Recovery of erroneously availed refund credit is barred when the demand notice is issued beyond five years.

The appellant, a manufacturer operating in Kutch, availed the benefit of Notification No. 39/2001-CE dated 31 July 2001, which granted an excise-duty exemption/refund based on value addition.

Under paragraph 2C of the Notification, eligible manufacturers could, subject to prescribed conditions, take credit of the monthly refundable amount in their account current instead of receiving a cash refund.

For the financial year 2008–09, the appellant submitted an application/statement for refund of the annual differential amount of ₹54,00,034 on 11 May 2009, but the jurisdictional Assistant Commissioner did not decide it within the prescribed time.

The appellant subsequently took suo motu credit of ₹54,00,034 in its account current in April 2010, describing it as “Re-credit (08-09 annual)”.

A show-cause notice dated 29 February 2016 proposed recovery of the credit under Section 11A of the Central Excise Act, 1944, along with interest and penalty.

The Joint Commissioner confirmed the demand and imposed an equivalent penalty, and the Commissioner (Appeals) upheld that order.

Whether the appellant violated Notification No. 39/2001-CE by taking suo motu credit of the annual differential refund amount in its account current without awaiting formal departmental sanction

Whether the show-cause notice dated 29 February 2016, issued more than five years after the appellant took credit in April 2010, was barred by limitation under Section 11A of the Central Excise Act, 1944

Whether the demand, interest and penalty were otherwise sustainable when the appellant’s refund application remained undecided by the jurisdictional authority

The Tribunal applied Notification No. 39/2001-CE, particularly paragraphs 2B, 2C and 2.2.

Paragraph 2B prescribed the procedure for monthly cash refunds, while paragraph 2C permitted a manufacturer exercising the prescribed option to take credit of the monthly refundable amount in its account current, subject to submission and departmental verification of the relevant statement.

Paragraph 2C(g) provided that irregular or excess credit not reversed within the stipulated period would be recoverable as duty of excise erroneously refunded.

Consequently, Section 11A of the Central Excise Act applied to recovery proceedings; under Section 11A, the normal limitation was one year and the extended period was five years where fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade duty was established.

For erroneous refunds, the relevant date was the date of refund.

The Tribunal also relied on Parle Product Pvt. Ltd. v. Commissioner of Central Excise, Rajkot, 2009 (237) E.L.T. 579 (Tri.-Ahmd.), affirmed by the Gujarat High Court in 2010 (20) S.T.R. 179 (Guj.), which held that an assessee should not be penalised where an alleged breach resulted from the department’s failure to follow the prescribed procedure.

The Tribunal held that the recovery provision in paragraph 2C(g), read with Section 11A, subjected the proposed recovery to the statutory limitation period applicable to erroneous refunds.

Since the credit was taken in April 2010 and the show-cause notice was issued on 29 February 2016, it was issued beyond five years from the relevant date.

The department’s allegation of suppression or contravention with intent to evade duty was not sufficient, particularly where the appellant had disclosed the transaction and had submitted the annual refund claim to the Assistant Commissioner on 11 May 2009.

On merits, the Tribunal found that paragraph 2.2(2) required the Assistant Commissioner to decide the annual differential refund by 15 May of the succeeding financial year, but the department failed to establish that the application had ever been disposed of.

The subsequent departmental reports were themselves unable to ascertain whether the claim was pending or had been disposed of.

Applying Parle Product, the Tribunal concluded that the appellant could not be faulted for the procedural consequence of departmental inaction, especially since the appellant had duly submitted the relevant statement and awaited the prescribed departmental decision.

The show-cause notice was held to be time-barred because it was issued after the maximum five-year limitation period under Section 11A.

The suo motu credit was also held not to be recoverable on merits, as the appellant had filed the annual differential refund claim and the department had failed to decide it within the period prescribed by Notification No. 39/2001-CE.

The impugned order was set aside, the appeal was allowed, and the demand, interest and penalty were consequently annulled.

The Tribunal further directed the jurisdictional Chief Commissioner to inquire into the prolonged departmental inaction and take corrective measures.