CESTAT New Delhi Holds CENVAT Credit Does Not Lapse If Other Dutiable Final Products Continue

On 18 May, the New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that CENVAT credit lying in balance does not lapse merely because some final products become exempt from excise duty, as long as other final products manufactured from the same inputs continue to attract duty.

President Justice Dilip Gupta and Technical Member P. Anjani Kumar dismissed three Departmental appeals and upheld the order dropping demands exceeding Rs.22.88 crore against Sharp Menthol India Ltd., arising from alleged wrongful availment and utilisation of CENVAT credit between March 2008 and September 2010. The Bench observed:

“Rule 3(4) of the 2004 Credit Rule provides that CENVAT credit may be utilised for payment of any duty of excise on any final product. This means that if out of the same CENVAT credit availed inputs, more than one final product is manufactured and out of those final products, one is exempted from duty, CENVAT credit can be utilised for payment of duty for the other final products which are dutiable.”

The dispute arose after notifications issued in 2008 and 2010 exempted certain products manufactured by Sharp Menthol, including Menthol Crystals and Menthol, from excise duty.

The Department argued that Sharp Menthol must reverse the CENVAT credit balance as on 1 March 2008 under Rule 11(3) of the CENVAT Credit Rules, 2004, and also pay an amount equivalent to 10%/5% of the value of exempted goods cleared in the domestic market and exported under bond under Rule 6 of the Rules.

The Tribunal rejected this contention and held that Rule 11(3) applies only where all final products manufactured from common inputs become exempt. It noted that Sharp Menthol continued to manufacture dutiable products from the same inputs and therefore remained entitled to utilise the credit balance for payment of duty on such products. It also recorded that earlier proceedings involving identical facts had already settled the issue in favour of the taxpayer.

The Bench further held that the Department could not sustain its demand for 10%/5% of the value of exempted goods cleared in the domestic market. It found that Sharp Menthol maintained separate accounts for dutiable and exempted products and did not avail credit on inputs used exclusively in the manufacture of exempted goods cleared for home consumption.

It emphasised that Rule 6(3) gives the option to the taxpayer and the Department cannot compel a particular option or impose the 10%/5% levy. The Tribunal observed:

“Option under rule 6(3) of the 2004 Credit Rules is with the assessee and the department cannot demand 10%/5% of the value of the exempted goods. Sharp Menthol had not exercised any one of the options under rule 6(3) of the 2004 Credit Rules. There is no proposal in the show cause notice to recover the credit alleged to have been taken by Sharp Menthol of the inputs or input services used in the manufacture of exempted goods.”

On exports, the Tribunal held that Rule 6(6)(v) of the CENVAT Credit Rules protects exempted goods exported under bond. It reiterated that authorities cannot deny or require reversal of credit for such exports and noted that the Department itself permitted the exports without challenge.

Accordingly, the CESTAT held that the demands, interest and penalties lacked legal basis and upheld the Principal Commissioner's order dropping the proceedings and dismissed all three Departmental appeals.

For Appellant: Shri Bhagwat Dayal, authorised representative

For Respondent: Shri Mihir Mehta, advocate