By TIOL News Service

MUMBAI, MAY 24, 2016: THE CCE, Pune-I disallowed CENVAT credit of Rs.5,90,83,654/-, demanded interest thereon and imposed penalties under rule 15(2) of the CCR, 2004.

The assessee is engaged in the manufacture of boilers and had been clearing their products to customers in India, outside India and also to the Special Economic Zone at Jamnagar . In relation to the clearance of 10 boilers to M/s Reliance Utility Limited, Jamnagar and exports effected, the case of Revenue is that, in addition to manufactured goods emanating from the registered factory, assessee supplied certain ‘bought-out items' which were first brought into the factory premises before being shipped to destination and, on these, the duty paid was being availed as CENVAT credit. The impugned order finds that said ‘bought-out items' are not inputs for manufacture and, hence, the duty paid is not eligible for CENVAT credit.

The assessee, on the other hand, claims that the goods are procured and brought to the factory as the contract envisaged erection of complete boilers at the contracted site and that the boiler, using their own output and ‘bought-out' items, in assembled state is classifiable under 8402. It is further contended that as these goods being exported or supplied to special economic zones are not to be burdened with taxes and duties, it was submitted that credit was correctly taken.

It was also contended before the CESTAT that the appellant is, indisputably, eligible for rebate of duty on inputs ‘bought-out' and supplied as exports. It was claimed that it is a well-settled principle of law that what is available as rebate can also be availed as credit. Further, the appellant-assessee, even if regarded as merchant exporter, was entitled to such rebate and hence denial to them as a manufacturer would be grossly inequitable; that the principle and policy of ‘non-exportability' of taxes is jeopardized if the contention of the Revenue is accepted.

The following case laws were cited in support viz. Flat Products Equipments (I) Ltd - 2011-TIOL-781-CESTAT-MUM, Dicitex Decor Pvt Ltd - 2012-TIOL-1233-CESTAT-MUM and Finolex Cables Ltd. - 2006-TIOL-1619-CESTAT-MUM.

The AR submitted that in view of the definition of Input & final product contained in rule 2 of the CCR, 2004 and the fact that the ‘bought-out' items are used as auxiliary equipment to the goods manufactured by the appellant and that as these are not required for manufacture of the pressure parts and since, as a matter of practice, these are not brought within the factory of manufacture which is an essential requirement to qualify as an ‘input', CENVAT credit could not have been availed of. The apex court decision in KCP Ltd. - 2013-TIOL-42-SC-CX is relied upon in support.

The CESTAT, after considering the submissions made by both sides, observed that an identical matter had come up for decision before the Bench in the case of ThermaxBobcock& Wilcox Ltd - 2005-TIOL-1661-CESTAT-MUM and where it was held that, in view of the sub-heading 8402.10 of the schedule to the Central Excise Tariff Act, 1985 and rule 2(a) of the Interpretative Rules, it is the boiler which is the final product of the manufacturer which, being physically impossible to remove from the factory in assembled form, is, nevertheless, classifiable as boiler per se and consequently the duty is liable to be discharged on the value of the boiler in complete form including the value of the 'bought-out items'.

The Bench, therefore, held –

"From this, it would appear that, even if the manufacturer is compelled to assemble the product on-site, it is the boiler in complete form that is liable to duty including the value of the ‘bought-out' components'. However, it has been pointed out, that in the matter of domestic clearance, the ‘bought-out' items are generally not brought into the factory and the appellant does not take credit on the same. That, however, is not the practice when it came to exports or supplies made to special economic zones. Under the contractual agreement, as well as for compliance with statutory requirement, the appellant stores ‘bought-out' components at the factory of manufacturer where these are tested and connected along with the parts manufactured in the factory and, thereafter, removed from the premises as boiler for erection and installation at Special Economic Zone or at the site of the purchasers abroad. In these circumstances there cannot be any conclusion other than that the manufacture of boiler in its final form is rendered at the factory of manufacturer and the clearance of boiler is, for all practical purposes, effected from the said factory gate. Since the boiler is the final product of the manufacturer, every component within it and every input that goes into the component manufactured in the factory would be an input so far as CENVAT Credit Rules, 2004 is concerned. It is certainly not a tenable claim that Revenue can distinguish between an input of an input and an input itself when there is no dispute that the components manufactured from inputs and the components that are inputs have gone into the final products; nor can Revenue presume to enter the commercial arena and dictate the manufacturing policy of an industry. In the context of the decision of the Tribunal in the appellant's own case cited supra which we respectfully follow, we find that the ‘bought-out' items are also inputs for the purpose of taking credit in accordance with the definition in rule 2(k)(i) as it stood then."

Noting that in view of the Tribunal decision in Flat Products Equipments (I) Ltd - 2011-TIOL-781-CESTAT-MUM, the demand of credit cannot survive, the impugned order was set aside and the appeal of the assessee was allowed.

Incidentally, Revenue had also filed an appeal against the very same order to the limited extent of it having allowed appellant-assessee to file rebate claim. According to revenue, it is beyond the scope of the show cause notice and beyond the authority vested in the Commissioner of Central Excise.

To this plea of the Revenue, the Bench observed –

"…We do not find any merit in these contentions. A show cause notice is intended to notify the tax-assessee that detrimental action is proposed and the adjudication proceedings is required to limit itself to the extent of detriment so proposed. Admission of a claim advanced by the noticee is not a detrimental outcome and can, therefore, never be described as having travelled beyond the notice. We also observe that impugned order has merely acknowledged the admissibility of claim for rebate without granting the rebate or directing that application for rebate be disposed off in a specific manner."

The Revenue appeal was dismissed.

(See 2016-TIOL-1227-CESTAT-MUM)