Credit is admissible for input services used in manufacture of exported goods.

Case:- LAVINO KAPUR COTTONS PVT. LTD. VERSUSCOMMISSIONER OF C. EX., THANE-II

Citation:- 2015 (39) S.T.R. 514 (Tri. - Mumbai)

Brief facts:-The appellant filed this appeal against Order-in-Original No. 03-04/KLG/Th-II/2010, dated 22-1-2010 whereby the learned Commissioner has disallowed the Cenvat credit of Rs. 1,01,23,236/- along with interest and imposed penalty of Rs. 4,000/- under Rule 15(3) of the Cenvat Credit Rules, 2004.
Briefly stated the facts of the case are that the appellant is a 100% EOU and engaged in the manufacture of absorbent cotton falling under Chapter Heading 56 of the Central Excise Tariff Act, 1985 and working under the Manufacture and other operations in Warehouse Regulations, 1966. The appellant availed Cenvat credit of Service Tax paid on input service for the period from March, 2008 to September, 2008 and from October, 2008 to March, 2009. The appellant did not utilize the Cenvat credit and it was lying in balance in their Cenvat account. The department denied them the above Cenvat credit on the ground that they have availed the benefit of Exemption Notification No. 30/2004-C.E., dated 9-7-2004 while clearing their entire quantity of goods manufacture including waste generated during the course of manufacture. Therefore, the appellant was not eligible to avail Cenvat credit in view of Rule 6(1) of the Cenvat Credit Rules since they had neither cleared the goods nor did they maintain separate accounts as provided under sub-rule (2) of the Cenvat Credit Rules, 2004. Accordingly, demand-cum-show cause notices were issued for demanding Cenvat credit wrongly availed on service tax, along with proposal for penalty. The learned Commissioner confirmed the demand and imposed penalty of Rs. 4,000/- under the provisions of Rule 15 of the Cenvat Credit Rules, 2004. Aggrieved by the same, the appellant is in appeal.

Appellant’s contention:- The contention of the appellant is that show cause notice was issued against them on the ground that one of the conditions for availing exemption under Notification No. 30/2004-C.E. that no credit is availed on the inputs under the provisions of Cenvat Credit Rules and on the ground that the goods are exported by availing exemption under the said Notification and the appellant is not debiting their running bond account at the time of export of their finished goods whereas the demand has been confirmed on the ground that since they are availing the benefit of Notification 30/2004, they are not eligible for the Cenvat credit. The contention is that their unit is 100% EOU and they are exporting the entire quantity of manufactured goods and they have availed the benefit of the Notification by mistake. Therefore, they are eligible to take Cenvat credit on the service tax paid on the input service used in the manufacture of their final product. Further, the department has not treated their export under bond on the ground that they have not debited the B-17 bond, the contention is that in respect of final product exported under bond at no point of time did the department ask the appellant to debit such running bond and the B-17 bond simpliciter was sufficient to secure the revenue. The contention is that the show cause notice was issued that they were not entitled to the benefit of Cenvat credit in view of the provisions of Notification 30/2004 whereas in Order-in-Original it was held that the appellant has correctly taken the benefit of the Notification which is self-contradictory and is in breach of the principles of natural justice. The contention is that there cannot be any motive or purpose for claiming the benefit of the Notification and the unit is 100% EOU and its final products are even otherwise not liable to any duty of excise and the department was fully aware that the appellant’s goods were cleared for export without payment of duty. The contention is that Rule 6(1) of the Cenvat Credit Rules would not apply to their case as the final product, viz. absorbent cotton, has been cleared for export under bond and thereby covered by Rule 6(6)(v) of the Cenvat Credit Rules. The contention is that export under bond does not amount to exemption from payment of duty and the action of the learned Commissioner is contrary to the binding decision of the Hon’ble Bombay High Court in the case of Repro India Ltd. v. UOI reported in 2009 (235)E.L.T.614 (Bom.)wherein it was held that Cenvat credit is available in respect of inputs used in the manufacture of final products being exported irrespective of the fact that the final products are otherwise exempted. In support of their contention, they have also placed reliance on the Hon’ble Delhi High Court decision in the ease of CCE, Delhi-I v. Punjab Stainless Steel reported in 2009 (234)E.L.T.605 (Del.) wherein it was held that a manufacturer is entitled to Cenvat credit in respect of inputs used in the exempted goods. The contention is that the decision is binding on all the authorities functioning within the State and in support of their contention they have placed reliance on the Hon’ble Supreme Court decision in the case of East India Commercial Co. Ltd. v. CC, Calcutta reported in 1983 (13)E.L.T.1342 (S.C.).

Respondent’s contention:- The contention of the learned AR is that the appellant has not availed the benefit of Notification No. 30/2004 by mistake but they have availed the benefit of the Notification consciously which is clear from the fact that they were also clearing their wastage by availing the benefit of the Notification. The contention is that they were not debiting their running bond which shows that they were availing the benefit of the Notification and not clearing their goods under bond. Since their goods were exempted goods (nil rate of goods), the bar prescribed in terms of Rule 6(1) of the Cenvat Credit Rules shall apply in their case. In support of their contention, they have placed reliance on the decision of the Tribunal in the case of Suryamitra Exim Pvt. Ltd. v. CCE, Guntur reported in 2012 (283)E.L.T.504.

Reasoning of judgment:- They have considered the submissions, and perused the records. Undisputedly, the appellant unit is a 100% EOU and they are working under the Manufacture and other operations in Warehouse Regulations, 1966 is also not in dispute. The appellant also executed a general bond (with surety) in Form B-17 on 27-1-2004 for Rs. 5 crores valid for a period of five years which was further renewed up to 31-3-2010 in terms of Notification No. 6/98-C.E. (N.T.), dated 2-3-1998 and C.B.E. & C. Circular No. 14/98-Cus., dated 10-3-1998 as amended. The appellant is exporting their entire product is also not in dispute.
The appellant availed Cenvat credit on input service used in the manufacture of their final products. The department denied them the credit on service paid on input service on the ground that they have exported the goods while claiming the benefit of Notification 30/2004. The case of the appellant is that they are a 100% EOU and they are exporting most of their product and they have claimed the benefit of Notification 30/2004. The department has denied them Cenvat credit availed in view of the provisions of Rules 6(1) and 6(2) of the Cenvat Credit Rules, 2004, which are reproduced hereunder :-
”(1) The Cenvat credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).
(2) Where a manufacturer or provider of output service avails of Cenvat credit in respect of any inputs or input serviced, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take Cenvat credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.”
Cenvat credit has been introduced to mitigate the cascading effect of the double taxation. Therefore, if the final product is exported, it deserves for a relaxation/dispensation to enable the goods to be internationally competitive and in view of the principle that only the goods are exported and taxes are not exported including the taxes on final products or taxes on inputs used in the manufacture of final product. The intention of the legislation is to ensure that duty is not levied on the export goods or on inputs used in the manufacture of goods which is reflected in Rule 6(6)(v) ibid reproduced hereunder :
“(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either -
(i)         …….
(ii)        ………
(iii)       …….
(iv)       ……..
cleared for export under bond in terms of provisions of the (v) Central Excise Rules. 2002.”
Further, the Hon'ble High Court of Bombay in the case of Repro India Ltd.v. UOI reported in 2009 (235)E.L.T.614 (Bom.) held as under :-
“Even though Rule 6(1) of the Cenvat Credit Rules, 2004 provides that no Cenvat credit will be available in respect of the inputs used in the manufacture of exempted products. Rule 6(6)(v) of the Cenvat Credit Rules creates an exemption inter alia in respect of the excisable goods removed without payment of duty for export under bond in terms of Central Excise Rules, 2002. Considering the language of Rule 6(6)(v) of the Cenvat Credit Rules, 2004 the petitioners are entitled to avail Cenvat credit in respect of the inputs used in the manufacture of the final products being exported irrespective of the fact that the final products are otherwise exempt.”
(Underline supplied)
So far as the decision cited by the learned AR in the case of Suryamitra Exim Pvt. Ltd. v. CCE, Guntur reported in2012 (283)E.L.T.504, the export related to frozen shrimps and frozen fish which are attracting no duty or nil rate of duty and the exception provided in respect of export bond should be read in the context of liability to duty, which is the primary condition for the purpose of allowing Cenvat credit under the Cenvat Credit Rules which is not the issue in the present case. The input services used in the manufacture of final product have suffered service tax and are exported is not in dispute in this case. Therefore, the case law cited by the learned AR is not relevant to the present case. In these circumstances, the learned Commissioner’s order is not sustainable and the same is accordingly set aside and the appeal is allowed.

Decision:- Appeal allowed.

Comment:- The analogy of the case is that as per Rule 6(6)(v) of the Cenvat Credit Rules, 2004, the cenvat credit on inputs/input services is admissible in case the final products are exported without payment of duty. This is for the reason that the goods are required to be internationally competitive and in view of principle that only the goods are exported and taxes are not exported including the taxes on final products or taxes on inputs used in manufacture of final product.

Prepared by:- Monika Tak

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PJ/CASE LAW/2015-16/2847

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