Cash refund of unutilized credit impermissible on closure of business

The Larger Bench (LB) of Bombay HC rules in favour of Revenue, holds that cash refund u/s 11B of the Central Excise Act, 1944 ('the Excise Act') is not permissible when CENVAT Credit on inputs remains unutilized on account of closure of manufacturing unit or inability to utilize input credit.

Issues:

• Whether cash refund is permissible in terms of clause (c) to the proviso to section 11B(2) of the Excise Act where an assessee is unable to utilize credit on inputs?
• Whether by exercising power under Section 11B of the said Act of 1944, a refund of un-utilised amount of Cenvat Credit on account of the closure of manufacturing activities can be granted?
• Whether what is observed in the order dated January 25, 2007 passed by the Apex Court in Petition for Special Leave to Appeal (Civil) No. CC 467 of 2007 (Union of India vs Slovak India Trading Company Pvt Ltd.) can be read as a declaration of law under Article 141 of the Constitution of India?

Facts & Background:

• The appellant was engaged in manufacturing of resin PVC pipes and fittings. There was a dispute regarding availability of small-scale industries exemption ('SSI') under the Notification dated February 28, 1993.
• A SCN was issued for recovery of dues on clearance of the pipes during the period of denial of this exemption. The order-in-original was passed confirming the demand and a penalty was also imposed. The exemption was denied on the ground that the appellant was manufacturing pipes bearing a mark 'Jain Pipe' and that was a brand name.
• An appeal was preferred to the Commissioner (Appeals) and he allowed the appeal holding that this cannot be considered as a brand name. In view of the order passed in appeal, an application for refund was made seeking refund, but a SCN was issued proposing to reject the refund claim of ₹ 8,41,043/- out of the total amount claimed on the ground that on surrender of registration certificate on September 8, 2000, the entire unutilised credit lapses and hence, subsequent reversal made was not permissible.
• The Commissioner (Appeals) upheld the order-in-original on the ground that the appellant was not entitled to cash refund but was entitled to credit in CENVAT Account after surrender of the registration certificate.

Arguments by assessee:

• The assessee argued that on perusal of section 11B, cash refund of accumulated credit lying un-utilized on account of closure of factory/ stopping of activity/ inability to use, was admissible.
• Rule 5 of the Credit Rules permits the un-utilized credit to be claimed as set out in Rule 3. According to Rule 11(2) of the Credit Rules refund claim can always be made in the event the conditions laid down therein are set out.
• In the case of Slovak India Trading Private Limited vs. Commissioner of Central Excise (Bengaluru) [2006 (205) ELT 956] wherein assessee claimed refund on un-utilized CENVAT in their account as on the date of the closure of their factory and it was held that 'refund claimed is eligible to the assessee and refund has to be made in cash when the assessee goes out of the erstwhile MODVAT Scheme or their unit is closed'. Revenue filed an appeal before Karnataka HC at Bengaluru which was dismissed clarifying that there is no express prohibition in Rule 5 and the claims have been allowed on the basis of closure of the factory and in the light of the assessee going out of MODVAT scheme. Revenue filed an appeal with SC who concluded that the tribunal at Bengaluru relied upon the order of coordinate Benches of the tribunal and against which, no appeals were preferred by the Revenue and thereby dismissed Revenue's appeals.
• Assessee further submitted that in the case of Commissioner of Central Excise vs. Jain Vanguard Polybutylene Ltd. 2010 (256) ELT 523 (Bom.), the Mumbai Tribunal followed the view taken in the case of Slovak India Trading Company Pvt Ltd. (supra) and concluded that the refund of un-utilized credit on account of closure of factory was permissible. Thereafter, the Revenue filed an appeal to Division bench of this HC, held that when the question for consideration on facts is almost identical to the cases before the various Benches of the tribunal, then, the Revenue cannot be allowed to take a different view and dismissed the appeal. The same was confirmed by the SC finding no reason to interfere with the order of the Division Bench in exercise of the discretion under Article 136 of the Constitution of India.
• Assessee further submitted that merely because the Hon'ble SC dismissed the SLP leaving the question of law open would not mean that the later Division Bench in this case was free to differ from the view taken by the earlier Division Bench. The Assessee therefore argued that we must uphold the consistent views of the tribunal.

Revenue contended:

• Revenue contended that if the law does not permit something, no provision therein should be construed to hold that it is also not prohibited. This would amount to rewriting the provisions or reading not them something which they themselves do not provide.
• Further, contended that this court should hold that a refund of unutilized amount of CENVAT Credit on account of closure of manufacturing activities or inability to utilize input credit is not permitted. The Revenue relied upon judgment of larger Bench of the CESTAT in the case of Steel Strips Ltd. vs. Commissioner of Central Excise, Ludhiana while urging that the claim of refund is not a matter of right unless vested by law.
• Furthermore, contended that a refund is not axiomatic and nothing should be read in the provisions, enabling claiming of refund, which is expressly not there.

Held:

• The HC referred to Section 11B(1) of the Excise Act to find that instead of crediting the amount of refund to the fund, it can be paid to the applicant seeking refund, if such amount is relatable, to refund of credit of duty paid on excisable goods used as inputs in accordance with the rules made or any notification issued under the Excise Act.
• Further, the HC perused Rule 5 of the Cenvat Credit Rules, 2004 ('Cenvat Credit Rules') and the word ‘inputs' defined under Rule 2(k) of the Cenvat Credit Rules and found that inputs means all goods used in the factory by the manufacturer of the final product.
• Furthermore, the HC stated that reference can usefully be made to the judgment of the Hon'ble Supreme Court setting out the fundamental legal principles. These are that 'in a fiscal statute, nothing can be read, into its provisions and rather should not be read, which is expressly not there. In other words, an implied meaning cannot be given'.
• The HC opined that, 'The crucial words are that 'the refund of credit of duty paid on excisable goods used as inputs in accordance with the rules made or any notification issued under this Act. If the excisable goods are not used as inputs in accordance with the rules made, to our mind, there is no question of any refund'.
• The HC further clarified that refund of CENVAT Credit is permissible where any inputs is used for the final product which is cleared for export under bond or letter of undertaking or used in the intermediate products cleared for export.
• The HC referred to Rule 11 of transitional provisions of Cenvat Credit Rules which enables carrying forward of the un-utilized CENVAT Credit and concluded it does not enable the HC to hold that the amount of un-utilized CENVAT Credit can be refunded in cash as it was a distinct contingency altogether.
• The HC concluded that the attempt by the assessee to claim refund of un-utilized CENVAT Credit cannot be upheld while elucidating that merely because the inputs were lying un-utilized or were capable of being utilized, but the manufacturing activities came to a standstill on account of closure of the factory would not enable the assessee to claim refund of CENVAT Credit. HC explained 'That such credit can be availed of provided the inputs are used and not otherwise is clear from the scheme of the rules'.
• The HC expounded that dismissal of Revenue's SLP by the SC 'by no stretch of imagination, is a confirmation or approval of the view taken by the South Zonal Bench of the Tribunal at Bengaluru or the High Court of Karnataka'.
• The HC stated that question of law was still open to be raised and equally examined by us even after SLP filed by Revenue with the SC was dismissed. The HC propounded that the earlier view of the tribunal does not merge with dismissal of the SLP in the case of Slovak India.
• The HC further stated that the order of the Hon'ble SC in the case of Slovak India (supra) cannot be read as a declaration of law under Article 141 of the Constitution of India.
• According, HC answered the reference in Revenue's favour and listed the matter before the Division Bench for disposal.