CENVAT Credit Not Available On DEPB Scrip-Based Duty Payment Before 31 August 2004: Madras High Court

The Madras High Court on 23 July held that CENVAT credit cannot be claimed on additional customs duty adjusted through DEPB scrips for imports made before 31 August 2004, as such credit was available only where the duty was paid in cash.

A Division Bench of Justices G. Jayachandran and N. Mala allowed the Revenue's appeal against Computer Graphics Ltd, holding that the taxpayer was not entitled to CENVAT credit on duty discharged through DEPB scrips and upholding the extended limitation period, penalty and interest. The judges held:

“for the period upto 31.08.2004, unless the duty was paid in cash, the CENVAT credit was not available since mere payment by debit in the DEPB scrips was of no avail. Assuming that the CENVAT credit for duty debited in DEPB scrips was available, in view of the categorical finding of the Division Bench that the value of DEPB scrip, once used, gets extinguished and there would be no question of seeking CENVAT credit thereafter, squarely applies and therefore the contention of the learned counsel for the 1st respondent cannot be sustained.”

The dispute arose after the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) granted relief to Computer Graphics Ltd by setting aside the excise duty demand for the period 2004-05 and 2005-06 on the ground of revenue neutrality and holding that the demand for the earlier period was time-barred. The Revenue challenged the Tribunal's order before the High Court.

The High Court relied on its earlier Division Bench decision in Commissioner of Central Excise v. Mohan Breweries & Distilleries Ltd. and reiterated that for imports made prior to 31 August 2004, CENVAT credit could not be availed where additional customs duty was discharged by debiting DEPB scrips instead of cash payment.

It observed that once a DEPB scrip is used, its value gets exhausted and the taxpayer cannot claim CENVAT credit on the amount adjusted through the scrip. It also noted that the subsequent amendment to the Foreign Trade Policy permitting such credit operated only prospectively. The Bench rejected the Tribunal's finding on revenue neutrality, noting that the Tribunal had reached the conclusion without examining the evidence or determining the actual quantum of admissible CENVAT credit. It held:

“Having raised the issue of “manufacture” and “excisability” of the subject goods, in its grounds of appeal before the Tribunal, for the reasons best known to it, the 1st respondent did not address the primary issue of ''manufacture'' and ''excisability'', but confined its submissions to the alternate plea of revenue neutrality.”

Further, the judges held that once Computer Graphics Ltd relied on revenue neutrality, it was required to establish the necessary facts through supporting material, which it failed to do.

On the issue of limitation, the Court held that the Tribunal had set aside the extended period of limitation without assigning proper reasons. It upheld the Revenue's invocation of the extended limitation period under Section 11A of the Central Excise Act, which permits recovery of duty beyond the normal limitation period in cases involving suppression of facts.

Lastly, the Bench upheld the penalty under Section 11AC and interest under Section 11AB of the Central Excise Act, finding that the adjudicating authority had correctly concluded that Computer Graphics Ltd had contravened the provisions of the Central Excise Rules, 2002 with an intention to evade payment of duty.

Accordingly, the High Court allowed the Revenue's appeal, set aside the CESTAT order and restored the duty demand, penalty and interest against Computer Graphics Ltd.

For Appellant: A.P. Srinivas, Standing Counsel

For Respondent: L.Maithili, For R1