Introduction: The case of Panihati Rubber Limited vs. Commissioner of Central Excise (CESTAT Kolkata) revolves around a crucial issue related to Central Value Added Tax (CENVAT) credit and the Small Scale Industries (SSI) exemption. The appellant, engaged in rubber product manufacturing, had to navigate through intricate tax regulations regarding availing SSI exemption and reversing CENVAT credits. This article delves into the details of the case, the key arguments, and the final judgment by CESTAT Kolkata.
Background and SSI Exemption: The appellant, Panihati Rubber Limited, had been availing the SSI exemption, which allowed them to clear finished goods without paying duty during specific financial years. However, after crossing the exemption threshold of Rs. 1 crore, they were required to pay duty on final products and could also avail modvat/cenvat credit on inputs.
CENVAT Credit Reversal Requirement: A critical aspect of the case was the obligation to reverse CENVAT credits on inputs when transitioning between SSI exemption and paying duty. This reversal was mandatory and required precise calculation and documentation.
Mistakes and Duty Liabilities: The appellant made errors in managing CENVAT credits, leading to duty liabilities on multiple occasions. These errors stemmed from not correctly availing CENVAT credits on inputs and failing to reverse credits during the transitions.
Audit Discovery: The issues related to CENVAT credit management came to light during a routine audit conducted in July 2004, covering the financial years 2002-03 and 2003-04.
Appellant’s Corrective Actions: Upon being alerted by the audit findings, the appellant took corrective measures. They calculated and reversed CENVAT credits on inputs, works in progress, and finished goods as required. This rectification was carried out on July 28, 2005.
Interest Payment: The appellant also paid interest on the CENVAT credit amounts for the intervening period when the credits should have been reversed.
Show-Cause Notice (SCN): Surprisingly, despite the appellant’s self-initiated corrective actions, a show-cause notice was issued on July 18, 2006, demanding recovery of CENVAT credits and proposing penalties.
Appellant’s Arguments: The appellant argued that the SCN was unnecessary because they had already reversed the CENVAT credits and paid interest after the audit findings. They contended that the SCN was also time-barred since the obligation to reverse CENVAT credits during SSI exemption transitions had been communicated to the authorities through a letter dated July 9, 2004, and subsequently rectified by the appellant on July 28, 2005.
Revenue’s Position: The Revenue authorities maintained their stance as per the impugned order, which included demanding CENVAT credit recovery and imposing penalties.
Conclusion: In this case, the appellant, Panihati Rubber Limited, demonstrated proactive compliance by promptly rectifying errors related to CENVAT credits after an audit pointed them out. The self-reversal of CENVAT credits and the payment of interest for the intervening period were substantial efforts to ensure compliance with tax regulations.
However, despite the appellant’s corrective actions, a show-cause notice was issued. The appellant successfully argued that such a notice was unnecessary since they had already complied with the requirements and that it was also time-barred.
This case serves as a reminder of the importance of proper tax compliance and rectification of errors when they are discovered, even if such errors may not lead to significant financial liabilities. It also highlights the significance of timely communication with tax authorities to avoid unnecessary disputes and legal proceedings.
FULL TEXT OF THE CESTAT KOLKATA ORDER
Aggrieved from the impugned order, the appellant has filed this appeal.
2. The facts of the case are that the appellant is engaged in the manufacture of rubber products and availing the benefit of SSI exemption.
2.1 During the period from 31.03.2000 to 31.03.2004, the appellants have availed the benefit of SSI exemption from the beginning of every financial year and was clearing its finished goods without payment of duty.
2.2 After crossing the exemption of Rs.1.00 Crore, the appellant commenced payment of duty as leviable on final products and also started availing modvat/cenvat credit on inputs.
2.3 Again, at the beginning of the next financial year, the appellant opted for SSI exemption benefit and cleared the goods without payment of duty and upon crossing the exemption limit started paying duty and availing modvat/cenvat credit.
2.4 On reaching the turnover of Rs.1.00 Crore when duty liability commenced, it became entitled to avail modvat credit and the appellant was required to calculate the total credit available on inputs in stock and those contained in works in process and finished goods and take such credit , which could be utilized for payment of duty on the finished goods.
2.5 Similarly, on reaching the end of financial year, when the appellant opted for the benefit of SSI exemption in the next financial year, the appellant was required to reverse the cenvat credit on input and those contained in works in process and finished goods as on 31st March of each year.
2.6 The appellant neither took the cenvat credit on inputs lying in stock, inputs contained in works in process or in finished goods when it came out of the SSI exemption, nor did it reverse the credit on inputs lying in stock or input contained in works in process and finished goods at the time of opting for SSI exemption benefit.
2.7 For this error, the appellant became liable for payment of duty on 15.07.2000, 07.10.2001, 25.06.2002 and 13.12.2003 and on 31.03.2000, 31.03.2001, 31.03.2002 and 31.03.2003 after which it again started availing the SSI exemption. Although the appellant intimated that upon commencement of every financial year, it would avail the SSI exemption. Thereafter, upon crossing the exemption ceiling, the appellant intimated to the Central Excise Authorities that it would avail the benefit of modvat credit in respect of inputs.
2.8. In the month of July, 2004 during the time of Audit for the period 2002-03 and 2003-04, it was pointed out that the appellant was required to reversal of cenvat credit with reference to the stock at the time of opting SSI exemption and going into the exemption.
2.9 The appellants rectified their mistake by computing the cenvat credit involved on inputs and those contained in work-in-process and finished goods on respective dates and making necessary entries in RG-23A Part II on 28.07.2005 for taking its entitlement of cenvat credit and reversed the credit as required.
2.10 The appellant also paid the interest on the said amount for the intervening period. The same was intimated to the Department.
2.11 Thereafter, on 18.07.2006, a show-cause notice was issued to the appellant for recovery of cenvat credit , which was debited from the amount, the same has to be paid through PLA and penalty was also proposed on the appellant.
2.12 The show-cause notice was adjudicated and passed the impugned order demanding cenvat credit from the appellant and equivalent amount of penalty was also imposed on the appellant.
2.13 Against the said order, the appellant is before us.
3. The ld.Counsel for the appellant submits that on being pointed out by the Audit, the appellant has reversed the cenvat credit and paid interest thereon. Therefore, no show-cause notice has been issued to the appellant. Further, it is his contention that the show-cause notice is barred by limitation as during the course of Audit, the appellant is required to make reversal of cenvat credit at the time of opting for SSI exemption notification in each year and the same has been intimated by the appellant vide letter dated 9th July, 2004 and the appellant rectified their mistake by reversing cenvat credit on 28.07.2005. He further submits that a show-cause notice has been issued on 18.07.2006 by invoking extended period of limitation. Therefore, the show-cause notice is also barred by limitation.
4. The ld. A. R. for the Revenue reiterated the findings of the impugned order.
5. Heard both sides and considered the submissions.
6. We find that the discrepancy regarding the reversal of cenvat credit while opting SSI exemption came to the Department at the time of Audit and the appellant reversed the cenvat credit along with interest for intervening period. In that circumstances, there was no requirement to issue the show-cause notice to the appellant.
7. In that circumstances, we hold that the proceeding against the appellant is not sustainable.
8. Accordingly, the impugned order is set aside and the appeal is allowed by confirming reversal of cenvat credit by the appellant and the payment of interest thereof for the intervening period.
9. In view of the above observations, the appeal is allowed.
(Operative part of the order was pronounced in the open court.)