By TIOL News Service

MUMBAI, OCT 16, 2014: THE appellant is a manufacturer of automobile components and availed CENVAT credit. On receipt of inputs, the defective ones are segregated and returned to the suppliers but some inputs which have been issued for processing are rejected in machining process.

During the course of scrutiny of records it was observed in Audit report that the assessee had shown certain quantity-wise details of input/raw material as ‘Process rejection' and kept in stock and it appeared that the valuation of these inputs in books of account such as audited financial statements and tax audit report is done on the basis of the rate applicable for scrap and not at the actual purchase price of such inputs.

The appellant was asked to show cause as to why under the provisions of Rule 3(5B) of CCR, 2004 they should not reverse the CENVAT credit availed on such process rejection.

By an o-in-o, the demand of Rs.1,82,750/- was confirmed along with interest and imposition of penalty. This order was upheld by the Commissioner(A) and so the appellant is before the CESTAT.

The appellant, inter-alia, submitted that the defective inputs, which are called as ‘Process rejection', were segregated and were valued at lower rate for the purpose of valuation of stock and there is no entry made in the books of account writing off such process rejection inputs either partially or fully and, therefore, the order is required to be set aside and the appeal should be allowed.

The AR submitted that the valuation of inputs at a lower rate than the purchase value amounts to writing off partially and accordingly, the impugned order is correct and the same be upheld.

The Bench adverted to the provision of Rule 3(5B) of CCR, 2004 as substituted by notification 16/2009-CE(NT) and observed -

++ The aforesaid rule clearly provides that subsequent to taking of credit if any amount is written off fully or where provision is made to write off fully in the books of account, then the manufacturer shall pay an amount equivalent to the CENVAT credit taken in respect of the said input.

++ In the present appeal, there is no such finding that the appellant have written off the "process rejection inputs". The only finding is that the appellant have valued the process rejection materials at lower value than the purchase price for the purpose of finalization of account.

++ Valuing at lower rate is not equivalent to writing of the value of inputs in the books of account.

Holding that the proceedings initiated are due to misinterpretation of the Rules, the order was set aside and the appeal was allowed with consequential relief.

(See 2014-TIOL-2003-CESTAT-MUM)