Post-1 March 2011, provisions for partial inventory write-offs require immediate CENVAT credit reversal.

The appellant manufactured electrical transformers, relays, switchgears and control panels.

During audit, the Department found that the appellant had created accounting provisions for writing off raw materials for the financial years 2010–11 and 2011–12 but had not reversed the corresponding CENVAT credit under Rule 3(5B) of the CENVAT Credit Rules, 2004.

The appellant contended that the provisions were merely accounting adjustments, that the materials remained physically available, and that provisions were proportionately released when the materials were subsequently consumed.

It reversed CENVAT credit of ₹69,38,000 under protest but did not substantiate the alleged subsequent consumption with item-wise records or an auditor’s certificate.

A show-cause notice dated 9 December 2015 proposed recovery of the balance credit, interest and penalty.

The adjudicating authority confirmed ₹8,57,537 under Section 11A of the Central Excise Act, 1944, with applicable interest and penalty; the Commissioner (Appeals) upheld the demand, leading to the present appeal.

Whether the creation of provisions for full or partial write-off of inputs required reversal of the corresponding CENVAT credit under Rule 3(5B) of the CENVAT Credit Rules, 2004, particularly in respect of provisions made before and after 1 March 2011.

Whether the appellant could claim re-availment or avoid reversal on the basis that the provisioned inputs were subsequently used, despite failing to produce documentary evidence linking the provisions to actual consumption.

Whether the extended period of limitation and consequential interest and penalty were validly invoked in the circumstances of the case.

The Tribunal applied Rule 3(5B) of the CENVAT Credit Rules, 2004, under which credit attributable to inputs or capital goods whose value is written off, or for which a provision for full or partial write-off is made in the books, must be reversed; its proviso permits re-availment where the goods are subsequently used in manufacturing or provision of taxable services.

It held that, before Notification No. 3/2011-C.E. (N.T.) dated 1 March 2011, the rule covered only full write-offs or provisions for full write-offs, whereas the amended rule applied to partial write-offs and partial provisions prospectively.

The burden of establishing credit eligibility rested on the appellant under Rule 9(6) of the CCR, 2004.

For limitation, the Tribunal relied on Easland Combines, Coimbatore v. Collector of Central Excise and Uniworth Textiles Ltd. v. Commissioner of Central Excise, which state that mere non-payment is insufficient for invoking the extended period absent suppression, wilful misstatement or a positive act of concealment; however, the Tribunal held that non-disclosure and failure to provide information despite departmental requisitions could constitute suppression.

It also invoked the principle that where a statute prescribes a particular manner of compliance, it must be followed in that manner, relying on Competent Authority v. Barangore Jute Factory, A.K. Roy v. State of Punjab and CIT v. Anjum M.H. Ghaswala.

The Tribunal held that from 1 March 2011 the creation of an accounting provision for partial write-off immediately triggered the obligation to reverse the corresponding CENVAT credit, even if the inputs remained physically available and usable.

For the period preceding the amendment, partial write-offs or partial provisions were not covered by Rule 3(5B), but the amended rule applied to the relevant post-1 March 2011 provisions.

The appellant’s subsequent-use defence could have supported re-availment only if the appellant had first reversed the credit and then demonstrated actual use of the inputs.

Since it failed to produce item-wise inventory records, supporting documents or the requested auditor’s certificate, and admitted that individual tracking of provisions and releases was not feasible, the Tribunal found the claim of subsequent use unsubstantiated.

It further concluded that the appellant’s failure to disclose the non-reversal and its non-cooperation despite repeated departmental requests justified invocation of the extended limitation period, notwithstanding the appellant’s argument that the dispute involved an interpretation of the amended rule.

The Tribunal upheld the demand of ₹8,57,537, together with applicable interest and penalty, holding that the appellant was required to reverse the CENVAT credit attributable to the relevant provisions and had failed to establish subsequent use of the inputs or otherwise rebut the demand.

The invocation of the extended limitation period was also sustained.