Reversal of CENVAT credit in excess of the amount originally availed during inter-unit transfers does not contravene Rule 3(5) of the CENVAT Credit Rules, 2004, nor does it attract Section 11D of the Central Excise Act, 1944, as no independent buyer is involved.

Per Mr. VASA SESHAGIRI RAO

These three Excise Appeals were filed by M/s. Yazaki India Pvt. Ltd. (hereinafter referred to as “the Appellant/Assessee”) and one Appeal No. E/40330/2016 was filed by the Revenue. The proceedings arise out of separate Orders-in-Original and the corresponding Orders-in-Appeal, wherever applicable. The dispute in all four appeals concerns the clearance of inputs “as such” between the assessee’s own manufacturing units and whether reversal of CENVAT credit in an amount different from the credit originally availed amounted to “passing on excess credit” in contravention of Rule 3(5) of the CENVAT Credit Rules, 2004.

1.2 The Appellant manufactures automotive wiring harnesses falling under Chapter Heading 85 of the Central Excise Tariff Act, 1985. The units involved are D-7, Industrial Estate, Maraimalai Nagar – 603 209; K-7, SIPCOT Industrial Park, Guduvancherry; and E-8, Industrial Estate, Maraimalai Nagar – 603 209, all under the jurisdiction of the then Chennai-III Commissionerate. For brevity, they are referred to as D-7, K-7 and E-8. Inputs were procured at one unit, credit was availed, and certain inputs were transferred “as such” to sister units. Instead of reversing the exact credit originally taken as required under Rule 3(5), the assessee debited an amount computed on its internal accounting methodology, which in some instances resulted in higher reversal.

1.3 The Department alleged that D-7, by issuing invoices reflecting such debit, passed on excess credit to K-7 and E-8, enabling them to avail inadmissible credit. Consequently, Show Cause Notices were issued invoking Rule 3(5) and Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11A of the Central Excise Act, 1944, and in certain cases Section 11D , proposing recovery with interest and penalties under Rule 15 of CENVAT Credit Rules, 2004.

1.4 In the case of D-7, Order-in-Original No. 13/2015 (CE) dated 28.09.2015 dropped the entire demand proposed in SCN No. 45/2014 but imposed a penalty of Rs.1,00,000/- under Rule 15 of CCR, 2004. In the cases of K-7 and E-8, the adjudicating authorities confirmed demands of Rs.38,31,600/- and Rs.39,06,886/- respectively, with interest and penalties, and the Commissioner (Appeals) upheld the same. The Assessee has challenged the confirmation of demands and penalties in respect of K-7 and E-8 as well as the penalty on D-7, while the Revenue has appealed against the dropping of demand in the case of D-7.

2. The Ld. Advocate Mr. M. Karthikeyan, appeared on behalf of the Assessee and advanced elaborate submissions assailing the confirmation of demands and penalties in respect of K-7 and E-8 units and challenged the imposition of penalty on D-7 unit. The Ld. Authorized Representative Ms. O.M. Reena appeared for the Revenue. She defended the confirmation of demands and penalties in the cases of K-7 and E-8 and, in respect of D-7 unit, submitted that the adjudicating authority erred in dropping the demand proposed in SCN No. 45/2014 and that the same ought to have been confirmed under Section 11A read with Rule 14 and Section 11D .

3. The Ld. Advocate appearing for the Assessee as Appellant and as Respondent in Department’s Appeal made the following submissions which are summarised as below: -

3.1 The assessee/Appellant contends that Rule 3(5) merely requires reversal of an amount equal to credit availed when inputs are removed as such. In the present case, reversal was admittedly made. The allegation of “excess credit passed on” is misconceived because the transaction was revenue neutral within the same legal entity. It is further submitted that the rule does not prescribe any methodology for matching invoice-wise historical credit; it merely requires debit of equivalent credit. If excess amount