(Per : HONOURABLE MR. JUSTICE AKIL KURESHI) 1. These appeals involve similar facts and similar questions of law. There are, however, minor factual differences which we shall notice at an appropriate time.
2. In Tax Appeal No.798/2006, a Division Bench of this court had, while admitting the appeal on 25-1-2007, framed the following substantial question of law:-
“Whether or not modvat credit on inputs not used by the assessee and completely written off in books is or is not required to be reversed?”
2.1 The respondent assessee is a manufacturer of Air Compressors. On the raw material purchased by the company for manufacturing its final product, as per the modvat scheme prevailing at the relevant time, the assessee would take credit of tax paid on such inputs. Some of these components would not be used immediately. As per the accounting standards permissible, the assessee would, therefore, depreciate the book value of these inputs for the purpose of income-tax.
2.2 The case of the respondent is that though the respondent would write off such inputs either fully or partially for the income-tax purpose, the goods would not be unusable and would be used over a period of time as per its requirement. For the purpose of excise, therefore, the respondent would not reverse the modvat credit taken on such inputs.
2.3 The Department, however, was of the opinion that such different standards adopted by the respondent would not be permissible. A show-cause notice, therefore, came to be issued by the adjudicating authority on 18-7-2003 calling upon the respondent to show cause why modvat/cenvat credit amounting to Rs.88,26,440/- be not recovered from them under rule 57I(ii) of the Central Excise Rules, 1944 (hereinafter referred to as 'the rules of 1944') and further why penalty should not be imposed on the company.
2.4 The respondent opposed the proceedings contending that the respondent which is a public limited company is regularly following the accounting practice as per law. It shows the inventory on cost or market value whichever is lower for the income-tax purpose. The company being an engineering industry continuously designs and develops new models and upgrades its existing models. Whenever the compressors are sold, there is a policy to ensure that necessary parts and components of such compressors are available for repair and servicing work. The company, therefore, had to maintain a certain minimum stock to ensure that such parts were easily available even in cases where a model would be discontinued. The stock and the parts would be maintained for a period of eight years so that in case of requirement of repairs of the machines already sold, such parts could be made available to the buyers. It was pointed out that as per the accounting practice, depending on the passage of time, a portion of the value of such parts would be reduced and to that extent, written off in the books of account.
2.5 The adjudicating officer, however, was not convinced by such explanation. He passed an order-in-original dated 24-12-2003 confirming duty demand of Rs.88,26,440/- with interest. He also imposed penalty of matching sum on the company. He imposed separate penalties of Rs.10 lakhs and 5 lakhs on the officers of the company. In his order, he noted that the company had partially written off some of the inputs and fully written off the rest which were lying for a period in excess of four years. He relied on a circular of CBEC dated 22- 2-1995 which provided that upon writing off of the inputs, it was obligatory on the part of the assessee to reverse the modvat credit taken.
2.6 The assessee carried the matter in appeal before the Customs, Excise and Service Tax Appellate Tribunal ('CESTAT', for short). The Tribunal in its short order dated 6-12- 2005 substantially allowed the assessee's appeal. Relying on its previous decisions, the Tribunal was of the opinion that modvat credit cannot be denied on the ground that the input was written off in the books of account for income-tax purpose as long as the inputs were still available within the factory premises. However, since the departmental representative had submitted before the Tribunal that such inputs were not available in the factory premises also, the Tribunal directed the original adjudicating authority to examine the presence of the inputs in the appellant's factory even though they were written off in the books of accounts and to decide the availability of the modvat credit accordingly. It is this decision of the Tribunal which the revenue has challenged in Tax Appeal No.798/2006.
3. In Tax Appeal No.810/2008, a Division Bench of this court on 22-4-2009 while admitting the appeal framed the following substantial questions of law:-
(a) Whether, in the facts and circumstances of the case, the Tribunal was justified in rejecting the appeal of the Revenue and confirming the order of the Adjudicating Authority dropping the demand for recovering the amount of Modvat Credit on inputs completely written off in the books of accounts on account of the same being rendered obsolete and slow moving items and which were of no use and were not used in or in relation to manufacture of final product?
(b) Whether, in the facts and circumstances of the present case, the Tribunal was justified in holding that writing off of inputs completely in the books of accounts would not make an assessee liable to reverse the Modvat/Cenvat Credit availed of on such written off inputs?
3.1 Such appeal arises out of similar factual background. Here also, the same assessee was subjected to show-cause notice proceedings for recovery of the modvat credit taken and retained on the inputs which were either partially or fully written off for the accounts purpose. The Commissioner passed his order-in-original dated 18-4-2005. He dropped the demand of recovery following various decisions of the Tribunal. In particular, the Commissioner observed that “Besides, as already discussed, once modvat/Cenvat is availed on inputs, unless the Department proves that such credit is wrongly availed or the inputs on which credit is availed is cleared as such without payment of duty, the Department cannot extinguish such credit, so as long as the inputs remain in the factory premises and physical presence is confirmed. Thus recovery of modvat credit in such cases will go against the provisions prescribed under Modvat/Cenvat Rules. Hence in my considered view the assessee should not be deprived of modvat/Cenvat credit which is lawfully and legally admissible to them on the sole ground that the value of such inputs had been written off fully in their books of account, notwithstanding anything contained in Board's Circular.”
3.2 Revenue challenged this decision of the Commissioner before the Tribunal. The Tribunal, by the impugned judgment, dismissed the revenue's appeal. In view of the fact that the Commissioner had also not disputed the physical presence of the goods, the Tribunal in its judgment did not remand the proceedings for such verification. The Tribunal observed as under:-
“5. We find that the Commissioner has also taken into consideration the Board's Circular and has observed that the same does not clarify whether write-off in the books of accounts accompanied with physical liquidation of the inputs or only write-off in the books of accounts with the physical form of inputs being intact and found to be available in the factory. In any case, we find that inasmuch as the issue stands covered by the Tribunal's decision, the adjudicating authority was justified in following the ratio of the same. We do not find any merit in the revenue's appeal and reject the same.”
4. Counsel Shri Ravani on behalf of the revenue submitted that the respondent had written off the inputs in the books of accounts. In some cases, such writing off was complete, in some cases it was partial. In either case, the respondent was required to reverse the modvat/cenvat credit taken on such inputs. He drew our attention to two circulars of the Board dated 22-2-1995 and 16-7-2002 in this regard. We would take note of contents of such circulars later.
4.1 Counsel submitted that as per such circulars, the respondent was required to reverse the credit on such inputs in the books of accounts. The respondent, therefore, can not continue to avail modvat credit even if the goods were still lying in the factory premises.
5. Counsel Shri Nainawati for the respondent assessee opposed the appeal contending that the modvat scheme permitted the manufacturer to take credit on the inputs as soon as the same were purchased. The scheme did not defer the event of taking such credit to the actual utilisation of the inputs for the manufacture of the final product. He submitted that such credit could be utilised for clearance of other goods as well. In this respect, he relied on the decision of the Apex Court in the case of Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd., 1999 (112) E.L.T. 353. He contended that the assessee as per the permissible accounting practices was authorised to reduce the book value of the goods depending on the period of time for which the same remained unused. Accordingly, in the books of accounts, the assessee had made entries and written off partially or fully the value of such inputs. This would not, however, have any bearing on the question of reversal of modvat credit since the goods were still available in the factory premises for its use. In fact, in number of cases, such goods would be used either as spare parts for repairing of the machinery already sold by the assessee or for manufacture of its product.
5.1 Counsel relied on the provisions contained in Chapter VAA of the rules of 1944 to contend that the relevant provisions under which the modvat scheme was framed, did not envisage any time limit within which the inputs must be consumed in manufacture of the final product. He submitted that the Board's circulars cannot run counter to the statutory provisions. Counsel referred to various decisions of the different benches of the Tribunal to contend that consistently the view of the Tribunal has been that in such cases, insistence of the Department to reverse the modvat credit is not valid.
5.2 Counsel drew our attention to a decision of Bombay High Court in case of Commr. Of Central Excise vs. Indian Petrochemicals Corpn. Ltd., 2008 (226) E.L.T. 339 wherein similar view was taken. Counsel also pointed out that such decision was followed in a later judgment of the same High Court in the case of Commissioner of C. Ex., Navi Mumbai vs. Hindalco Industries Ltd., 2011 (272) E.L.T. 161.
5.3 Counsel also drew our attention to rule 5B of the Cenvat Credit Rules, 2004 which was introduced with effect from 11-5-2007 which envisaged reversal of cenvat credit under certain circumstances. He also pointed out that such rule was thereafter amended further with effect from 7-7-2004 making further stringent provisions of reversal of cenvat credit under certain circumstances. The counsel submitted that however, these rules were framed later and, therefore, would not apply in the present case.
6. Having thus heard learned counsel for the parties and having perused the documents on record, the short question that calls for our consideration is whether upon an assessee writing off certain inputs either partially or fully in its books of accounts for the income-tax purpose, he is also required to reverse cenvat credit taken on such inputs? As already noted, the case of the assessee is that such writing is only for the limited purpose of its accounts so as not to present a distorted picture of the balance-sheet and the ultimate profit. Such writing off for the income-tax purpose had no relation to the manufacturing activity of the assessee. Before the revenue authorities, it was pointed out that as a manufacturer of engineering product, the assessee would have to continuously introduce new models and also upgrade its existing machinery. For such purpose, it was required to maintain a larger inventory of spares. Even for repairs of the machinery already sold in the market, it would have to maintain certain spares even though the product of the model may have been discontinued.
7. We are of the opinion that the reduction of the value of such spares (inputs) for income-tax purpose, cannot be equated with writing off of the physical stock. The accounts maintained by the manufacturer for the income-tax purpose stand on an entirely different footing and would have to follow the accounting standards prescribed under the law. If under such accounting principles, the assessee is entitled to diminish the value of a certain stock held over a period longer than the specified period, the same has no correlation with the availability of physical stock insofar as the manufacturing activity is concerned.
8. Even otherwise, the rules of 1944 did not envisage any period within which the input must be consumed. In the case of Dai Ichi Karkaria Ltd. (supra), the Apex Court observed as under:-
“17. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product.”
9. Apart from the said decision, we have perused the rules. The modvat credit was available as provided under rule 57A. Sub-rule (1) thereof provided that the provisions of this Chapter (which is Chapter V(AA) pertaining to credit of duty paid on excisable goods used as inputs) shall apply to such finished excisable goods as may be notified by the Central Government for the purpose of allowing credit on any duty of excise or additional duty as may be specified in such notification paid on the goods used in the manufacture of the said final products. Rule 57F provided for the manner of utilisation of inputs and the credit allowed in respect of duty paid thereon. Relevant portion of the said rule reads as under:-
RULE 57F. Manner of utilisation of inputs and the credit allowed in respect of duty paid thereon.-- (1) The inputs on which credit has been taken may be used in or in relation to the manufacture of final products.
(2) The inputs may be removed, after intimating the Assistant Commissioner of Central Excise concerned, in writing, for home consumption or for export under bond.
(3) All removals of inputs for home consumption shall be made -
(a) on payment of duty equal to the amount of credit availed in respect of such inputs; and
(b) under the cover of invoice prescribed under rule 52A.
From the said rule, it can be seen that the liability of the assessee to pay duty equal to the amount of credit availed in respect of a particular input would arise at the time of the removal of the inputs for home consumption. This rule did not envisage reversal of cenvat credit even before removal of goods.
10. With this background, we may peruse the two circulars heavily relied upon by the revenue. These circulars have been issued by the CBEC in exercise of powers under section 37B of the Central Excise Act, 1944 ('the Act', for short). In the circular dated 22-2-1995, it was inter alia provided as under:-
“Instances have been brought to the notice of the Board where Modvat credit taken on inputs by the assessee was not reversed even after writing off of the materials on which the credit was taken. Cases have also been noticed where the credit had not been adjusted even though the write-off of the input materials had taken place three or four years ago. In such situation, it is obligatory on the part of the assessees to straight away reverse the Modvat credit taken under intimation to the Ranger Officers concerned. Utilisation of Modvat credit taken on inputs, which had actually been written off for stock account purposes, clearly will amount to mis-construction and abuse of the Modvat scheme.”
11. This circular thus provided that where the credit has not been adjusted even though write-off of the input material has taken place, in such a situation it is obligatory on the part of the assessee to reverse the modvat credit. It was further provided that utilisation of cenvat credit taken on inputs which had actually been written off for stock account purpose would clearly amount to misconstruction and abuse of the modvat scheme.
12. Quite apart from the question whether such circular can provide for reversal of the modvat credit when the rules did not envisage to which question we shall advert to later, to our mind, this circular did not provide any clarity about the writing off of the inputs namely, whether the circular desired to strike at non-reversal of the modvat credit upon writing off of the value of the inputs for the accounts and income-tax purpose or to strike at non-reversal of the modvat upon physical writing off or the stock writing off of the goods. Be that as it may, the CBEC issued yet another circular dated 16- 7-2002 and provided as under:-
(i) In cases, where unused inputs are fully written off, Board's instructions dated 22-2-95 shall apply i.e. the credit availed must be paid back.
(ii) In cases where the value of the inputs is partially written of/reduced in the accounts of the company, but the inputs are still capable of and available for use in the manufacture of finished goods, there would be no question of payment of CENVAT credit availed.
(iii) In respect of capital goods viz. components, spare parts etc. which are written off before use and hence are not proposed to be used, the CENVAT credit availed will have to be paid back on the same lines as applicable to “inputs” as mentioned in (i) above.
13. In this circular, there was greater clarity. In particular, in para (ii), it was provided that in case where the value of the inputs is partially written off or reduced in the accounts of the company but the inputs are still capable of or available for use in the manufacture of finished goods, there would be no question of demand of cenvat credit availed. However, in cases where unused inputs were fully written off, the earlier circular would prevail. In other words, the reversal of modvat credit would be compulsory.
14. To our mind, such a circular could not provide for the reversal of modvat credit in cases which are covered prior to introduction of rule 5B of the Cenvat Credit Rules. As already noted, there was no provision under which the modvat credit already taken under the rules of 1944 could be directed to be reversed simply because the input goods were not utilised for a certain period of time. We also note that there is significant difference in the accounting approach for the income-tax purpose and the approach for stock maintenance for the purpose of manufacturing activities relevant for the question of excise. Therefore, merely because the value of goods diminished in the books of accounts of the assessee would not by itself permit the Department to insist on reversal of the credit particularly when such goods were still available in the factory in usable condition.
15. In absence of any such authority under the rules, the CBEC could not have issued circular for reversal of the credit. The reversal of the credit would amount to collection of duty which would be wholly unauthorised. The Board's circular could not have created a liability which did not exist under the rules. Section 37B of the Act permits the Board to issue circulars. It provides that the Board, if it considers it necessary or expedient for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods, may issue such orders, instructions and directions to the Central Excise officers as it may deem fit, and such officers and all other persons employed in the execution of the Act shall observe and follow such orders, instructions and directions of the Board.
16. The powers of the Board to issue circulars under section 37B are similar to those of Central Board of Direct Taxes under section 119 of the Income-Tax Act, 1961. Section 119 of the Income-tax Act also authorises the CBDT to issue orders, instructions and directions for proper administration of the Act to the income-tax authorities who shall observe and follow such orders, instructions and directions of the Board. It is held in a number of decisions that such instructions and directions of the Board would bind the Department but if it is adverse to the trade, would not bind the assessees. In case of M/s. Inter Continental (India) vs. Union of India & Ors. reported in 2002 (2) G.L.R. 1337, a Division Bench of this Court observed “It is well established in law that the circulars issued by the Board may bind the officers of the department yet the position would be different with regard to an assessee who is always entitled to contest the validity or legality of such instructions.”
17. It is equally well-settled that under such powers, the authority can clarify the position emerging from the statutory provisions and may even in a given situation relax the rigour of law. In case of Keshavji Ravji & Co. vs. Commissioner of Income-Tax reported in 183 ITR 1, the Supreme Court observed as under:-
“This contention and the proposition on which it rests, namely, that all circulars issued by the Board have a binding legal quality incurs, quite obviously, the criticism of being too broadly stated. The Board cannot pre-empt a judicial interpretation of the scope and ambit of a provision of the Act by issuing circulars on the subject. This is too obvious a proposition to require any argument for it. A circular cannot evenimpose on the tax-payer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However,--this is what Sri Ramachandran really has in mind--circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under Section 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to assessees have been held to bepermissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, the support of certain judicial observations for the view that such circulars constitute external aids to construction.”
17.1 This decision was followed in a later judgment in case of UCO Bank vs. Commissioner of Income-Tax reported in 237 ITR 889 where the Supreme Court observed as under:-
“In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under Section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v.CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a "sticky" loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received.”
18. Under the circumstances, with the aid of the circulars noted above, the Department could not have collected the duty which was otherwise not permissible under the rules. We may notice that the rules themselves were later on amended to cover such a situation. The modvat scheme was substituted by the cenvat scheme framed under the Cenvat Credit Rules. In such rules, rule 5B was introduced as under:-
[(5B) If the value of any,
(i) input, or
(ii) capital goods before being put to use, on which CENVAT Credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods :
Provided that if the said input or capital goods is subsequently used in the manufacture of final products, the manufacturer shall be entitled to take the credit of the amount equivalent to the CENVAT Credit paid earlier subject to the other provisions of these rules.]
19. Such rule was substituted by a new rule with effect from 7-7-2009 which reads as under:-
[(5B) If the value of any,
(i) input, or
(ii) capital goods before being put to use, on which CENVAT credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods :
Provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of taxable services, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules.]
20. On the basis of such statutory provisions, it may be open for the Department to insist on reversal of cenvat credit under similar circumstances. However, admittedly, in this case we are not governed by such statutory provisions. In absence of such statutory provisions, merely on the strength of the Board's circulars, it would not be open for the Department to enforce reversal of cenvat credit.
21. In a short order in case of Indian Petrochemicals Corporation Ltd. (supra), the Bombay High court also upheld the assessee's contention making following observations:-
“2. We find from the order of the Commissioner dated 24-12-2004 that it was the contention of the respondent that there is no prescribed time limit for using the capital goods under the Cenvat rules and hence credit cannot be denied for goods lying unutilized. In other words, it is clear that this is a case of goods which are not obsolete but goods which are lying unutilized and which can be utilized. The Tribunal in a long line of judgments where goods have been shown as written off in the books, have taken a view that the benefit is available. Those judgments have been accepted.”
22. This decision was followed by the High Court in a subsequent decision in the case of Hindalco Industries Ltd. (supra) making following observations:-
“6. In Commissioner of Central Excise v. Indian Petrochemicals Corporation Limited, 2008 (226) E.L.T. 339 a Division Bench of this Court had noted that the Tribunal in a long line of judgments had taken the view that where the goods have been shown as written off goods, the benefit is available. In the present case, as already noted earlier, the period to which the dispute relates is prior to the insertion of sub-rules (5B) and (5C) in Rule 3. The Tribunal held that the case of the assessee was covered by several of its judgments which have been adverted to in para 11 of the judgment. Counsel appearing on behalf of the Revenue has not submitted before the Court that any of those judgments have been overruled by any decision of this Court or of the Supreme court. This case relates to a period prior to the amendment of Rule 3 by the insertion of sub-rules (5B) and (5C). In that view of the matter and for the reasons already noted, the Appeal would not raise any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs.”
23. Under the circumstances, we are of the opinion that both the appeals lack merits. The questions are answered in favour of the assessee and against the Department. Both appeals are dismissed.
( Akil Kureshi, J. ) ( Harsha Devani, J. ) hki