Partial Write-Offs Require CENVAT Credit Reversal From March 1, 2011: CESTAT Chennai

The Chennai bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that a provision for partial write-off of inputs made on or after March 1, 2011 requires immediate reversal of the corresponding CENVAT credit.

The credit can be re-availed if the inputs are subsequently used in manufacturing, subject to the assessee establishing such use.

Technical Member M. Ajit Kumar rejected GE T&D Ltd.'s appeal against a ₹8.57 lakh demand relating to CENVAT credit on provisions created for the write-off of raw materials during 2010-11 and 2011-12. The demand also carried applicable interest and penalty.

The issue turned on Rule 3(5B) of the CENVAT Credit Rules, 2004. Before March 1, 2011, the rule covered cases where inputs were fully written off or a provision was made for their full write-off. An amendment effective from March 1, 2011 brought partial write-offs and partial provisions within its scope.

The tribunal observed, “Prior to 1st March 2011, Rule 3(5B) applied strictly to instances where raw material values were written off fully or where provision was made to write off fully in the books of account. Reversal of CENVAT credit was not legally required for partial write-offs or partial provisions made prior to 01.03.2011. Rule 3(5B) was amended via Notification No. 3/2011-CE (N.T.) dated 01.03.2011, inserting the word "partially" into the provision. Hence from 01.03.2011 onwards, a manufacturer was legally required to reverse CENVAT credit equivalent to the provision created, even for partial write-offs. If the raw materials for which a provision was created (and CENVAT credit reversed) were subsequently used in the manufacture of final products, Rule 3(5B) explicitly allowed the manufacturer to re-avail / take back the CENVAT credit corresponding to the used inventory.”

In simple terms, from March 1, 2011, the rule required an assessee to reverse CENVAT credit when inputs were fully or partially written off, including where a provision for such write-off was made in the books. If those inputs were later used in manufacturing, the rule allowed the assessee to take back the credit that had earlier been reversed.

GE T&D argued that the provisions were only accounting entries and that the materials remained physically intact and usable. It submitted that provisions were released when the inventory was subsequently used and that it had reversed credit based on the revised provision.

The tribunal, however, found that GE T&D had not established the subsequent use of the provisioned materials. Despite opportunities, the company did not furnish the required documents or an auditor's certificate and had acknowledged that individual tracking of provisions against specific materials was not feasible.

The tribunal held that from March 1, 2011, creating a provision for partial write-off triggered the obligation to reverse the corresponding credit. Had GE T&D reversed the credit initially, it would have been entitled to re-avail it upon subsequent use of the materials.

On limitation, GE T&D argued that the demand was time-barred because the dispute involved interpretation of Rule 3(5B) and its amendment. The tribunal rejected this contention, holding that the interpretational nature of the dispute by itself did not restrict the demand to the normal limitation period.

The tribunal found that the company had failed to provide information sought by the department despite repeated requests. It held that the circumstances satisfied the requirements for invoking the extended limitation period.

The tribunal observed, “Silence may be treated as deception when there is a duty on the part of the Appellant to provide information to the department enquiring into a matter pertaining to the appellant.”

It added that a person cannot take advantage of their own wrong.

The tribunal accordingly rejected the appeal.

For Appellant: Advocate Joseph Prabhakar,

For Respondent: M. Selvakumar, Authorized Representative