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Commissioner Of C. Ex., Chennai-Iii v. Joy Foam Pvt. Ltd.
Factual and Procedural Background
On 25.9.1999 a fire at the first respondent's factory premises destroyed manufactured goods, raw materials, work-in-progress and returned goods. The assessee reversed credit on stock of raw materials, returned goods and inputs contained in semi-finished goods destroyed in the fire. The Commissioner allowed remission of duty on finished goods to the extent of Rs.9,85,744/-, and in the same order directed payment of cenvat credit of Rs.6,67,138/- with interest. The assessee appealed to the Tribunal against the direction to pay cenvat credit. The Department relied on the decision in Mafatlal Industries Ltd. V. CCE (2003 53 RLT 578) to support reversal of input credit; the assessee relied on Inalsa Ltd. V. CCE, New Delhi ([1997] (90) ELT 417 (Tri.)) and subsequent Larger Bench decisions (including Grasim Industries Ltd. Vs. CCE) that took a contrary view. The Tribunal, following a Larger Bench decision approving Inalsa and overruling Mafatlal, allowed the assessee's appeal. The Department appealed to this Court. The first respondent did not appear despite notice.
Legal Issues Presented
- Whether the decision of the Tribunal is correct in law in rejecting the claim of reversal of CENVAT credit by the Department especially when Rule 21 of the Central Excise Rules empowers the Commissioner/appellant herein to grant remission, subject to conditions as may be imposed by him?
- Whether the 1st respondent is entitled to seek remission of duty without reversal of CENVAT credit when Rule 21 of Central Excise Rules contemplates only a conditional remission?
Arguments of the Parties
Department's Arguments
- The Department relied upon Mafatlal Industries Ltd. V. CCE, Ahmedabad reported in 2003 53 RLT 578, which, according to the Department, held that input credit should be reversed where finished goods are destroyed and remission is granted.
- The Department appealed the Tribunal's decision allowing the assessee, seeking to uphold reversal of credit as required in such circumstances.
Assessee's Arguments
- The assessee relied upon the Tribunal decision in Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.), which took the view that goods destroyed by natural causes or unavoidable accidents cannot be equated with exempted goods and that inputs are to be considered put to intended use (thus not requiring reversal of input credit).
- The assessee also relied on the Larger Bench decision in Grasim Industries Ltd. Vs. CCE (referred to in the opinion) which approved the view in Inalsa and overruled Mafatlal.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mafatlal Industries Ltd. V. CCE, Ahmedabad reported in 2003 53 RLT 578 | Held (per Department) that input credit should be reversed where finished goods are destroyed and remission is granted. | The Tribunal's view in the Larger Bench ultimately overruled this decision; the Court refers to Mafatlal as the decision the Larger Bench disapproved. |
| Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.) | Held that goods destroyed due to natural cause or unavoidable accident cannot be equated with exemption and inputs can be considered put to intended use for manufacture (thus no reversal of input credit). | The Larger Bench approved this view; this Court adopts and approves the Larger Bench/Tribunal reasoning based on Inalsa. |
| 2006 (199) ELT 437 (Grasim Industries Ltd. Vs. CCE, Indore) | Single Member referred the issue to the Larger Bench on the question of reversal of credit where remission is granted for goods destroyed. | The reference led to a Larger Bench decision that approved Inalsa and overruled Mafatlal; the Court refers to this procedural history in support of the Tribunal's conclusion. |
| 2007 (208) E.L.T. 336 (Tri.-LB) (Grasim Industries Ltd. Vs. CCE, Indore) | The Larger Bench considered whether remission given under Rule 49/Rule 21 equates to general exemption and whether credit on inputs must be reversed. | The Larger Bench answered that remission for destroyed goods is not equivalent to exemption and approved the view that reversal of input credit is not required; this Court extracts and approves that reasoning. |
| CCE v. Indchem Electronics reported in 2003 (151) ELT 393 and CCE v. Indchem Electronics reported in 2003 (157) ELT A206 | The Tribunal had taken the view that credit in respect of inputs used in manufacture of final product destroyed by fire and remission granted was not desirable; the Revenue's appeal against that order was dismissed by the Supreme Court. | The Larger Bench noted this line of authority and the Supreme Court dismissal of the Revenue's appeal as supporting the conclusion that reversal of credit is not mandatory when remission is granted for destruction by accident. |
Court's Reasoning and Analysis
The Court considered the scope and language of the rules governing remission — specifically Rule 49 of the Central Excise Rules, 1944 read with Rule 21 of the Central Excise Rules, 2002 — and the Modvat rules regarding credit on inputs. The Court noted the following points from the Tribunal's Larger Bench decision and adopted them:
- The statutory provisions authorising remission of duty in respect of goods lost or destroyed by natural causes or unavoidable accidents do not themselves mandate reversal of input/CENVAT credit; the remission provisions do not attach a condition requiring reversal of credit.
- The Modvat rules bar credit where inputs are used in the manufacture of exempted goods (i.e., goods charged to nil rate), but remission granted because goods were lost or destroyed by natural causes or accident is not equivalent to an exemption or nil-rating of goods.
- Where goods are destroyed or lost by natural causes or unavoidable accidents, inputs used in manufacture are to be considered as having been put to their intended use and hence deemed consumed in the manufacturing process; thereby reversal of credit on those inputs is not warranted.
- The Larger Bench's approval of Inalsa and its disapproval of Mafatlal were treated as persuasive and binding for the issues before the Tribunal; the Court expressly approved the Tribunal's reasoning on these points.
Applying these principles to the facts — where goods were destroyed by fire and remission of duty was granted on those goods — the Court concluded that reversal of CENVAT credit could not be countenanced because the governing provision for remission did not provide for reversal and the inputs are deemed consumed.
Holding and Implications
APPEAL DISMISSED
Holding: The substantial questions of law were answered in favour of the assessee and against the Revenue; the Civil Miscellaneous Appeal is dismissed. There will be no costs.
Direct implications: The Commissioner’s direction to recover CENVAT credit of Rs.6,67,138/- (with interest) in respect of inputs used in goods destroyed by fire was not upheld by the Tribunal or by this Court. The assessee is not required to reverse CENVAT credit on inputs used in goods where remission has been granted due to destruction by natural causes or unavoidable accidents, on the reasoning adopted and approved by the Larger Bench and this Court.
Broader implications: The Court approved the Larger Bench's interpretation that remission under Rule 49/Rule 21 for goods destroyed/lost by accident is not equivalent to exemption and does not, by itself, require reversal of input credit. The opinion does not articulate any further, novel rule beyond adopting the Larger Bench's conclusions.
(Judgment of the Court was delivered by R.SUDHAKAR,J.) This Civil Miscellaneous Appeal filed as against the order of the Tribunal was admitted by this Court on the following substantial questions of law:
"1. Whether the decision of the Tribunal is correct in law in rejecting the claim of reversal of CENVAT credit by the Department especially when Rule 21 of the Central Excise Rules, empowers the Commissioner/appellant herein to grant remission, subject to conditions as may be imposed by him?
2. Whether the 1st respondent is entitled to seek remission of duty without reversal of CENVAT credit when Rule 21 of Central Excise Rules, contemplates only a conditional remission?"
2. Despite notice, none appears for the first respondent. Hence, after hearing the learned counsel appearing for the appellant and after perusing the relevant materials placed before this Court, the following order is passed.
3. The brief facts of the case are as follows:
In the fire accident occurred in the factory premises of the first respondent on 25.9.1999, the stock of manufactured goods, raw materials, work-in-progress and the returned goods were destroyed. The assessee reversed the credit availed on stock of raw materials, returned goods and inputs contained in semi-finished goods, which destroyed in the fire accident. Taking note of their application for remission of duty on the finished goods destroyed in the fire accident, the Commissioner allowed remission of duty to the tune of Rs.9,85,744/-. In the same order, the assessee was directed to pay cenvat credit of Rs.6,67,138/- along with interest.
4. Aggrieved by this portion of the order of Commissioner seeking payment of cenvat credit, an appeal was filed before the Tribunal by the assessee. Before the Tribunal, The Department relied upon the decision in the case of Mafatlal Industries Ltd. V. CCE, Ahmedabad reported in 2003 53 RLT 578, which held that input credit should be reversed in such circumstances. The first respondent/assessee relied upon the decision of the Tribunal in the case of Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.), wherein the Tribunal took a contrary view. In the decision reported in 2006 (199) ELT 437 (Grasim Industries Ltd. Vs. CCE, Indore), the single Member of the Tribunal referred the issue to the Larger Bench and the Larger Bench of the Tribunal approved the view taken in the case of Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.) and overruled the decision in the case of Mafatlal Industries Ltd. V. CCE, Ahmedabad reported in 2003 53 RLT 578. Following the decision of the Larger Bench, the Tribunal allowed the appeal filed by the assessee.
5. Aggrieved by the said decision of the Tribunal, the Department is before this Court in this appeal.
6. The issue that arise for consideration is whether on remission of duty, the assessee is liable to reverse the cenvat credit. We find that the reasoning given by the Larger Bench of the Tribunal, which took note of the factors that i) reading of Rule 49 of the Central Excise Rules 1944 read with Rule 21 of the Central Excise Rules 2002, which provides for remission of duty in respect of goods lost or destroyed by natural cause or unavoidable incidence and consequently become unfit for consumption or for marketing or production, does mot make it mandatory that there should be reversal of credit in respect of inputs used in the manufacture of such goods and ii) Modvat rules prohibits the credit of duty paid in respect of inputs, which are used in the manufacture of exempted goods, which are chargeable to nil rate of duty. However, in the decision in the case of Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.), a finding was rendered that goods destroyed due to natural cause or by unavoidable accident cannot be equated with exemption of goods and inputs can be considered to have been put to intended use for manufacture of the finished products. In otherwords, the provision of Modvat Rules prohibits reversal of credit in respect of exempted goods, whereas in the present case, the remission of duty is on account of goods being lost or destroyed by natural cause or accident and as such, the order of remission was granted, but it does not provide for any condition regarding reversal of credit taken in respect of inputs used in such goods.
7. In the decision reported in 2007 (208) E.L.T. 336 (Tri.-LB) (Grasim Industries Ltd. Vs. CCE, Indore), the Larger Bench of the Tribunal approved the view taken in the decision in the case of Inalsa Ltd. V. CCE, New Delhi reported in [1997] (90) ELT 417 (Tri.). We extract the relevant portion of the decision of the Larger Bench as such for better clarity.
"6. We find that the Tribunal in the case of Inalsa Ltd. v. CCE, New Delhi (supra) held that the final product has not suffered duty only as a result of remission of duty given a fulfilling the conditions, therefore, under Rule 49, it is not to be equated to a general exemption from duty or goods being charged to nil rate of duty. Therefore, the credit in respect of inputs used in the manufacture of such goods need not be reversed. In the case of Mafatlal Industries (supra), the Tribunal agreed with the earlier view in the case of Inalsa Ltd. (supra) that remission of duty on finished goods cannot be equated with exemption to goods. However, it is further held that in case remissions granted to finished goods destroyed in fire, a manufacturer is not entitled for credit of duty in respect of inputs used in the manufacture of such goods. We find that the Tribunal in the case of CCE v. Indchem Electronics reported in 2003 (151) ELT 393 has taken the view that inputs which were to be used in the manufacture of final product and the final product was destroyed due to fire and remission of duty was granted the credit in respect of inputs used on such inputs is not desirable. The Revenue filed appeal against this order and the same was dismissed by Supreme Court reported in CCE v. Indchem Electronics reported in 2003 (157) ELT A206.
7. We find that reading of Rule 49 of Central Excise Rules, 1944 and Rule 21 of Central Excise Rules, 2002 which provides for remission of duty in respect of goods lost or destroyed by natural cause or by unavoidable accidents or in case goods become unfit for consumption or for marketing at any time before removal does not provide reversal of credit in respect of inputs used in the manufacture of such goods. The Modvat rules prohibits the credit of duty paid in respect of the inputs which are used in the manufacture of exempted goods in respect of the inputs which are used in the manufacture of exempted goods which are chargeable to nil rate of duty. The Tribunal in both the cases, that is Mafatlal Industries (supra) and in the case of Inalsa Ltd. (supra) held that in case the goods were destroyed due to natural cause or by unavoidable accident during handling or storage, cannot be equated with exemption to goods and the inputs can be considered to have been put to intended use for manufacture of the final product. Reading of rules under which remission is granted in respect of goods which were lost or destroyed by natural cause or by natural accident, does not provide any condition regarding reversal of credit taken in respect of inputs used on such goods, hence we are unable to support the view taken in respect of inputs used on such goods, hence we are unable to support the view taken in the case of Mafatlal Industries (supra) whereby it has been held that assessee has to reverse the credit taken of inputs used in such goods on which remission is granted. Therefore, we approve the view of the Tribunal taken in the case of Inalsa Ltd. (supra) in this regard. The issue to the Larger Bench is answered in the above terms and the matter be placed before the Regular Bench."
8. We find that once the goods are destroyed or lost due to natural cause, remission of duty is granted on such goods. Since the inputs are considered to be put to intended use in the manufacture of finished products, it is deemed to have been consumed in the process of manufacture and since the goods are lost or destroyed due to unavoidable accident, the claim of reversal of credit cannot be countenanced, more so, when the said provision does not provide for reversal of credit, as has been observed by the Tribunal, which we approve.
9. In the light of the above, the questions of law are answered in favour of the assessee and against the Revenue. Consequently, this Civil Miscellaneous Appeal stands dismissed. No costs.
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