Credit not to be reversed when inputs shown as scrap at lesser value and not written off

We are sharing with you an important judgment of the Hon’ble CESTAT, Mumbai in the case of Autoline Vs. Commissioner of Central Excise, Kolhapur [2017 (1) TMI 297 - CESTAT MUMBAI] on the following issue:

Issue: Whether reversal of Cenvat credit is required on the inputs which are shown as scrap & value of such inputs was shown at lesser value and not written off in the books of account?

Facts & Background:

M/s Autoline ("the Appellant") is a manufacturer of automobile components for two, three and four wheelers. The Appellant has availed Cenvat credit paid on inputs, input services and capital goods. Certain inputs were shown in the books of the Appellant as scrap and lesser value was shown ("the Impugned inputs") but the said inputs were not written off and remained in the factory.

However, the Department has alleged that as per Rule 3(5B) of the Cenvat Credit Rules, 2004 ("the Credit Rules"), if the assessee has written off the value of the inputs or made a provision for writing off, then, the Cenvat Credit on such inputs is required to be reversed. Accordingly, Cenvat credit in respect of the Impugned inputs has been denied.

Thus, after the credit was denied by the Adjudicating Authority and the same order was upheld by the Commissioner, the Appellant preferred an appeal before the Hon'ble CESTAT, Mumbai.

Held:

The Hon’ble CESTAT, Mumbai has held that though the impugned inputs were shown in the books of the Appellant as scrap and lesser value was shown, but it is not the case where the value of the inputs was written off. Therefore, Rule 3(5B) of the Credit Rules has no application. Further, so long the input is lying in the factory, credit cannot be asked to be reversed. However, it is needless to say that as and when the inputs are cleared from the factory it will be liable for duty in terms of Rule 3(5B) of the Credit Rules.   

Relevant Provisions in the GST Regime - Our Comment:

As per Section 17(4)(g) of the Model CGST/SGST Act, 2016, input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, when the assessee actually writes off the goods in their books of account, then only, the GST credit on such inputs is required to be reversed in the GST Regime.

This seems to be in consonance with the recent legal pronouncements wherein it has been held that unless the inputs are actually written off, the assessee is not required to reverse the Cenvat credit taken on such inputs. For e.g.-

In the case of BCH Electric Ltd. Vs. Commissioner of C. Ex., Faridabad-I [2016 (344) ELT 469 (Tri.-Chan.)], it was held that "appellant has made a provision for written-off but inputs and components were not actually not written off by the appellant. Further, the appellant has used these inputs and components later on, in the manufacture of final goods, in that circumstances, as per provision of Rule 3(5B) appellant is entitled to take Cenvat credit on these inputs and components, therefore, appellant is not required to reverse Cenvat credit on inputs/components for which they have made provision in the balance sheet."

Similarly, followed in the above 'Autoline' case.

But the question is still wide open to interpret whether provision made for written off or shown at lesser value for multiple reasons like treated as scrap, rejected inputs, etc., can be construed as actually written off unless such inputs are removed from the factory.