulds on which Cenvat credit has been availed as capital goods, has already been put into use for manufacture of finished goods for the last four years. We find that there is no provision in the Cenvat Credit Rules, 2004 to reverse the credit availed on capital goods after they were put into use in the manufacture of final products, even if they are worn out or damaged due to wear and tear.
9. During the course of audit, the C.I. Moulds mentioned in the Mould Register were physically not available for verification. In absence of physical presence of such moulds in the factory, the department alleged that those were cleared clandestinely and hence demanded the Cenvat credit availed on such Moulds.. We observe that non availability of the moulds in the stock or physical absence of goods, cannot be a reason to allege clandestine clearance. There must be positive evidence available on record to substantiate the allegation of clandestine clearance. In the present case, the department has not brought in any evidence to establish clandestine clearance of the used C.I. Moulds.
10. The Appellant contended that these mould were capital goods on which Cenvat credit has been availed. Admittedly, when the credit in respect of these capital goods was availed, the same was in order. These capital goods have been put to use for a number of years, when the same were ultimately unfit for use, they were scrapped. The Appellant claims that the scrap were used in the furnace for manufacture ingots. However, the department’s allegation is that there was no evidence for such consumption. We observe that Cenvat Credit Rules, 2004 has provisions for reversal of credit availed on capital goods only in a situation where the capital goods are either removed as such or sold. In the instant case neither the capital goods have been cleared “as such” nor removed on sale. As such, we do not fine any justification for reversal of Cenvat credit availed by the Appellant on the said capital goods, which after being put into use scrapped. Thus, we hold that the Appellant has taken Cenvat credit correctly on the capital goods, namely C.I. Moulds and there is also no provision in the Cenvat credit Rules to reverse the Cenvat credit when they are scrapped after put into use. In view of the above, we hold that the Appellant is not required to reverse the Cenvat credit availed on the capital goods, M.I. Moulds. Since, the credit is not liable to be reversed, there is no liability of interest or penalty. Accordingly, the penalty imposed in the impugned order is also set aside.
11.In view of the above discussion, we set aside the impugned order and allow the appeal filed by the Appellant.
(Pronounced in the open court on…04.10.2023…)