By TIOL News Service

NAINITAL, OCT 02, 2014: THESE are appeals filed by Revenue before the Uttarakhand High Court against the orders of the CESTAT.

The substantial question of law involved is:

"Whether Cenvat Credit attributable to the quantity of Inputs (Molasses) used in, or in relation to manufacture of exempted final product (Rectified Spirit, attracting nil rate of duty and which was reported as wastage / storage loss) should not be reversed as per provisions of para (a)(i) of Sub-Rule 3 of Rule 6 of CENVAT Credit Rules, 2004?"

The Respondent has two plants situated in the same factory premises. It has a sugar mill and a distillery unit. In the sugar mill, it manufactures Vacuum Pan Sugar and Molasses out of sugarcane. In the distillery unit, it is mainly manufacturing alcoholic liquor for human consumption, namely, country spirit and Indian made foreign liquor out of duty paid Molasses. It also manufactures rectified spirit and denatured spirit. Rectified spirit attracts NIL rate of duty and denatured spirit attracts 16 per cent ad valorem .

While scrutinizing the returns for the months July, 2005 to March, 2006, it was observed that the stock of rectified spirit was short by 33172.80 Bulk Litres and which was shown as wastage.

According to the department, the CENVAT credit taken on Molasses (Rs.1.27 lakhs) and involved on the quantity of rectified spirit lost/cleared as wastage is required to be reversed.

The lower authorities confirmed the demand but the CESTAT set aside the same and hence the Revenue is before the High Court.

The Tribunal had inter alia held that Rectified Spirit evaporated during storage at the appellants' premises; that under the State Excise Law storage loss up to 0.5% is allowed and that can be taken to be a safe basis for allowing a similar benefit under the Central Excise Law as well; that inasmuch as the loss was only 0.4% and which is within the permissible limit of 0.5% as settled by the State Excise Department, credit cannot be denied.

The Counsel for the Revenue submitted that the Tribunal had clearly erred in applying the practice under the State Excise laws in the matter of making allowance for the wastage; that the case arose under the CCR, 2004; that since rectified spirit is subject to Nil rate of duty they are exempted goods and, therefore, in view of Rule 6 of CCR, 2004 credit taken on Molasses is required to be reversed. Inasmuch as only the stage at which the reversal is to take place is when there is removal and the same is alone what is contemplated under Rule 6(3) but that does not mean that, if, after manufacture, there is wastage, the party will be able to get CENVAT credit.

The High Court observed -

++ As regards the merits of the matter, it may be true that the final goods, in this case rectified spirit, have been lost by evaporation. Here, we are not concerned with the case under the State Excise law. Here, we are concerned specifically with the issue relating to availability of CENVAT credit under the CENVAT Credit Rules. The object of the rules appears to be to avoid the cascading effect of duties at various stages and till the final product emerges, if duty is paid on the raw materials or on the intermediary products, credit could be taken for the same when it comes to payment of duty on the final product. Quite clearly, for working out the scheme, what the rule maker has provided is that the final product in respect of which CENVAT credit is claimed must be itself dutiable. Rectified spirit, as we have already noted, is not dutiable being assessable at NIL rate, which, by the CENVAT Credit Rules, is exempted. Being exempt the final product, respondent could not possibly have claimed CENVAT credit in respect of the same.

++ We would think that, under the scheme, when admittedly duty paid molasses have been used for the manufacture of rectified spirit for which a formula has been deployed by the authorities; we can proceed on the basis that a particular quantity of duty paid molasses is used for the manufacture of the final product, which, because it is not dutiable, respondent becomes disentitled to claim CENVAT credit on the same. In such circumstances, the direction, which is impugned, namely, to reverse the credit and imposition of the penalty and the interest for the failure to do so, cannot be complained of. Merely because it is not cleared for the reason that it cannot be cleared does not mean that the manufacture did not take place. The credit standing to the account of duty paid molasses used for the purpose of producing the non-dutiable final product necessarily must be proportionately reduced. The danger of the party using it for other purposes as highlighted by the Commissioner cannot be overlooked by us.

In fine, the Revenue appeals were allowed by setting aside the order of the CESTAT.

(See 2014-TIOL-1733-HC-UKHAND-CX)