By TIOL News Service

MUMBAI, AUGUST 06, 2014: A demand of Rs.1,13,10,843/- is confirmed against the appellant along with penalties and interest. Penalty of Rs.10 lakhs has also been imposed against Shri Varruchi Sharma.

The reason for all this is that Electricity generated out of fuels (on which CENVAT credit was taken) has been wheeled outside the factory premises i.e. for use at the river site to draw water, for use in residential quarters and for sale to M/s. Vipras Castings Ltd. The department says that credit is not admissible & hence seeks to recover the same. The period involved is from October, 2003 to September, 2005 and the SCN is issued on 22.02.2006.

The appellant submits that the issue is now settled by the decisions of the Supreme Court in the case of Maruti Suzuki Ltd. - 2009-TIOL-94-SC-CX and in the case of Gujarat Narmada Fertilizers Co. Ltd. - 2009-TIOL-96-SC-CX where it is held that the appellants are not entitled for input credit in respect of the duty paid on fuel which is used for generation of electricity and which has been wheeled outside the factory. Nonetheless, the appellant submits that the demand beyond the normal period of limitation is not sustainable as earlier decisions were in favour of the manufacturer and as such suppression cannot be invoked and so also penalties are not imposable.

The Vice President in his order cited paragraph 21 of the decision of the apex Court in Maruti Suzuki and also adverted to the LB decision in Gujarat Narmada Fertilizers (in manufacturer's favour) which was set aside by the Supreme Court and concluded that since there were divergent views during the period of dispute,allegation of suppression is not sustainable and the demand beyond the normal period of limitation was set aside. So also penalties are not sustainable, hence set aside. In fine, the demand for the normal period with interest was upheld.

The Member (Technical) differed with the view of the Vice President on the point of limitation. Narrating the sequence of events which preceded the Show Cause notice and the correspondences entered by the jurisdictional authorities with the appellant, the MODVAT credit era of the late 1980's and early 1990's, the faith reposed in the assessees in the last two decades by the department, the Member (Technical) concluded that the conduct of the appellant has been totally defiant and non-co-operative and, therefore, the delay in issuing the demand notice is solely due to the conduct of the appellant. Holding that the appellant cannot be allowed to reap the benefit of his wrong doing; limiting the demand to the normal period would only enable the appellant to get windfall benefit wherein more than 90% of demand would become time barred and the appellant would be entitled to regularize the incorrect CENVAT credit availed by them, the Member (Technical) viewed that the demand for the extended period is liable to be confirmed along with imposition of penalties.

And, therefore, the matter was referred to the third Member for resolving the issue.

The Third Member (Technical) observed that the decisions relied upon by the appellant in support of their claim of bonafide belief were all rendered in the year 2006/2007 and since the period involved is October 2003 to September 2005, it cannot be said that there was a reasonable belief for the appellant to not reverse the CENVAT credit taken. Inasmuch as argument of the appellant that in view of the bonafide belief, extended time could not have been invoked falls flat, the Member(T) held. It is further mentioned that in view of the contents of rule 2(d) & rule 2(f) of the CCR, furnace oil which was used for generation of electricity did not qualify as an input and, therefore, availment of credit was clearly not permitted under the law. Nonetheless, the Member (T) took a view that since the issue related to a question of interpretation of law, imposition of penalty is not warranted. The reference was answered by the third Member (T) thus–

+ Extended period of time would be applicable for demand of CENVAT credit taken by appellant;

+ No penalty is imposable as the issue relates to interpretation of law and;

+ As regards the relevant date for computation of time limit, this exercise would be purely academic, inasmuch as whichever date is taken, the demand is well within the period of limitation.

And so, the Majority decision is that the demand is confirmed and the penalties are set aside.

In passing – not only but also: Allahabad High Court in the case of Jan Mohammed, Nainital v. Commissioner of Income Tax AIR 1953 Allahabad 119 held that where a point is referred to Third Member, he can decide only the point that has been referred to him and he cannot formulate a new point for himself on which he could base his decision, and that after the decision of the point or points referred to him by the Third Member, the case should go back to the original Tribunal because the Third Member has not been given any right to decide the appeal.

(See 2014-TIOL-1444-CESTAT-MUM)