The appeal by the Revenue arises from a decision of the Customs, Excise and Service Tax Appellate Tribunal dated 25 November 2013. The Revenue has formulated the following questions of law :-
"(i) Whether, it was correct and proper for the CESTAT to hold that the fire having been caused in respondents factory on account of electric short circuiting, was covered by expression "unavoidable accident" for the purpose of remission of excise duty.
(ii) Whether, it was correct and proper for the CESTAT to hold that the assessee was not required to reverse the credit in respect of raw materials consumed."
The assessee carries on the business of manufacturing footwear which falls under Chapter 64 of the Central Excise Tariff Act, 1985. A fire occurred in its factory on 2 June 2004 during the course of which, the stored raw materials and semi finished goods as well as finished goods were destroyed. The Central Excise Authorities were intimated on 3 June 2004 and the Range Excise Officer conducted a site survey on 4 June 2004. The assessee filed a remission application under rule 21 of the Central Excise Rules, 2002 on 30 May 2005 for seeking a remission of excise duty of Rs.8.85 lacs in respect of goods in process and Rs.5.12 lacs in respect of finished goods which were destroyed in the fire. The Assistant Commissioner by a letter dated 1 August 2005 recommended the rejection of the remission application on the ground that the assessee had not reversed the credit involved on the inputs which were contained in the finished goods which had been destroyed and that under rule 21, remission of duty was contemplated only on the finished goods and not on semi finished goods. In a report dated 7 February 2006, the Assistant Commissioner stated that the assessee had informed of the fire which had taken place within 24 hours of its occurrence; the insurance claim alleged by the assessee did not include the excise duty element on the destroyed goods; the quantity of destroyed goods was verifiable on the basis of records; the documents enclosed with the remission application appear to be correct; and that the accident of fire had occurred due to short circuit. The report of the Chief Fire Officer dated 18 June 2004 also noted that the fire had occurred on account of a short circuit due to overheating of cables.
A notice to show cause was issued to the assessee on 25 April 2006 proposing to reject the application for remission of duty. The Adjudicating Officer held that a fire on account of short circuit did not fall within the purview of the expressions "natural cause" or "unavoidable accident" under rule 21. Moreover, it was stated that on a previous occasion, a fire had broken out in the factory of job workers in 2002 due to a short circuit. The Adjudicating Officer rejected the remission application on the ground that the assessee had not reversed the Cenvat credit involved in the raw materials contained in the final product. In respect of the semi finished goods, the Adjudicating Officer observed that they had not attained a marketable status and, hence, remission was not warranted.
In an appeal by the assessee, the Tribunal held that admittedly a fire had taken place in the factory of the assessee on account of a short circuit which was attributable to electric malfunctioning. The Tribunal followed the decision of the Rajasthan High Court in Union of India Vs. Hindustan Zinc Limited1 which had taken the view that the expressions "natural cause" and "unavoidable accident" in rule 21 must be given a reasonable and liberal meaning with a practical approach. In the present case, as a matter of fact, the Tribunal arrived at a conclusion that the fire which had taken place on account of short circuit was covered by the expression "unavoidable accident".
On the second aspect of the matter, the Tribunal held that the assessee was not disentitled to a remission of duty on the ground that it had not reversed the credit which had been availed of in respect of raw materials used in the final products. In this regard, the Tribunal has relied on the decision of its larger bench in Grasim Industries Vs. Commissioner of Central Excise, Indore2. The Tribunal observed that instead of following the decision of the larger bench, the Commissioner had followed the Board's Circular dated 1 October 2004 holding that Departmental Circulars are binding on departmental officers. The Tribunal, following the decision of the Supreme Court in Ratan Melting & Wire and Cables Industries3, was of the view that the effect of a beneficial circular of the Board cannot be ignored by the Adjudicating Officer. However, where a judicial decision of a larger bench of the Tribunal holds the field and the principle of law has been adjudicated upon, the adjudicating authorities are bound unless the decision has been reversed by a higher appellate forum. Finally, as regards the remission of duty on semi finished goods, the Tribunal observed that if the goods had not attained a marketable status, there was no requirement of a remission of duty and the Revenue cannot call for any duty on semi finished goods. Either the goods are non-dutiable in which case no duty can be demanded or the remission would have to be granted on the payment of duty on goods which have admittedly been damaged in a fire accident.
Rule 21 of the Central Excise Rules, 2002 provides as follows:-
"Remission of duty.-
Where it is shown to the satisfaction of the Commissioner that goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal, he may remit the duty payable on such goods, subject to such conditions as may be imposed by him by order in writing:
Provided that where such duty does not exceed ten thousand rupees, the provisions of this rule shall have effect as if for the expression "Commissioner", the expression "Superintendent of Central Excise" has been substituted:
Provided further that where such duty exceeds ten thousand rupees but does not exceed one lakh rupees, the provisions of this rule shall have effect as if for the expression "Commissioner", the expression "Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be," has been substituted:
Provided also that where such duty exceeds one lakh rupees but does not exceed five lakh rupees, the provisions of this rule shall have effect as if for the expression "Commissioner", the expression "Joint Commissioner of Central Excise or Additional Commissioner of Central Excise, as the case may be," has been substituted."
Under rule 21, a remission of duty is contemplated where it is shown to the satisfaction of the Commissioner that goods have been lost or destroyed by (i) natural causes; or (ii) unavoidable accident; or are claimed by the manufacturer as being unfit for consumption or for marketing. The remission is to be granted subject to such conditions as may be imposed. The expressions "natural causes" or "unavoidable accident" have to be interpreted in their ordinary and natural connotation. An unavoidable accident is an event which lies beyond the control of the assessee and which has taken place despite the exercise of due and reasonable care and protection. Both the expressions have to be construed in a reasonable manner to subserve the object of the legislature in introducing the provision for remission of duty in rule 21.
In the present case, a finding of fact has been recorded by the Tribunal based on the material on record that the accident of fire had occurred due to a short circuit. The Tribunal has, in our view, taken a broad and robust perspective in holding that this was an unavoidable accident based on the facts as they had been placed on the record. This aspect of the reasoning is unexceptionable and will not give rise to any substantial question of law.
On the second question as framed, it would appear that there was a conflict in the decisions of the Tribunal. In Mafatlal Industries Limited Vs. Commissioner of Central Excise4, the Tribunal had held that in case finished goods are destroyed in a fire and a remission of duty has been granted, the modvat credit which was involved in the inputs utilised in the manufacture of such goods has to be reversed. On the other hand the Tribunal in Electrolux Kelvinator Limited Vs. Commissioner of Central Excise, Jaipur5, after following an earlier decision in Inalsa Limited Vs. Commissioner of Central Excise, New Delhi6, held that in case of remission of duty being granted in respect of goods destroyed in a fire, modvat credit on the inputs used in the manufacture of goods need not be reversed. The judgment of the larger bench of the Tribunal is reported in Grasim Industries (supra). The Tribunal held as follows:-
"7. We find that reading of Rule 49 of Central Excise Rules, 1944 and Rule 21 of Central Excise Rules, 2002 which provides for remission of duty in respect of goods lost or destroyed by natural cause or by unavoidable accidents or in case goods become unfit for consumption or for marketing at any time before removal does not provide reversal of credit in respect of inputs used in the manufacture of such goods. The Modvat rules prohibits the credit of duty paid in respect of the inputs which are used in the manufacture of exempted goods or which are chargeable to nil rate of duty. The Tribunal in both the cases, that is Mafatlal Industries (supra) and in the case of Inalsa Ltd. (supra) held that in case the goods were destroyed due to natural cause or by unavoidable accident during handling or storage, cannot be equated with exemption to goods and the inputs can be considered to have been put intended use for manufacture of the final product. Reading of rules under which remission is granted in respect of goods which were lost or destroyed by natural cause or by natural accident, does not provide any condition regarding reversal of credit taken in respect of inputs used on such goods, hence, we are unable to support the view taken in the case of Mafatlal Industries (supra) whereby it has been held that assessee has to reverse the credit taken of inputs used in such goods on which remission is granted. Therefore, we approve the view of the Tribunal taken in the case of Inalsa Ltd. (supra) in this regard. The issue to the Larger Bench is answered in the above terms and the matter be placed before the Regular Bench."
Now, it may be noted at the present stage that after the decision of the Tribunal in Grasim Industries (supra) which was rendered on 7 August 2006, the Cenvat Credit Rules, 2004 were amended by Notification No.33/2007-CE (NT) dated 7 September 2007. With the amendment, sub-rule 5C was introduced into Rule 3 to the following effect :-
"(5C) Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods shall be reversed."
Consequently, upon the introduction of sub-rule (5C) into rule 3 with effect from 7 September 2007, the subordinate legislation has clearly provided that where the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002 on goods manufactured or produced by an assessee, the Cenvat credit taken on the inputs used in the manufacture or production of goods shall be reversed.
The present case, however, relates to a period prior to the introduction of rule 3(5C) and is, therefore, not covered by the modified provision. Prior to the introduction of rule 3(5C), there was no such restriction to the effect that the Cenvat credit which is taken on inputs used in the manufacture or production of goods in respect of which duty is remitted under rule 21 would have to be reversed. The law at the relevant point of time was governed by the decision of the larger bench of the Tribunal in Grasim Industries (supra). The position has subsequently been materially altered following the introduction of sub-rule (5C) into rule 3 but we are not governed in the present case by the amended provision since the period in question is prior to the amendment. We clarify that after the amended provision has come into force, where a remission is granted under rule 21, the Cenvat credit taken on the inputs used in the manufacture or production of the goods has to be reversed. Prior to the introduction of sub-rule (5C), the Board had issued a Circular dated 1 October 2004 in the light of the decision of the Tribunal in Mafatlal Industries (supra). However, as we have noted, the decision in Mafatlal Industries (supra) had been overruled by the Tribunal in Grasim Industries (supra). In any event, insofar as the period after the introduction of sub-rule (5C) into rule 3 is concerned, the law has now been set at rest.
For the reasons which we have indicated, we have come to the conclusion that since the present matter relates to a period prior to the introduction of sub-rule (5C) into rule 3 of the Cenvat Credit Rules, 2004, the decision of the Tribunal, which is based on the larger bench decision in Grasim Industries (supra), is consistent with the provision of law as it then stood. Hence, no case for interference in the appeal is made out. The present appeal shall not give rise to any substantial question of law and is, accordingly, dismissed.
Date:04.07.2014 SK (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.)