Calcutta HC Rejects ₹27.74 Cr CENVAT Demand, Says Revenue Cannot Choose Assessee's Compliance Method

The Calcutta High Court has recently dismissed the Revenue's appeals against a biscuit manufacturer in a Rs 27.74 crore CENVAT credit dispute involving the manufacture of both dutiable and exempted biscuits.

It held that an assessee has the right to choose between the methods of compliance available under Rule 6(3) of the CENVAT Credit Rules.

A Division Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar held that the Revenue cannot switch an assessee to a more punitive method merely because it disputes the calculation made under the method chosen by the assessee.

Ganges Valley Foods Pvt. Ltd. is engaged in the manufacture of biscuits. During the financial years 2010-11 to 2015-16, it manufactured both dutiable and exempted biscuits.

The assessee used common inputs and input services. It reversed proportionate credit attributable to exempted goods under Rule 6(3A).

The Department alleged that the assessee had failed to follow the prescribed procedure. It also alleged that the reversals were not reflected in its ER-1 returns for several years and that timely intimations had not been provided.

The Department consequently sought to recover a much higher amount based on a percentage of the value of exempted goods. The demand was calculated under Rule 6(3)(i) of the CENVAT Credit Rules.

The Court noted that the assessee had availed common credit of Rs 95.88 lakh. It had reversed Rs 68.78 lakh out of this amount.

The assessee had also produced Chartered Accountant certificates and intimation letters supporting the reversals. The Court found that these documents provided sufficient factual proof that the required reversals had been calculated and made.

The Bench held that the primary objective of Rule 6 is to prevent retention of CENVAT credit attributable to exempted goods. It found that the reversal made by the assessee satisfied this core requirement.

The Court also held that the Revenue cannot unilaterally switch the assessee to the more punitive, percentage-based option under Rule 6(3)(i). If the Department believed that the calculation under Rule 6(3A) was incorrect, it could reject the wrongly availed credit or provide a correct calculation under the same sub-rule.

The Court observed, “The respondent in this case elected to reverse proportionate credit in accordance with the formula and procedure prescribed under Rule 6(3A).”

The Court particularly noted that the demand of over Rs 27 crore was roughly 28 times the total common credit of Rs 95.88 lakh. It held that such a demand would transform a compensatory tax provision into an arbitrary penal measure.

On the procedural lapses alleged by the Revenue, the Court held that substantial compliance supported by documentary evidence could not be invalidated by minor procedural lapses. It noted that the CA certificates and intimation letters supported the assessee's claim of reversal.

The Court further observed, “When the substantive objective of the law has been met and can be verified through independent audits and records, technical defects in the mode of disclosure in tax returns do not justify the denial of a substantive right or the imposition of a disproportionate liability.”

Finding that the CESTAT's conclusions were primarily factual, the High Court held that the Revenue had failed to establish any perversity in those findings.

It accordingly upheld the Tribunal's order and dismissed the Revenue's appeals. All connected applications were also disposed of.

For Appellant: Advocates Uday Sankar Bhattacharjee and Tapan Bhanja, 

For Respondent: Advocate Rahul Tangri