By TIOL News Service

MUMBAI, OCT 13, 2014: THE appellants were manufacturing Aluminium Alloys and Zinc Alloys at their Khopoli factory. They sold their assets i.e. land and building etc. vide Sale Deed dated 28.12.2010 and also sold the stock of unutilized raw material and finished goods. The Central Excise registration was surrendered to the department on 03.01.2011. At that time there was a credit balance of Rs.35,49,815/- in the CENVAT account.

This amount, the appellant claimed as refund u/r 5 of the CCR, 2004.

The adjudicating authority rejected the refund by holding that Rule 5 does not provide any legal basis to grant cash refund of unutilized credit on account of closure of factory except in cases where the same is attributable to inputs which have gone into final products which are exported.

As this order was upheld by the Commissioner(A), the appellant is before the CESTAT.

The following case laws were cited by the appellant to buttress their claim of refund –

+ M/s Jain Vanguard Polybutylene Ltd. 2010-TIOL-911-HC-MUM-CX

+ Union of India v. Slovak India Co. Pvt. Ltd. 2006-TIOL-469-HC-KAR-CX

+ Rama Industries Ltd. v. CCE, Chandigarh 2009-TIOL-100-HC-P&H-CX

The AR justified the denial by citing the following decisions –

+ Steel Strips v. CCE, Ludhiana – 2011-TIOL-656-CESTAT-DEL-LB

+ Birla Corporation vs. CCE 2011-TIOL-1110-CESTAT-MUM

The Bench considered the submissions and after extracting rule 5 of the CCR, 2004 observed –

++ Rule 5 categorically states that where any inputs are used in the final products which are cleared for export under bond or letter of undertaking, then the credit shall be allowed to be utilized by the manufacturer towards payment of duty of excise on any final products cleared for home consumption or for export on payment of duty and where for any reason such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to such safeguards, conditions and limitations as may be specified by the Central Govt. by notification. The words “such adjustment” have to be read in context of the whole sentence. The words “where for any reason such adjustment is not possible” can only imply that refund in cash may be granted only when the CENVAT Credit cannot be adjusted against duty on final products cleared for home consumption or for export on payment of duty. Any other interpretation would be against the scheme of CENVAT Credit which is to prevent cascading in taxation. If the appellants' contention that refund may be granted on closure of factory is held to be valid, then there may be cases when the inputs are not even used in manufacture of the final product. Grant of refund in such cases would lead to an illogical result – that is, the duty paid on inputs is being refunded without their use in the manufacture of final products. This will amount to refund of Central Excise duty paid which has no basis in law.

++ The appellant have argued that there is no express provision in terms of Rule 5 which bars refund on closure of factory. We find that Rule 5 expressly allows refund only when “adjustment” is not possible to utilize CENVAT Credit for clearing goods for home consumption or for export on payment of duty. There cannot be any other reasonable interpretation in the manner of reading this Rule. The Rule starts with the phrase “where any inputs are used in the final products which are cleared for export.....” Thus the first condition is that the final products must be exported. The general principle of construction in canons of law is that a legislative instrument has to be read as a whole. The phrases in a sentence have to be read in their cognate sense. That is, Rule 5 has to be read as a whole and not in parts. The whole conveys only one sense i.e. refund of unutilized credit is only permissible in case of export of goods and not for any other reason.

++ The other important part of Rule 5 is that it allows refund of unutilized CENVAT Credit subject to such safeguards, conditions and limitations as may be specified by the Central Government by Notification. It is seen that the Central Govt. has issued Notification 5/2006 dated 14.03.2006 which prescribes the conditions and limitations for availing the refund. The basis of determining the refund amount is the export clearances of the final products as mentioned in the appendix to the Notification. The Notification provides for submission of documents such as shipping bills etc. If the appellants' contentions were accepted it would mean that the reference to conditions and limitations in Rule 5 is to no effect and such conditions specified in Rule 5 read with Notification 5/2006-CE(NT) are superfluous . Rule 5 clearly states that refund shall be allowed subject to such conditions as may be specified. In the present case the conditions are not fulfilled. Therefore, refund in such cases of closure of factory is not provided under the statute.

In the matter of the decision of the Courts sought to be placed reliance upon by the appellant, the Bench observed that the Larger Bench had in the case of Steel Strips considered all the decisions and also the doctrine of merger and, therefore, in the light of the same, when the very right to refund does not accrue under the law, its sanction is not warranted. Adverting to the decision of the apex Court in Jain Vanguard Polybutlene Ltd. the Bench observed that the Special Petition was dismissed leaving the question of law open and, therefore, the judicial orders on the issue have not attained finality. The Bench also referred to the Supreme Court decision in Hariprasad Shivshankar Shukla vs. A D Divikar – 2002-TIOL-447-SC-MISC-CB and concluded that the refund claim does not have sanction of law.

The appeal was dismissed.

(See 2014-TIOL-1981-CESTAT-MUM)