CENVAT credit is admissible on eligible duties paid upon EOU de-bonding of inputs and capital goods.

The assessee manufactured 100% cotton terry towels and initially operated as a 100% Export Oriented Unit (EOU).

After achieving positive Net Foreign Exchange, it exited the EOU scheme pursuant to the Development Commissioner’s order dated 22.06.2011 and became a Domestic Tariff Area (DTA) unit.

At the time of de-bonding, it paid the applicable customs and excise duties on inputs, capital goods, consumables and finished goods lying with the unit, and subsequently availed CENVAT credit of the duties paid.

The Department disputed credit amounting to Rs.3,19,26,833/-, including credit relating to imported machinery spares, alleging that the assessee had deliberately exited the EOU scheme to obtain inadmissible credit and claim rebate on exported goods.

The Commissioner allowed credit of Rs.2,16,53,205/- but disallowed Rs.1,03,89,840/-, with interest and penalty under Section 11AC of the Central Excise Act, 1944.

The assessee challenged the disallowance, while the Revenue challenged the credit allowed by the Commissioner, relying on AVO Carbon (India) Pvt. Ltd. v. CCE.

1. Whether an assessee converting from a 100% EOU into a DTA unit could avail CENVAT credit of eligible duties actually paid at the time of de-bonding on inputs and capital goods.

2. Whether credit relating to imported machinery spares and other goods could be denied merely because the goods had originally been procured or held duty-free while the assessee operated as an EOU.

3. Whether the extended period of limitation, interest and penalty were sustainable in the absence of suppression or intent to evade duty.

The Tribunal applied Rule 3 of the CENVAT Credit Rules, 2004, which substantively permits credit of eligible duties paid on inputs and capital goods, read with Rule 9, which prescribes the documentary basis for availing such credit.

It relied principally on Stanadyne Amalgamations (P) Ltd. v. CCE and AVO Carbon (India) Pvt. Ltd. v. CCE, 2019 (8) TMI 572 (Madras), where the Madras High Court held that duties paid upon de-bonding by an EOU were eligible for CENVAT credit and that the proviso to Rule 3(1), inserted by Notification No. 35/2008-CE(NT), could not restrict credit only to central excise duty paid on capital goods.

The Tribunal also followed its subsequent decision in Avo Carbon India Pvt. Ltd. v. Commissioner of GST & Central Excise, Final Order Nos. 41131–41132/2024, holding that CENVAT credit lying with an EOU could be transferred to the DTA unit upon de-bonding.

Since the credit was legally admissible and the relevant duty payment was within the Department’s knowledge, the extended limitation and penal provisions under Rule 15(2) of the CENVAT Credit Rules and Section 11AC were not attracted.

The Tribunal treated the relevant event as the subsequent payment of duty upon de-bonding, rather than the earlier duty-free procurement of the goods under the EOU scheme.

Once the assessee paid the assessed duties and commenced manufacture as a DTA unit, the goods became duty-paid goods, and the credit was referable to the duties actually paid at de-bonding.

The Tribunal held that eligibility under Rule 3 and documentary compliance under Rule 9 were satisfied, and that the prior EOU status did not independently bar credit.

The Madras High Court’s decision in Stanadyne Amalgamations had also displaced the restrictive approach adopted in AVO Carbon by the Tribunal, particularly regarding imported inputs and capital goods.

Accordingly, the Revenue’s allegation that the assessee had deliberately exited the EOU scheme to obtain rebate was considered speculative and unsupported by any blameworthy conduct.

In the absence of suppression or intent to evade duty, the consequential interest and penalties could not survive.

The assessee’s appeal was allowed with consequential relief, the Revenue’s appeal was rejected, and the cross-objection was disposed of accordingly.