CESTAT Mumbai Allows CENVAT Credit On Kinder Joy Plastic Toys Despite Excise Exemption On Toys

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has allowed CENVAT credit on duty paid inputs and capital goods used to make plastic toys supplied with Kinder Joy chocolates.

It held that such credit cannot be denied only because the toys were exempt from central excise duty.

A coram of Judicial Member C.J. Mathew and Technical Member Ajay Sharma said that entitlement to CENVAT credit arises once duty-paid inputs or capital goods enter the factory. It can be denied only if the law expressly prohibits it.

The dispute involved a manufacturer supplying plastic toys along with Kinder Joy chocolates. The chocolates were dutiable. The plastic toys were exempt under the 2006 Notification issued under Section 5A of the Central Excise Act.

Between May 2010 and July 2011, the appellant availed CENVAT credit of Rs 82.51 lakh on inputs and capital goods. Part of the credit was used to pay excise duty on clearance of plastic toys.

The Excise Department denied the credit. It said the toys were exempt from central excise duty. It argued that credit was not available on inputs and capital goods used to manufacture exempt goods.

The department also invoked Section 11D of the Central Excise Act. It alleged that the manufacturer had collected excise duty from buyers but had not deposited it with the government.

The Tribunal rejected these arguments. It held that payment of duty on exempted goods, even if contrary to an absolute exemption, does not attract penal consequences. It also does not invalidate credit otherwise available under Rule 3 of the CENVAT Credit Rules, 2004.

The tribunal clarified that eligibility for credit must be tested only under Rule 3. It said eligibility has no link with whether the final product is dutiable at the time credit is taken.

It added that Rule 6 applies at a later stage. That rule deals with retention and reversal of credit. It does not defeat initial entitlement.

The Tribunal relied on rulings in Creative Enterprises, Ajinkya Enterprises, and Foam Techniques. It said credit cannot be denied once duty paid on inputs has been accepted, merely because the final product is exempt.

The tribunal also held that Section 11D did not apply. It said the adjudicating authority had not examined whether any excess duty was actually collected and retained.

The bench noted that factual claims were not verified. This included the claim that common capital goods were also used to manufacture dutiable products. It also noted that binding precedents were ignored.

The tribunal set aside the order. It remanded the matter to the adjudicating authority for fresh consideration.