Custom, Excise & Service Tax Tribunal
Heavy Engineering Corporation Ltd vs Ranchi on 13 February, 2025
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
EASTERN ZONAL BENCH : KOLKATA
REGIONAL BENCH - COURT NO. 1
Excise Appeal No. 76130 of 2017
(Arising out of Order-in-Original No. 05/Central Excise/Commr/2017 dated
24.03.2017 passed by the Commissioner, Central Excise and Service Tax, Ranchi-I,
5-A, C.R. Building, Main Road, Ranchi - 834 001)
M/s. Heavy Engineering Corporation Limited : Appellant
Plant Plaza Road, Dhurwa,
Ranchi - 834 003
VERSUS
Commissioner of Central Excise and Service Tax : Respondent
Ranchi-I Commissionerate,
5-A, C.R. Building, Main Road, Ranchi - 834 001
APPEARANCE:
Shri Satyaprem Majumder, Advocate for the Appellant
Shri S. Dey, Authorized Representative for the Respondent
CORAM:
HON'BLE SHRI ASHOK JINDAL, MEMBER (JUDICIAL)
HON'BLE SHRI K. ANPAZHAKAN, MEMBER (TECHNICAL)
FINAL ORDER NO. 75502 / 2025
DATE OF HEARING / DECISION: 13.02.2025
ORDER:[PER SHRI K. ANPAZHAKAN] The present appeal has been filed against the impugned Order-in-Original No. 05/Central Excise/Commr/2017 dated 24.03.2017 passed by the Commissioner, Central Excise and Service Tax, Ranchi-I, 5-A, C.R. Building, Main Road, Ranchi - 834 001, wherein the Ld. Commissioner has confirmed Central Excise duty amounting to Rs.11,80,18,142/-, along with interest, and imposed equal amount of duty as penalty.
Page 2 of 11Appeal No.: E/76130/2017-DB
2. The facts of the case are that M/s. Heavy Engineering Corporation Limited, Ranchi (hereinafter referred to as the appellant / HEC) have made provisions to write off, having total Value Rs. 101,94,77,000/-, in the Financial Years 2010-11 to 2014-15, in respect of Raw materials, components, stores, loose tools etc. The Central Excise Auditors, while conducting audit, found the figures from the respective balance sheets of HEC. By not reversing the CENVAT Credit of Rs.11,80,18,142/- on the amount taken as provisions in the books of company, HEC were found to have violated the provisions of Rule 3(5B) of the CENVAT Credit Rules, 2004 .
2.1. Accordingly, a demand notice was issued and after due process, vide the impugned order, the demand was confirmed, along with interest and equal amount of duty as penalty,. Aggrieved against the confirmation of the demands and imposition of penalty, the appellant has filed this appeal.
3. The appellant submits that as per Inventory Management System, they follow the accounting policy of valuation of inventories, categorised as the slow-moving items at the end of each financial year, if such inputs were lying in stock for a specified period; it is intended to determine the profit & loss at the end of the year. They have stated that it is based on the principle of conservatism and to comply with the Accounting Standards, which was never with an intention to write off any portion of inventory in the Books of Accounts. Since it is not concerned with obsolete items, which are unusable, the appellant contends that the provision of Rule 3(5B) of the CENVAT Credit Rules was not applicable. The Page 3 of 11 Appeal No.: E/76130/2017-DB appellant states that the issue is no more res integra and cites the following reported decisions in support:-
(a) M/s. Steel Authority of India Ltd.vs Commissioner of Central Excise, Durgapur [2025-TIOL-231-CESTAT-KOL];
(b) General Motors Pvt.Ltd.vs Commissioner of CGST and CE, Pune-I [(2023)12 Centax 79 (Tri.Bom.)];
(c) Commissioner of Central Excise vs. Ingersoll Rand (India) Ltd. [2012-TIOL-
1107-HC-AHM-CX] 3.1. The appellant submits that as per the accounting standard developed by the Institute of the Chartered Accountants in India, they followed the accounting principle of making provision in respect of the value of the Raw Materials & Components, Stores, Spares and Loose tools, drawing instruments, etc., that have remained un-moved consecutively for three years. They have also written-back the value from among those provided-for in each year, when some of those could be used in the manufacture. It is submitted by them that in the balance sheet of each year, to arrive at the value of 'Inventories' under 'Current Assets', the cumulative amount of provision was considered after taking into account the amount the increase as well as decrease, as the case may be; the primary principle behind adopting such accounting policies is that the financial statements represent the true and fair view of the state of affairs of the entity as at the balance sheet date and of the profit & loss account for the period ended on that date.
3.2. The appellant further submits that the Ld. Commissioner has confirmed the demand under Rule Page 4 of 11 Appeal No.: E/76130/2017-DB 3(5B) of the CENVAT Rules, based on the cumulative figures shown in the Notes forming part of the balance sheets for the Years 2010-11 to 2014-15. He has overlooked the fact that the figures considered for provision for Inventory/Stores/Loose Tools, etc., were based on cumulative figure and that the figures for alleged default were arrived at on total basis. It is stated that on perusal of the details computation of additional provisions as specified in the Annexure, it would be evident that the additional provisions made year by year was either negative or nominal and sum total of incremental provision was only Rs. Rs. 1,53,40,000/-, whereas the Department considered the accumulated value of each of the five years together, amounting to Rs.101,94,77,000/-. It is the appellant's contention that this incremental figure, on the other hand, varied from year to year due to reassessment of inventory, based on the accounting policy of valuation of inventories. Therefore, since there was no violation of Rule 3(5B) of CENVAT Credit Rules, the appellant contends that no question of reversal of CENVAT Credit arose in this case and the Department should have considered only the incremental value of provision, if at all.
3.3. The appellant also submits that the Ld. Principal Commissioner ought to have appreciated that the major portion of the demand, in respect of the period 2010-11 to 2014-15 under the Show Cause Notice dated 30-03-2016, is time-barred, being beyond the normal period of one year from the relevant date. The appellant submits that they are a wholly owned Govt. of India undertaking where complete set of records were maintained and accounts audited by statutory auditors appointed by CAG as well as supplementary audit by representatives of Page 5 of 11 Appeal No.: E/76130/2017-DB CAG-New Delhi; the Central Excise Auditors while conducting audit found the figures from the respective audited financial accounts. They submit that it must be appreciated that the appellant, based on their bona fide understanding of the law, did not consider any reversal of credit; since the issue is a predominant legal issue no mala fide can be attributed on the part of the appellant so as to attract the longer period of limitation as well as the penal provisions. The appellant claims that they did not suppress any information from the Department and maintained all the statutory documents, records/registers and accounts and filed the statutory returns and thus the conditions precedent for invoking longer period of limitation under proviso to Section 11A(4) of the Act are not satisfied in the present case; hence they contend that the demand confirmed by invoking the extended period of limitation is not sustainable. In support of their contention, the appellant relied on the following decisions:
(a) Tamil Nadu Housing Board vs. UOI [1994 (74) ELT 9 (S.C.)]
(b) Uniworth Textiles Ltd. vs. CCE [2013 (288) ELT 161 (S.C.)]
4. The Ld. Authorized Representative of the Revenue reiterated the findings in the impugned order.
5. Heard both sides and perused the appeal documents.
6. We observe that as per the accounting standard, developed by the Institute of the Chartered Accountants in India, the appellant followed the accounting principle of making provision in respect of Page 6 of 11 Appeal No.: E/76130/2017-DB the value of the Raw Materials & Components, Stores, Spares and Loose tools, drawing instruments etc that have remained un-moved consecutively for three years. Accordingly, they have written-back the value from among those provided-for in each year, when some of those could be used in the manufacture. In the balance sheet of each year, to arrive at the value of 'Inventories' under 'Current Assets', the cumulative amount of provision was considered by the appellant after taking into account the amount the increase as well as decrease, as the case may be. The primary principle behind adopting such accounting policies is that the financial statements represent the true and fair view of the state of affairs of the entity as at the balance sheet date and of the profit & loss account for the period ended on that date.
6.1. We observe that the appellant had not written off the obsolete items. They only reduced the value of the slow-moving items, at the end of each financial year, if such inputs were lying in stock for a specified period. It is intended to determine the profit & loss at the end of the year. It is based on the principle of conservatism and to comply with the Accounting Standards, which was never with an intention to write off any portion of inventory in the Books of Accounts. Since it is not concerned with obsolete items, which are unusable, we hold that the provision of Rule 3(5B) of the CENVAT Credit Rules was not applicable. We observe that the issue is no more res integra as the issue has been decided by this Tribunal in the case of M/s. Steel Authority of India Ltd. vs Commissioner of Central Excise, Durgapur reported in 2025-TIOL-231-CESTAT-KOL, wherein it has been held that the provisions of Rule 3(5B) of the CENVAT Rules are not applicable in such cases.
Page 7 of 11Appeal No.: E/76130/2017-DB The relevant part of the said decision is reproduced below:
"5. Heard the parties, considered the submissions and perused the record.
6. We find that the issue came up before this Tribunal in the appellant's own case reported as 2024 (10) TMI 1336-CESTAT NEWDELHI, wherein the facts of the case are as under:-
"The appellant herein is engaged in manufacture of Billets, Slabs, angles, TMT Bar, Channels etc. They were also availing the facility of Cenvat Credit on inputs, capital goods and input services as provided under Cenvat Credit Rules, 2004 (hereinafter referred as CCR 2004).While auditing the records of the appellant, it was pointed out by the auditors that the appellant has made the provision ofRs.20,07,37,034/- against the stock value of Rs.28,14,81,491/- in the Financial Year 2016 & 17, for non- moving/obsolete/surplus inventories on which the Cenvat Credit was not reversed by the appellant as is required under rule 3 (5B) of CCR 2004. Though the appellant contended that the said rule does not apply but no documentary evidence could be produced by the appellant. Resultantly, vide SCNNo.16827 dated 16.12.2020 Cenvat Credit amounting toRs.3,30,81,463/- was proposed to be reversed along with the interest and the penalty of the same amount. While adjudicating the said proposal, the original adjudicating authority vide Order No.29/2022dated 21.12.2022 has ordered the partial recovery for the sum ofRs.7,86,240/- by dropping the balance demand of Rs.3,22,95,223/-along with the interest. Penalty of same amount of Rs.7,86,240/- has been imposed upon the appellant. Still being aggrieved the appellant before this Tribunal.
And this Tribunal held as under:-
7. Having heard the parties at length and perusing the record I observe that the question to be decided for adjudication of Page 8 of 11 Appeal No.: E/76130/2017-DB present appeal is : "Whether the appellants are required to reverse the credit availed on the inputs alleged to have been written off in their books of account in accordance of rule 3 (5B) of CCR." For this purpose I have perused the rule. It reads as follows:-
"Rule 3(5B): If the value of any input or capital goods before being put to use on which CENVAT credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account, the manufacturer or service provider is required to pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods."
8. On a plain reading of the said Rule it is clear that in the event the value of any input or capital goods before being put to use on which Cenvat credit has been availed are written off fully or partially or any provision has been made to write off those fully or partially than the manufacturer or service provider are required to reverse/pay Cenvat credit availed on such inputs or capital goods. Thus it is clear that provisions of rule 3(5B) CCR are applicable only when the value of asset and or inventory is written of fully or partially, or wherein any specific provision to write-off fully or partially has been made in the books of accounts.
9. In the present case from the very beginning the appellant have submitted that they have only written down the value of the raw materials in their books of account and has not written off the value fully or partially. Also, the claim of the appellant are that all these raw materials are still available in their factory and are in usable conditions; the value is written down as per the accounting principle and since the credit availed is on inputs, therefore, under the CCR, 2004, there is no bar in taking depreciation benefit' under Income-tax Act, 1961. Further, I find that there is no evidence to the effect that the inputs whose value had been written down had been removed from the factory, thus, reducing the value of the raw materials.
Page 9 of 11Appeal No.: E/76130/2017-DB Keeping in view the accounting principles and Income-tax benefit, if any, if cannot be construed that the value of the inputs are written off from the books of account and are not usable resulting into invoking of Rule 3(5B) of Cenvat Credit Rules, 2004.
10. I also observe that the appellant has created a general provision for slow/non- moving inventory and have taken the stand that they have not written off the inventory from the asset account in actuality the provision has bene made by appropriation in the profit and loss account without writing off any input/value from the asset/inventory account. I observe that there is a difference between writing off inputs vis-à-vis provision of slow moving inventory the goods continued to lie in the appellant's factory and gradually used in manufacture of dutiable final products such goods cannot be called as the inventory written off. I draw my support from the decision of Hon'ble Supreme Court in the case of Reliance Energy Ltd. vs. Maharathtra State Road Development Corporation reported as 2007 (8) SCC 1 wherein it has been observed that the concept of provision for doubtful debts is different from the concept of write off. The provision for "doubtful debts" cannot be equated to "write off". Hon'ble Gujarat High Court also in the case of CCE vs. Ingersoll, Rand India Ltd. reported as 2014 (300) ELT 347 has held that writing down the inputs for income-tax purposes cannot be equated with writing off the inputs under Rule 3(5B) of CCR.
11. I further observe that there is no denial by the Department about appellant to have kept the inventory in their accounts at full value and upon consumption in regular course of business, the cost of inventory is booked at full value itself. There is also no denial to the fact that the non/slow moving inventory has at certain stage being used by the appellant in its manufacturing process. Hence the inventory which had not become obsolete cannot be called as the entry written off. As already observed above Rule 3(5B) CCR is invokable vis-à-vis written off entry only. I Page 10 of 11 Appeal No.: E/76130/2017-DB hold that the said rule has wrongly been invoked by the Department.
12. This Tribunal also in the case of Hindustan Zinc Ltd. vs. Commissioner of CGST, Udaipur reported as 2021 (8) TMI 935 -CESTAT New Delhi and in another case titled as Takata India Pvt. Ltd. vs. CCE, Alwar reported as 2022 (4) TMI 1359 (Tri. Del.) has been held that since the assessee has made only a general provision and the department has not been able to identify the details of inventory or assets for which the provision has been made as to whether those inventories have become obsolete, I hold that the demand confirmed invoking Rule 3(5B) in the circumstances is not sustainable. There is also no denial to the fact that in case where such non/slow moving inventory had become obsolete the appellant had already reversed the credit."
7. On going through the decision in the appellant's own case, we find that the facts are not in dispute that the appellant has made provisions in books of accounts for partial writing down the value in respect of the slow moving and non-moving of inventories and spares whereas the provision of Rule 3(5B) of Cenvat Credit Rules are applicable when the provision in the books of accounts, the stock/inventories have been written off which is not the case in hand. Therefore, relying on the appellant's own case, we hold that the provision of Rule 3(5B) of Cenvat Credit Rules, 2004 are not applicable to the facts of the present case, therefore, no demand is sustainable against the appellant. As no demand is sustainable against the appellant, no penalty is also imposable against the appellant.
With the aforesaid terms, we set aside the impugned order and the appeal is allowed accordingly."
6.2. By following the ratio of the decision cited above, we hold that the demand of duty, along with interest, confirmed in the impugned order is not sustainable. Since, the demand of duty is not sustained, the question of imposing penalty does not arise.
Page 11 of 11Appeal No.: E/76130/2017-DB
7. We also observe that the appellant is a wholly owned Govt. of India undertaking whose complete set of records were maintained and whose accounts were audited by statutory auditors appointed by CAG as well as supplementary audit by representatives of CAG-New Delhi. We find that the appellant did not suppress any information from the Department and in fact maintained all the statutory documents, records/registers and accounts and filed the statutory returns. Thus, we observe that the conditions precedent for invoking longer period of limitation under proviso to Section 11A(4) of the Central Excise Act are not satisfied in the present case and hence the demand confirmed by invoking the extended period of limitation is not sustainable.
8. In view of the above findings, we set aside the demands confirmed in the impugned order and allow the appeal filed by the appellant, with consequential relief, if any, as per law.
(Operative part of the order was pronounced in open court) Sd/-
(ASHOK JINDAL) MEMBER (JUDICIAL) Sd/-
(K. ANPAZHAKAN) MEMBER (TECHNICAL) Sdd