By TIOL News Service

MUMBAI, MAY 15, 2013: THE appellant are manufacturers of material handling equipment and avail CENVAT credit.

Vide Notification No. 25/2008-CE dated 29.4.2008 some of their products viz. Jumbo Electric, Jotruk, Jowalk and electrically operated vehicles were completely exempted from payment of Central Excise duty. The appellant says that they were unaware of this exemption notification and continued to pay duty @8% adv. till 31.07.2008. Thereafter, they started clearing the impugned goods under exemption.

Since they were manufacturing dutiable goods also, they maintained separate record of "inputs" used in dutiable as well as exempted goods.

However, the appellant was also availing credit of service tax paid on common input services such as Courier service, Telephone service, professional charges, security service, construction service, housekeeping service, catering service, freight inward etc. It appears they were unaware of the provisions of Rule 6(2) of CENVAT Credit Rules, 2004 which mandates maintenance of separate accounts both in respect of inputs as well as input services used in the manufacture of dutiable goods as well as exempted goods.

Without making them aware, the departmental officers visited their factory and upon being informed that the appellant was required to maintain separate accounts in respect of both inputs as well as input services which are commonly used for the manufacture dutiable as well as exempted products, the appellant immediately reversed the entire credit amounting to Rs.11,02,970/- taken on the input services along with interest thereon and intimated the same to the department vide letter dated 25.9.2009. Another amount of Rs.3,52,661/- and Rs.2,78565/- were paid by them on 1.10.2009 and 23.11.2009 towards service tax credit taken on input services which were used in the manufacture of both dutiable as well as exempted product which was also intimated to the department.

The department was not happy with this reversal and wanted the appellant to pay an amount equal to 5%/10% of the value of the exempted goods at the time of clearance of the exempted goods in terms of rule 6(3) of the CCR, 2004. This amount came to Rs.1.64 Crores [period 29.04.2008 to 30.09.2009] and which was sought to be recovered by issuance of a SCN dated 15.02.2010 and with imposition of penalty & interest.

The CCE, Mumbai-III made the appellant aware of their liabilities by confirming the demand of Rs.1.64 crores along with imposition of equivalent penalty and interest and a penalty of Rs.10 lakhs on the Manager Commercial u/r 26 of the CER, 2002 probably for being unaware of the legal position.

The appellant is before the CESTAT and submits that since they have reversed the "entire" credit availed on "Input Services" used in the manufacture of dutiable and exempted final product, that should suffice and no demand can further arise. They relied on the following decisions in support of their claim -

+ Hello Minerals Water (P) Ltd. vs. Union of India - (2004-TIOL-57-HC-ALL-CX)

+ Chandrapur Magnet Wires (P) Ltd. - (2002-TIOL-41-SC-CX)

+ CCE vs. Ashima Dyecot Ltd. - (2008-TIOL-659-HC-AHM-CX)

+ Face Ceramics Pvt. Ltd. vs. CC.Ex. Rajkot - (2009-TIOL-2298-CESTAT-AHM)

+ Emcure Pharmaceuticals Ltd. Vs. CC.Ex., Pune - (2010-TIOL-489-CESTAT-MUM)

+ CC.Ex., Bangalore-III vs. Himalaya Drug Company - (2011-TIOL-246-HC-KAR-CX)

+ Burn Standard Co. Ltd. vs. CCE, Salem - (2010-TIOL-1028-CESTAT-MAD)

An alternative plea was also made that if the appellant is held liable to discharge an amount @5%/10% the value of the exempted products, they should be allowed to take credit of the duty/tax paid on inputs/input services used in the manufacture of such exempted products. Inasmuch as since they were unaware of the legality, there was no intention on their part to evade or avoid any tax and as soon as the mistake was pointed out they have reversed the credit along with interest which shows their bona fides and hence imposition of penalty on the appellant and its manager was totally un-called for.

The Revenue representative shared the awareness about the provisions of Rule 6 of the CCR, 2004 and submitted that the order passed by the CCE, Mumbai-III was perfectly legal.

The Bench after extracting the lengthy provisions of rule 6 of the CCR, 2004 observed -

"5.2 In the present case it is an admitted fact the appellant did not maintain separate accounts for the input services used in or in relation to the manufacture of product dutiable as well as exempted products even though they maintained such accounts in respect of inputs. Therefore, two options were available to them, i.e., either to pay 5%/10% of value of the exempted goods or pay an amount equal to the credit attributable to the input services used in or in relation to manufacture of exempted goods subject to the provisions of Sub-rule (3A). When the mistake was pointed the appellant reversed not only the credit taken on input services used in the manufacture of exempted goods but also the credit taken on input services used in the manufacture of dutiable goods. In other words, the appellant reversed the entire credit taken along with interest thereon. Therefore, Rule 6(3) (i) will not have any application, when a credit is taken wrongly and the same is reversed along with interest as it tantamount to non-taking of the credit. The Hon'ble High Court of Allahabad in the Hello Minerals Water (P) Ltd. case cited supra clearly held that "reversal of Modvat credit amount to non-taking of credit on the input and even if such reversal was done after the clearance of the goods the said action amounts to non-availment of credit. The Hon'ble Apex Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra) also held that reversal of Modvat Credit at the time of clearance of the goods amounts to non-availing of credit. All the judgments relied upon by the appellant also confirm the above position. The Hon'ble High Court of Karnataka in the case of Himalaya Drug Company held that the provisions of Rule 6(3) (i) of the Credit Rule 2004 would not be attracted if reversal of credit is done in respect of inputs used in the manufacture of exempted final products. In view of these decisions, we are of the considered view that the reversal of credit by the appellant on the entire service tax taken along with interest thereon both in respect of dutiable goods as well as exempted goods amounts to non-availing of credit and, therefore, the provisions of Rule 6(3)(i) are not attracted and the confirmation of demand by the adjudicating authority directing the appellant to pay an amount at the rate of 5%/10% of the value of the exempted goods is not sustainable in law. Consequently, the imposition of penalties on the appellant and appellant firm and its manager are also not sustainable in law and accordingly, they are set aside. However, the appellant has initially availed credit and only on pointing out by the department they have reversed the credit and, therefore the appellant is liable to penalty under Rule 15(3) of the Cenvat Credit Rules 2004 for contravention of the provisions of Cenvat Credit Rules. The maximum penalty imposable under he said Rule is Rs. 2000/- and accordingly the appellant is liable to pay penalty of Rs. 2000/- under Rule 15(3) of the Cenvat Credit Rules, 2004."

The appeal was disposed of in the above terms.

Caught unawares - Incidentally, the period covered by the demand notice was 29.04.2008 to 30.09.2009 which means to say that it also included the period when the appellant cleared the goods on payment of duty without being "aware" that the goods were made exempted by notification 29/2008-CE dated 29.04.2008. So, for the period 29.04.2008 to 31.07.2008, a different treatment was required. But, now since the entire demand has been set aside, it is only a matter of academic interest.

(See 2013-TIOL-732-CESTAT-MUM)