CENVAT Credit Rules | Non-Availment of Input Credit on Non-Excisable Goods Exempts Rule 6(3) Payment : CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has clarified that manufacturers who do not avail CENVAT credit on inputs used for non-excisable goods are not liable to pay an amount under Rule 6(3) of the CENVAT Credit Rules, 2004. This ruling underscores the importance of maintaining proper accounts and provides relief to assessees who comply with the conditions of Rule 6(1) and Rule 6(2) of the CCR.

Background & Facts

The Dispute

The appellant, M/s Rajaram Maize Products, a manufacturer of excisable goods such as starch and glucose, also produced non-excisable by-products like husk, dry husk, gluten, oil, and oil cake during the manufacturing process. The appellant paid excise duty on the dutiable goods but cleared the non-excisable goods without paying any duty. The dispute arose when the Principal Commissioner of Central Goods and Service Tax, Raipur, issued show cause notices alleging non-compliance with Rule 6(3) of the CENVAT Credit Rules, 2004.

Key Facts

• The appellant manufactured excisable goods (starch and glucose) and non-excisable goods (husk, dry husk, gluten, oil, and oil cake) as by-products.
• Show cause notices were issued on 28.10.2015 (covering 2010-11 to December 2014) and 02.02.2016 (covering January 2015 to October 2015).
• The notices alleged that the appellant failed to pay an amount equal to 5%/6% of the value of non-excisable goods under Rule 6(3) of the CCR for not maintaining separate accounts for inputs used in dutiable and non-excisable goods.
• The value of the demand was Rs. 1,05,82,177, along with interest and an equal amount as penalty under Rule 15(2) of the CCR read with Section 11AC of the Central Excise Act, 1944.

Procedural History

• 27.10.2017: The Principal Commissioner initially dropped the demand, holding that non-excisable goods cannot be treated as exempted goods under the Supreme Court judgment in Union of India v. Hindustan Zinc (2014 (303) ELT 0321(SC)).
• Revenue appealed the order dated 27.10.2017, arguing that the Commissioner failed to consider the Explanation to Rule 6(1) of the CCR, introduced with effect from 01.03.2015, which includes non-excisable goods within the definition of exempted goods.
• 20.09.2018: CESTAT disposed of Revenue's appeal (No. 51857 of 2018) and remanded the matter to the Commissioner for reconsideration in light of the amended Rule 6.
• 18.01.2021: The Commissioner passed the impugned order, confirming the demand, interest, and penalty.
• Appeal filed before CESTAT (Excise Appeal No. 50695 of 2021).

Relief Sought

The appellant sought setting aside of the impugned order dated 18.01.2021 and consequential relief, including the quashing of the demand of Rs. 1,05,82,177, interest, and penalty.

The Legal Issue

The central question was whether an assessee who does not avail CENVAT credit on inputs used for non-excisable goods is liable to pay an amount under Rule 6(3) of the CENVAT Credit Rules, 2004, even if it complies with Rule 6(1) and Rule 6(2) of the CCR.

Arguments Presented

For the Appellant

• The appellant argued that it had not availed any CENVAT credit on inputs used for the manufacture of non-excisable goods or on common inputs used for both dutiable and non-excisable goods.
• A Chartered Accountant's certificate dated 12.08.2023 was submitted, certifying that:
  • The appellant did not avail CENVAT credit on inputs used up to the stage of generation of by-products (husk, dry husk, gluten, oil, and oil cake).
  • No CENVAT credit was availed on inputs commonly used for dutiable and non-excisable goods.
• The appellant contended that since it complied with Rule 6(1) and Rule 6(2), it was not liable to pay the amount under Rule 6(3).

For the Respondent

• The Revenue supported the impugned order, arguing that non-excisable goods are included within the definition of exempted goods under the Explanation to Rule 6(1) of the CCR, inserted with effect from 01.03.2015.
• The Explanation states: "For the purpose of this rule, exempted goods or final products as defined in clauses (d) and (h) to rule 2 shall include non-excisable goods cleared for a consideration from the factory."
• The Revenue contended that the Tribunal's remand order (dated 20.09.2018) required the Commissioner to re-examine the matter in light of this Explanation, and the impugned order was correctly passed.

The Court's Analysis

The CESTAT examined the obligations under Rule 6 of the CENVAT Credit Rules, 2004 and the appellant's compliance with them. The Tribunal noted the following:

1. Rule 6(1) of the CCR prohibits an assessee from availing CENVAT credit on inputs used for the manufacture of exempted goods.
2. Rule 6(2) of the CCR requires an assessee manufacturing both dutiable and exempted goods to maintain separate accounts for inputs used for each type of product.
3. Rule 6(3) of the CCR mandates that if an assessee does not maintain separate accounts, it must pay an amount equal to 5%/6% of the value of exempted goods.

The Tribunal observed that the Explanation to Rule 6(1), introduced on 01.03.2015, expanded the definition of exempted goods to include non-excisable goods. However, the critical factor in this case was the appellant's compliance with Rule 6(1) and Rule 6(2).

"Had the appellant submitted the CA's Certificate during the first round of litigation or during adjudication or at least at the remand proceedings, there would have been no case for confirming the demand of an amount under rule 6(3) of the CCR, 2004."

The Tribunal relied on the Chartered Accountant's certificate, which conclusively proved that the appellant had not availed any CENVAT credit on inputs used for non-excisable goods or on common inputs used for both dutiable and non-excisable goods. Since the appellant complied with Rule 6(1) and Rule 6(2), the Tribunal held that no liability under Rule 6(3) arose.

The Verdict

The CESTAT allowed the appeal and set aside the impugned order dated 18.01.2021. The Tribunal held that the appellant was not liable to pay the demanded amount of Rs. 1,05,82,177 under Rule 6(3) of the CCR, along with the interest and penalty imposed. Consequential relief was granted to the appellant.

What This Means For Similar Cases

Compliance with Rule 6(1) and Rule 6(2) Exempts Payment Under Rule 6(3)

• Assessees who do not avail CENVAT credit on inputs used for non-excisable goods or common inputs are not liable to pay the amount under Rule 6(3) of the CCR.
• The ruling reinforces that Rule 6(3) is triggered only if an assessee fails to comply with Rule 6(1) or Rule 6(2.
• Manufacturers must maintain proper records to prove compliance with Rule 6(1) and Rule 6(2) to avoid demands under Rule 6(3).

Chartered Accountant's Certificate as Conclusive Evidence

• The Tribunal relied heavily on the Chartered Accountant's certificate to establish that the appellant had not availed CENVAT credit on relevant inputs.
• Assessees should obtain similar certificates to substantiate their compliance with Rule 6(1) and Rule 6(2) during adjudication or appeal proceedings.
• Such certificates can prevent demands under Rule 6(3) if submitted at the earliest stage of litigation.

Impact of the Explanation to Rule 6(1)

• The Explanation to Rule 6(1), which includes non-excisable goods within the definition of exempted goods, does not automatically trigger Rule 6(3).
• The key determinant is whether the assessee availed CENVAT credit on inputs used for non-excisable goods or common inputs.
• Assessees must re-examine their input credit policies in light of this ruling to ensure compliance with Rule 6.