Reversal of Cenvat credit on Returned goods

Returned goods have to be treated as Inputs and the Assessee having shown the issuance of the said Inputs from their RG-1 are deemed to have manufactured final product – Reversal of Cenvat credit cannot be sought

CCE, Jaipur Vs. Amco India Ltd. [2015-TIOL-128-CESTAT-DEL]

Amco India Ltd. (the Assessee) was engaged in the manufacture of Aluminum Foils which were cleared to the customers upon payment of Excise duty. However, some of the goods were rejected by the customers and the same were returned to the Assessee in its factory either under the cover of the invoices issued by customers or under the cover of invoices which were issued by the Assessee himself.

In terms of the Rule 16 of the Central Excise Rules, 2002 (the Excise Rules), the Assessee was entering these goods in their Input receipt register and accordingly was availing Cenvat credit of the same.

However, the Department made an observation that after entering the goods in their Cenvat Account, the Assessee has simply shown the issuance of the said Inputs for further manufacture, without maintaining any records about the same. Investigation was initiated against the Assessee and during the course of investigation, statements of the employees were recorded that only 20% of the returned material is reusable and the balance quantity was cleared by them as scrap.

Later on, the Adjudicating Authority confirmed the demand of duty of Rs.19,60,153/- along with imposition of penalty on the ground that the reprocesses like rewinding, cutting, slitting, re-packing undertaken by the Assessee on the returned goods do not amount to ‘manufacture’ as defined under Section 2(f) of the Central Excise Act, 1944 (the Excise Act) and the Assessee cannot pay duty less than the Cenvat credit availed by them on such goods in terms Rule 16(2)of the Excise Rules.

Being aggrieved the Assessee preferred an appeal before the Ld. Commissioner (Appeals).The ld. Commissioner (Appeals)allowed the appeal in favour of the Assessee and held the following:

• Certain processes that were undertaken on the returned goods viz, re-annealing, slitting, edge trimming, lamination, built up-breaking etc., would be the process of manufacture if not incidental/ancillary to manufacture to render the goods marketable.
• The Rule 16 of the Excise Rules does not stipulate requirement of maintenance of any separate records of inputs whether returned after sales or fresh receipts. Inputs have to be treated as inputs and accounted for as prescribed.
• Differential demand on 80% of sales returns cleared as scrap is not sustainable because same is based on presumptions and assumptions as the Adjudicating Authority himself has concluded that the Assessee was not maintaining any separate accounts for the returned goods.
• The goods were returned to factory and Cenvat credit on these returned goods was availed in terms of the provisions of Rule 16 of Excise Rules.
• There is no evidence on records that these goods were removed clandestinely without payment of duty. Therefore, duty demand of Rs. 19,60,153/- on clearance of the said returned goods is not sustainable under law and deserves to be set aside.

Being aggrieved, the Department preferred an appeal before the Hon’ble CESTAT, Delhi.

The Hon’ble CESTAT, Delhi, while upholding the decision of the Ld. Commissioner (Appeals) held that the provision of Rule 16 of the Excise Rules does not require maintenance of any records. The returned goods have to be treated as inputs and the Assessee having shown the issuance of the said inputs from their RG-I are deemed to have manufactured final product. Accordingly, reversal of Cenvat credit cannot be sought.

Our Comments: – The Central Board of Excise and Customs (CBEC) vide Notification No. 21/2014-CE (NT), dated July 11, 2014 (Applicable w.e.f September 1, 2014) [“Notification No. 21”], has amended Rule 4(1) and Rule 4(7) of the Credit Rules to fix a time limit of six months from the date of issuance of any of the documents specified in Rule 9(1) thereof, for availment of the Cenvat credit on Inputs and Input services.

Now, there is an open query from the Trade that what will happen if such final products are received after 6 months of its removal from the factory in view of the amendment brought in Rule 4(1) and Rule 4(7) of the Credit Rules vide Notification No. 21.

Whether the newly added proviso to Rule 4(1) of the Credit Rules, which talks about Inputs, would apply to Cenvat credit taken on finished goods received by the manufacturer in the factory beyond six months of its removal from the factory?

Hope, the Board will provide clarification to the above stated issue.