IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA C.E.A No. 10 of 2006. Date of decision: 10.11.2009 Commissioner, Central Excise, Chandigarh. …. Appellant Versus M/s.Tyre Tops Rampur. ….. Respondent Coram:` The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice V.K.Ahuja, J. Whether approved for reporting? Yes For the appellant: Mr.Sandeep Sharma, Assistant Solicitor General of India. For the respondent: Ms.Jyotsana Rewal Dua, Advocate. _____________________________________________________ Deepak Gupta, J.(Oral) This appeal was admitted on the following substantial question of law:- “Whether Rule 9(2) of Cenvat Credit Rule 2002 provides that manufacturer shall be required to pay an amount equivalent to the Cenvat Credit allowed to him in respect of inputs lying in stock or in process or contained in final product lying in stock. “ 2 The short question which arises for decision is whether a manufacturer who has obtained credit of the Central Value Added Tax paid by him in respect of the raw material and inputs lying in stock or in process or contained in the final product lying in stock is required to refund/repay the credit when the final product is exempted from excise. The main argument of Sh.Sandeep Sharma, learned Assistant Solicitor General of India is that the authorities below have not taken into consideration Rule 9(2) of the Cenvat Rules. The brief facts of the case are that the assessee vide letter dated 21.10.2002 opted for Cenvat Credit Scheme notified on 1.3.2002. The assessee obtained Cenvat credit of Rs.81847.90 on account of VAT paid on inputs and raw material lying with them on the said date and started paying the central excise duty at tariff rate. With effect from 1.4.2003 the assessee sought to avail the small scale industry (SSI) benefit under notification dated 1.3.2003 whereby the finished goods were exempt from payment of excise. They also supplied the detail of closing stock of finished goods/semi-finished goods/raw material lying with them on 31.3.2003. The Department asked the assessee to reverse the credit of inputs in 3 respect of the items which were lying in stock or had been used in the manufacture of the finished goods which were exempt from duty. The assessee contested the claim of the revenue. Relying upon Rule 9(2), the assessing Officer issued a show cause notice asking assessee to reverse the credit of Rs.98,240.81. The assessee contested the notice on various grounds and relied upon the judgment of the Larger Bench of the Tribunal Commissioner of Central Excise, Rajkot Vs. Ashok Iron & Steel Fabricators, 2002 (140) ELT 277 and several judgments of other High Courts. The demand was confirmed by the Assistant Commissioner who also imposed penalty of Rs.98240/-. The assessee filed an appeal before the Commissioner (Appeals). The Commissioner (Appeals) held that the assessee was not required to reverse the credit involved on stocks lying in the factory when the appellant opted to avail the SSI benefit and opted out of the CENVAT Credit Scheme. Thereafter, the revenue filed an appeal before the Tribunal which rejected the same on the ground that a five Member Bench of the Tribunal in the case of Ashok Iron & Steel Fabricators supra had taken a view that the asssssee in such circumstances is not required to reverse the credit. 4 The main argument of Sh.Sandeep Sharma, learned Assistant Solicitor General of India is that in the case of Ashok Iron & Steel Fabricators, the Tribunal held that there was no rule which permitted the department to seek reversal of the Modvat credit. He relies upon Rule 9(2) of the Cenvat Rules in this behalf. It is pertinent to mention here that the Apex Court in Collector of Central Exicse, Pune and others Vs. Dai Karkaria Ltd. and others 1999 (7) SCC 448 considered a similar question relating to the reversal of Modvat credit under Central Excise Rules, 1944. Rule 57H(5) of the said Rules reads as follows:- “Where a manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been availing of the credit of the duty paid on inputs before such option is exercised, he shall be required to pay an amount equivalent to the credit, if any, allowed to him in respect of inputs lying in stock or used in any finished excisable goods lying in stock on the date when such option is exercised and after deducting the said amount from the said amount from the balance, if any, lying in his credit, the balance, if any, still remains shall lapse and shall not be allowed to be utilized for payment of duty on 5 excisable goods, whether cleared for home consumption or for export. “ After considering the Rule 57, the Apex Court held as follows:- “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 utilized, 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. The credit is, therefore, indefeasible. It should also be noted that there is no corelation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The 6 credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.” Rule 9(2) of the Cenvat Rules reads as follows:- “A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking of cenvat credit on inputs before such option is exercised, he shall be required to pay an amount equivalent to the cenvat credit, if any, allowed to him in respect of inputs lying in stock or in process or contained final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance if any, still remaining shall not be allowed to be utilized for payment of duty on excisable goods, whether cleared for home consumption or for export. “ The language of Rule 57H(5) of the Excise Rules and Rule 9(2) of the Cenvat Rules is identical, therefore, the decision also has to be similar. It would also be pertinent to mention here that the High Court of Kerala in Collector of Central Excise and Custom, Cochin Versus Premier Tyres Ltd. 2001 (130) ELT 417 following the judgment of the Apex Court answered a 7 similar question in favour of the assessee and against the Department. It would also be pertinent to mention that the judgment of the Tribunal in Ashok Iron and Steel Fabricators’ case has been upheld by the High Court of Rajasthan in Hindustan Zinc Ltd. Vs. Union of India, 2008 (223) ELT 149. The High Court held as follows:- “It can be seen from yet another angle. In case inputs are received in factory and used in manufacture of end product. But the end product is destroyed by fire before stage of its removal from factory premise. In such circumstances, no excise duty becomes payable on end product. Yet Modvat credit availed on inputs used in destroyed goods is not to be recalled. This is also suggestive of the fact the relevant date for considering exemption from duty of the end product in or in relation to which inputs are used is the date of its receipt in factory and condition is its actual use in or in relation to manufacture of end product by the manufacturer. The chargeability to duty or non-chargeability due to exemption or notified nil rate is to be considered at the stage before goods are actually produced, but on receipt of inputs intended to be used in manufacture of such goods. That being so ultimate clearance of goods at nil rate due to contingency existing at 8 the time of removal does not affect the entitlement that legally arises long before that date.” We are in respectful agreement with the judgment of the Kerala and Rajasthan High Courts. Since the language of Rule 9(2) of the Cenvat Rules is identical to that of Rule 57H(5) of the Excise Rules, we feel that the interpretation given by the Apex Court has to apply in the present case also and, therefore, even though the final product may be exempt from payment of excise, the assessee cannot be asked to reverse the Modvat credit already taken by it. In view of the above discussion, the question is answered in favour of the assessee and against the revenue. The appeal is accordingly dismissed. No order as to costs. ( Deepak Gupta ) Judge November 10, 2009 (V.K.Ahuja) (m) Judge