Calcutta High Court Affirms Assessee’s Right to Choose Option Under Rule 6(3); Massive CENVAT Demand Set Aside

Background of the Dispute

The Calcutta High Court in Commissioner of Central Excise Vs Ganges Valley Foods Private Limited examined a challenge by the Revenue against a common order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, dated June 05, 2024 (later rectified on August 07, 2024). The dispute centred around the manner in which Rule 6 of the CENVAT Credit Rules, 2004 (CENVAT Credit Rules, 2004) should be applied when an assessee uses common inputs and input services for both dutiable and exempted goods.

The respondent, M/s. Ganges Valley Foods Pvt. Ltd., was engaged in the manufacture of biscuits under the Central Excise Tariff Act, 1985. For the financial years 2010-11 to 2015-16, the respondent produced:

  • Dutiable biscuits, and
  • Exempted biscuits, namely packaged biscuits with a retail sale price not exceeding Rs. 100 per kilogram, covered by Notification No. 12/2012-CE.

Common inputs and input services were used in the manufacture of both categories of biscuits. This triggered the mandatory compliance framework under Rule 6 of the CENVAT Credit Rules, 2004 relating to supplies of both exempt and dutiable products from common inputs.

Statutory Scheme Under Rule 6 of CENVAT Credit Rules, 2004

Obligations When Using Common Inputs

Under Rule 6 of the CENVAT Credit Rules, 2004, an assessee who manufactures both dutiable and exempted goods using common inputs or input services must:

  1. Either maintain separate accounts for:

    • Receipt
    • Consumption
    • Inventory
      of inputs and input services used exclusively for dutiable goods and for exempted goods under Rule 6(2);

  2. Or where such separate accounts are not maintained, adopt one of the options laid down in Rule 6(3), namely:

    • Payment of a specified percentage of the value of exempted goods (Rule 6(3)(i)), or
    • Reversal/payment of proportionate CENVAT credit attributable to exempted goods in accordance with the formula and procedure set out in Rule 6(3A) read with Rule 6(3)(ii).

The core objective of Rule 6 is to ensure that CENVAT credit relatable to exempted products is not retained by the assessee and that credit is restricted to the extent attributable to dutiable clearances.

Revenue’s Allegations and Demands

Departmental Audit and Show Cause Notices

Following a departmental audit and examination of ER‑1 returns, the Department concluded that:

  • The respondent had not maintained separate accounts as mandated by Rule 6(2).
  • Although the respondent claimed to have reversed proportionate credit under Rule 6(3A),
    • Such reversals were not disclosed in ER‑1 returns for financial years 2010‑11 to 2014‑15, except for the period between July 2014 and March 2015.
    • The respondent allegedly did not adhere to the procedural requirements of Rule 6(3A), including timely intimation to the jurisdictional Superintendent and periodic computations and adjustments.

On this basis, the Department issued two Show Cause‑cum‑Demand notices:

  • Notice dated April 28, 2015 demanding Rs. 21,95,15,813/‑; and
  • Notice dated April 26, 2016 demanding Rs. 5,78,83,997/‑,

together aggregating to approximately Rs. 27.74 crores, along with interest and penalties. The adjudicating authorities, by orders dated August 30, 2016 and October 26, 2017, confirmed these demands invoking the formula under Rule 6(3)(i). The calculation was based on a fixed percentage of the value of exempted goods (5%, 6% or 7% as applicable for the relevant period).

Tribunal’s Decision in Favour of the Assessee

The respondent carried the matter in appeal to CESTAT, Kolkata. By a common final order dated June 05, 2024, the Tribunal:

  • Accepted the respondent’s case that it had either not taken credit on exempt clearances or had reversed proportionate credit attributable to exempted biscuits;
  • Noted that intimation letters and supporting documentation had been periodically furnished; and
  • Held that the demands calculated under Rule 6(3)(i) were unsustainable in light of the proportionate reversals under Rule 6(3A).

The Tribunal consequently set aside the entire demand along with interest and penalties.

Aggrieved, the Revenue preferred an appeal under Section 35G of the Central Excise Act, 1944 before the Calcutta High Court, formulating a substantial question of law on the correctness of the Tribunal’s interpretation of Rule 6(3) and Rule 6(3A).

Revenue’s Contentions Before the High Court

Alleged Non‑Compliance With Mandatory Procedure

Counsel for the Revenue argued that:

  1. The respondent failed to maintain separate accounts as required under Rule 6(2) and was therefore compelled to strictly follow one of the options under Rule 6(3).