Credit eligibility on bought out items supplied with exempted product.

PJ/CASE LAW/2015-16/2584

Case:-YAMUNA GASES AND CHEMICALS LTD. Versus COMMR. OF C. EX., PANCHKULA

Citation:- 2014 (310) E.L.T. 502 (P & H)

Brief facts:-The appellant has filed this appeal under Section 35G of the Central Excise Act, 1944 (in short, “the Act”) against the order, dated 1-7-2011, Annexure A-9, passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (hereinafter referred to as “the Tribunal”) in Appeal No. E/479/2006-Ex(DB) [2011 (271)E.L.T.209 (Tri.-Del.)], claiming following substantial questions of law for consideration of this Court :-
(i)     Whether in facts and circumstances of present case impugned order passed by Hon'ble CESTAT, dated 1-7-2011 is erroneous, unjust, incorrect and unsustainable in law and fact?
(ii)    Whether in facts and circumstances of present case the Hon'ble Tribunal is correct to hold that adjustment of Cenvat Credit of the bought-out items supplied with the 'CJK' is wrong, especially when the law laid down has specifically stated that credit is available?
(iii)   Whether in facts and circumstances of present case, the Hon'ble Tribunal is correct to hold that adjustment of Cenvat Credit of the bought-out items supplied with the 'CJK' is wrong, especially in the light of the ruling of Siddhartha Tubes (supra) of the Hon'ble Apex Court which is squarely in favour of the appellants?
(iv)   Whether in facts and circumstances of present case, the Hon'ble Tribunal is correct when the law is settled that the manufacturer would be eligible to claim Modvat credit on the bought out items as long as the manufacturer is discharging excise duty on consolidated value of manufactured items as well as bought out items?
(v)    Whether in facts and circumstances of present case, the Hon'ble Tribunal is correct when the appellants have paid excise duty much in excess of the duty that was required to be paid as per excise department?
Brief facts as narrated in the appeal for adjudication of present controversy may be noticed. The appellant is engaged in the manufacture of Cable Jointing Kit (CJK). For this purpose, the appellant procures various inputs and takes Cenvat Credit thereon as the same are used for manufacture of excisable goods. Thereafter, the manufactured items are packed alongwith the bought out items together in a box called CJK. The appellant is putting together manufactured items and bought out items to make kits. On 16-4-2004, a show cause notice was issued to the appellant proposing to deny Cenvat Credit on the bought out items on the ground that CJK is an exempted product. A demand of duty of Rs. 20,50,911/- for the period from April 2003 to October 2003 alongwith interest and penalty was proposed. The appellant filed a reply to the said notice. After considering the matter, the Additional Commissioner of Central Excise vide order, dated 27-1-2005, Annexure A-5 issued a direction for denial of Cenvat Credit of Rs. 20,50,911/- on the bought out items under Rule 12 of Cenvat Credit Rules, 2002 (in short, “the Rules”) read with Section 11A of the Act and recovery of interest under Section 11AB of the Act and penalty of Rs. 50,000/- under Rule 25 of Central Excise Rules, 2002. The appellant filed an appeal before the Commissioner (Appeals) against the said order. Vide order, dated 21-11-2005, the Commissioner (Appeals) upheld the disallowance of the Cenvat Credit of Rs. 20,50,911/- on the duty paid inputs used in the packing of CJK but allowed adjustment of Cenvat Credit from the amount of central excise duty paid on the CJK and set aside the interest and penalty imposed on the appellant. Aggrieved by the order, the revenue filed an appeal before the Tribunal. The appellant also filed cross-objections. Vide order, dated 1-7-2011, Annexure A-9, both the members of the Tribunal allowed the appeal and disposed of the cross objections and held that adjustment of Cenvat Credit on the bought-out items supplied with the CJK was wrong and a wrong cannot be remedied by another wrong. Hence this appeal by the assessee.

Appellant’s contention:-Learned counsel for the appellant did not dispute that the process of packing of bought out items and manufactured items undertaken by the appellant to make CJK did not amount to manufacture. He, however, submitted that the manufacturer would be eligible to claim Modvat credit on bought out items as long as manufacturer is discharging excise duty on consolidated value of manufactured items as well as bought out items. He cited various judgments of the Tribunal and relying upon Apex Court decision in Sidhartha Tubes Limited v. Collector of Central Excise, 2000 (115)E.L.T.32 (S.C.)submitted that though CJK was not exigible to excise duty but on the components which formed part of CJK, excise duty was payable. According to the learned counsel, in such circumstances, the appellant was entitled to the benefit of adjustment of Cenvat credit in respect of the amount of bought out items supplied with the CJK on which excise duty had been paid.

Respondent’s contention:- None appeared for respondent.

Reasoning of judgment:-The Tribunal while adjudicating the issue against the appellant came to the conclusion that there was no excise duty payable on CJK and as such, the assessee had claimed, wrong Cenvat Credit in respect thereof. The Tribunal further noticed that the present case related to recovery of wrongly utilised Cenvat Credit amounting to Rs. 20,50,911/- on the bought out items for payment of duty on CJK and it was not a case of demand of excise duty. No illegality or perversity could be shown by the learned counsel for the appellant in the approach of the Tribunal. Furthermore, under Rule 6 of the Rules, the assessee is not entitled to claim Cenvat Credit on such quantity of input used in the manufacture of exempted goods. However, under sub-rule (2) thereof, the assessee can bifurcate the claim between manufacture of dutiable goods and exempted goods, where the manufacturer is required to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take Cenvat Credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.
Adverting to Sidhartha Tubes Limited's case (supra) on which heavy reliance has been placed by learned counsel for the appellant, the Apex Court was dealing with the issue whether galvanisation which was done subsequent to paying duty on M.S. Black pipes could not be a ground for not including the cost of galvanisation in the assessable value of the black pipe subjected to the process of galvanization when in the classification list, the assessee had declared M.S. Black pipes and galvanised pipes as their products. The Hon'ble Supreme Court while dismissing the appeal of the assessee noticed that the assessable value is to be calculated on the galvanised black pipe made by the appellants and the element of cost of galvanisation shall form part thereof. The adjustment of Cenvat Credit as in the present case was not the subject matter in issue before the Hon'ble Supreme Court and, therefore, this judgment does not help the appellant.
Accordingly, they find that no question of law arises for consideration of this Court in the light of facts noticed above.

In view of the above findings, the appeal filed by the appellant was dismissed.

Decision:-Appeal dismissed

Comment:- The analogy of the case is that when no excise duty was payable on CJK, claim of Cenvat credit was wrong. The cenvat credit claim could not be justified on the ground that Central Excise duty was paid on CJK. The assessee cannot avail cenvat credit on inputs used in manufacture of exempted goods as per the provisions of Rule 6 of the Cenvat Credit Rules, 2004.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2584

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