CESTAT Sets Aside CENVAT Demand Against Textile Company On Inputs Processed By Job Workers Before Rule Change

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai Bench, has set aside a CENVAT credit demand against a textile exporter, holding that credit could not be denied merely because Rule 12B, which earlier allowed textile traders using job workers to pay excise duty and take credit as manufacturers, was later omitted from the Central Excise Rules, 2002.

A bench of Judicial Member S K Mohanty and Technical Member M M Parthiban said the issue was covered by existing law and circulars.

It held that “we are of the considered view that the appellants are eligible to CENVAT Credit during the disputed period from 09.07.2004 to 30.06.2005.”

The case involved Venus International, a Bhiwandi-based textile exporter. The firm worked through job workers. It sent duty-paid yarn and fabrics for processing.

After receiving the processed fabrics, it carried out cutting and packing at its factory. The finished goods were exported. Excise duty was paid on export. CENVAT credit was used to discharge that duty. The rebate was claimed under Rule 18.

Rule 12B had treated traders who got goods manufactured on a job-work basis as assessees. It allowed them to pay duty and avail credit even if the actual manufacturing was done by job workers. The rule was omitted on 9 July 2004. Venus continued to use credit only for inputs received before that date and lying in stock or circulation during the transition.

In August 2005, the department issued a show cause notice. It claimed that after the omission of Rule 12B, Venus could not be treated as a manufacturer and had wrongly availed credit. In September 2007, an addendum was issued. It alleged fraudulent availment of credit using bogus invoices.

The tribunal rejected the addendum. It held that new allegations could not be introduced years later through an addendum.

The bench observed that “Since, the addendum had considered entirely a new ground, which was not canvassed in the original SCN dated 09.08.2005, such fresh grounds urged cannot be addressed to by the judicial forum inasmuch as the said addendum is not in continuance with the original SCN containing the same allegations.”

It added that “the demand of CENVAT Credit on account of additional ground, even though such amount is already covered under the SCN issued earlier, is required to be issued separately within the normal time limit provided under Section 11A ibid”

The tribunal held that the department's case failed both on the settled legal position and on limitation. The demand against Venus International was set aside. The appeal was allowed. Other connected appeals were held to be infructuous.