Credit of inputs used exclusively in exempted goods not be considered for 6% reversal.

Case:-COMMISSIONER OF C. EX., CHENNAI-IV Vs BONFIGLIOLI TRANSMISSIONS (P) LTD.

Citation:-2015 (317) E.L.T. 214 (Mad.)

Brief Facts:-This civil miscellaneous appeal, at the instance of the Revenue, raises the following substantial questions of law :-
“(1) Whether on facts and in the circumstances of the case, the Tribunal is right in holding that the respondent is entitled to Cenvat credit on the inputs used exclusively in the manufacture of goods, which are exempted and which are cleared without payment of duty?
(2) Whether the CESTAT is justified in holding that the assessee is entitled to take Cenvat credit on all inputs including inputs exclusively used in the manufacture of exempted final products contraryto the provisions of Rule 6(1) of Cenvat Credit Rules 2004?
(3) Whether on facts and in the circumstances of the case, the CESTAT is right in applying the ratio of judgment in the case of Hetero Labs Ltd .v. Commissioner of Central Excise, Hyderabad - 2005 (192) E.L.T. 716 (Tri.-Bangalore) where the facts involved are entirely distinct and different from the facts of the instant case and when the said decision has not reached finality?”
The first respondent-assessee are engaged in the manufacture of gear motor assembly falling under chapter heading 85.01 of the Central Excise Tariff and they supply the said gear motor assembly to M/s. NEPC India Limited, Chennai, for being used in their wind mills. The gear motor assembly is manufactured by way of assembling 19 imported components. The first respondent is also manufacturing gear motor assembly for other general applications for usage by other customers and for such gear motor assemblies cleared for other customers, duty is paid.
So far as the supply of gear assembly to M/s. NEPC India Limited, Chennai is concerned, the said manufactured and cleared goods are exempted from duty in terms of the Notification No. 3/2001, dated 1-3-2001 and Notification No. 6/2002, dated 1-3-2002 and that the wind operated electricity generator, its components and parts thereof are exempted as per Serial No. 13 of List 9 of the Notification from payment of duty. According to the department, the first respondent wrongly availed Cenvat credit on the inputs used in the manufacture of exempted goods and thereby Rule 6(1) of the Cenvat Credit Rules, 2004 has been violated. Therefore, based on the two show cause notices, namely, Notice No. 86/2005, dated 16-12-2005 in respect of the period 1-6-2001 to 29-11-2005 and Notice No. 46/2006, dated 17-11-2006 in respect of the period 30-11-2005 to 31-10-2006, duty was demanded under Rule 12/14 of the Cenvat Credit Rules, 2001/2002/2004 read with the proviso to sub-section (1) of Section 11A together with interest under Section 11AB and penalty under Section 11AC of the Central Excise Act and for penalty under the other provisions, which we are not concerned for the present.
The basic premise on which the notices were issued is that the assessee had contravened Rule 6(1) of the Cenvat Credit Rules, 2001/2002/2004. But the assessee claimed that they are eligible for availing the Cenvat credit in view of Rule 6(3)(b) of the Cenvat Credit Rules, 2004, as they had paid the amounts specified under the said rule at the time of clearance of the final product. However, the Commissioner of Central Excise upheld the department’s plea with regard to wrongful availment of Cenvat credit, except for a sum of Rs. 37,725/- for the month of June, 2001 for which demand was dropped. The Commissioner of Central Excise was of the view that out of 19 inputs, 16 inputs were exclusively used in the manufacture of exempted goods and therefore in respect of 16 exclusive inputs, the assessee is not entitled to avail the Cenvat credit, as it is relatable to usage in the manufacture of exempted goods, and therefore Rule 6(1) should come into play and the Cenvat credit availed thereon should be reversed. The assessee’s plea that they did not maintain separate accounts of inputs used in the manufacture of exempted goods and goods cleared on payment of duty and therefore the rule that is applicable to them will be Rule 6(3) and not Rule 6(1), did not find favour with the Commissioner of Central Excise and accordingly, the Commissioner of Central Excise, Chennai, passed the following order on 15-3-2007:-
“1. I confirm an amount of Rs. 88,21,936/- (Rupees eighty eight lakhs twenty one thousand nine hundred and thirty six only) out of Rs. 88,59,661/- and an amount of Rs. 1,19,128/- (Rupees one lakh nineteen thousand one hundred andtwenty eight only) as Education Cess demanded vide show cause Notice No. 86/2005, dated 16-12-2005), being the undue credit availed during the period from 1-7-2001 to 29-11-2005 and I also confirm an amount of Rs. 34,31,162/- (Rupees thirty four lakhs thirty one thousand one hundred and sixty two) and an amount of Rs. 68,623/- (Rupees sixty eight thousand six hundred and twenty three only) as Education Cess, being the undue credit availed during the period from 30-11-2005 to 31-10-2006, issued vide this office file references of even no., under Rule 12 of Cenvat Credit Rules, 2001/2002 and Rule 14 of Cenvat Credit Rules read with proviso to sub-section (1) of Section 11A of the Central Excise Act, 1944.
I order payment of appropriate interest on the above amount demanded, under Section 11AB of the Central Excise Act, 1944.
I impose a penalty of Rs. 1,24,40,849/- (Rupees one crore twenty four lakhs forty thousand eight hundred and forty nine only) under Section 11AC of the Central Excise Act, 1944 equivalent to duty demand confirmed in SI. No. 1 above.”
Aggrieved by the above, an appeal was filed by the assessee before the Tribunal and the Tribunal, on a detailed consideration of the facts, came to hold on fact that the assessee did not maintain separate accounts in respect of inputs intended for use in the manufacture of exempted final product and those intended for use in the manufacture of dutiable final product and therefore the assessee paid 8% or 10%, as the case may be, on the sale price including taxes etc., on the exempted goods in terms of Rule 6(3) of the Cenvat Credit Rules, 2001/2002/2004. Hence, the present civil miscellaneous appeal.

Reasoning of Judgment:-Heard the learned counsel for the parties.
The allegation of the department that 16 out of 19 components were used exclusively in the manufacture of exempted gear motor assembly for supply to M/s. NEPC India Limited, was found to be erroneous as, on the contrary, a specific finding has been given by the Tribunal that for the period between 16-5-2005 and 31-10-2006, as there were invoices indicating the clearance of final product without payment of duty and the invoices issued to other customers for identical product indicated the clearance on payment of duty, it held that both the categories of invoices covered the clearance of identical goods in which the inputs mentioned in Serial Nos. 1 to 16 had been consumed and thereby a finding has been rendered on fact that the identity of inputs in Serial Nos. 1 to 16 could not be exclusively established in respect of the exempted final product that is supplied to M/s. NEPC India Limited. When the finding of fact is that the imported inputs were used by the assessee in respect of exempted goods as well as the goods cleared on payment of duty, the Tribunal came to hold that it is a case falling under Rule 6(3)(b) of the Cenvat Credit Rules, 2001/2002/2004. Once there is a finding of fact that the case of the first respondent falls within the provisions of Rule 6(3)(b) of the Cenvat Credit Rules, 2001/2002/2004, we now proceed to understand the scope of the said rule, which reads as follows :-
“6.(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 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 services), except inputs intended to be used as fuel, 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.)
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer (or the provider of output service), opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely :-
(a) …………
(i) to (vii) ………
(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight (ten) per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory;
(c)……….
Explanation I & II…….
(4) to (6)………”(emphasis supplied)
Rule 6(3) starts with a non obstante clause, which says that notwithstanding anything contained in sub-rules (1) and (2), the manufacturer opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely under clause (a), which we are not concerned, as the goods are not falling thereunder. The present case falls under clause (b) of sub-rule (3) of Rule 6, which clearly states that the manufacturer shall pay an amount equal to ten per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. If the inputs are exclusively used in the manufacture of exempted goods, then, the provisions of Rule 6(1) would apply. But when there is a specific finding on fact that the inputs had been used by the assessee in respect of exempted goods as well as the goods cleared on payment of duty, the department’s plea that the 16 components in Serial Nos. 1 to 16 were used exclusively as inputs in the manufacture of exempted goods, fails and there is no dispute by the Revenue on this finding of fact. Once it is held that the assessee did not opt to maintain separate account of inputs intended both for use in the manufacture of exempted final product and of dutiable final product and has opted to pay to the Revenue such amount as provided under Rule 6(3)(b) of the Cenvat Credit Rules, they are entitled to avail the Cenvat credit. On a reading of Rule 6(1) and Rule 6(3), we also find that the assessee in this case, who had opted not to maintain separate account of inputs in respect of the two categories of clearances, would be entitled to avail the Cenvat credit, if they paid the amount in terms of Rule 6(3)(b) and there can be no other interpretation on the admitted fact as above. The Tribunal was at pains to interpret Explanation III to sub-rule (3) of Rule 6, which was added vide Notification No. 27/2005-C.E. (N.T.), dated 16-5-2005, and the same reads as follows :-
“Explanation III. For the removal of doubts, it is hereby clarified that the credit shall not be allowed on inputs and inputs services used exclusively for the manufacture of exempted goods or exempted services.”
We have also noticed that the Tribunal relied upon the decision in Hetero Labs Ltd. v. Commissioner of Central Excise, Hyderabad [2005 (192) E.L.T. 716 (Tri.-Bangalore)], where an identical claim was made under the erstwhile Central Excise Rules to clarify that the Cenvat credit shall not be allowed for inputs used exclusively in the manufacture of exempted goods and held that in the present case, Explanation III will not get attracted. Rightly so, because Explanation III did not override Rule 6(3)(b), as it only clarified that credit will not be allowed on inputs used exclusively in the manufacture of exempted goods, which is not the fact in the present case, as has been found by the Tribunal that the inputs viz. Serial Nos. 1 to 16 had been used in the manufacture both in respect of exempted goods as well as goods cleared on payment of duty and no separate account is maintained. Therefore, we find that Explanation III is of no avail to the department on the facts of the present case. Therefore, on the first substantial question of law, we concur with the finding of the Tribunal that the first respondent-assessee in this case has shown on facts that the inputs on which Cenvat credit was availed had been used in the manufacture both in respect of exempted goods as well as goods cleared on payment of duty, however, they did not maintain separate account of inputs, which is a pre-requisite in terms of Rule 6(3) and having satisfied the conditions enumerated in the said rule, they are entitled to avail the credit. Accordingly, the first substantial question of law is answered against the Revenue and in favour of the assessee.
On the second substantial question of law, we hold that the assessee has not availed Cenvat credit on the inputs used exclusively in the manufacture of exempted final product. On the contrary, the finding of the Tribunal, which is not disputed by the department, is that the inputs have been used in the manufacture both in respect of exempted goods as well as goods cleared on payment of duty without maintaining separate accounts. Since we have held that it is a case falling under Rule 6(3)(b), Rule 6(1) does not get attracted to the facts of the present case. Therefore, the second question is also answered against the Revenue and in favour of the assessee.
In our view, the third substantial question of law is totally misconceived. Nevertheless, we hold that a question of law need not be framed on a decision of the Tribunal only on the ground that it has not reached finality. On the contrary, it has been now pointed out that the decision rendered by the Tribunal at Delhi in Life Long Appliances Ltd. v. Commissioner of Central Excise, Delhi-III, 2000 (123) E.L.T. 1110 (Tri.-Delhi) on an identical issue was tested before the Supreme Court in Civil Appeal No. 5660 of 2000 at the instance of Commissioner of Central Excise, New Delhi and the Supreme Court passed the following order on 9-3-2006 :-
“Heard the learned Senior Counsel for the appellant and the learned Counsel for the respondent. We have perused the order impugned in this appeal. The Tribunal as a matter of fact held that the appellant has satisfied the requirement of not taking Modvat credit on the inputs used in the manufacture of exempted goods and therefore their case is specifically covered by Rule 57CC as well as the decision in Chandrapur Magnet Wires (P) Ltd. v. Collector of C.Ex., Nagpur reported in 1996 (81) E.L.T. 3 (S.C.) with regard to not availing Modvat credit on inputs. The impugned order, therefore, is not liable to be interfered with at the instance of the Revenue. The appeal fails and stands dismissed. No costs.”
Therefore, the third substantial question of law does not survive in the light of the decision of the Supreme Court, upholding the Tribunal’s order in Life Long Appliances Limited case cited supra.
For all the above reasons, the civil miscellaneous appeal fails and it is dismissed. No costs.

Decision:-Appeal dismissed.

Comment:-The essence of the case is that when the facts are clear that the assessee used inputs that were consumed in manufacturing dutiable and exempted goods both, then the credit reversal of 6% of the value of exempted goods cleared is sufficient. The contention that cenvat credit of inputs exclusively used in manufacture of exempted goods cannot be taken becomes irrelevant when the fact that such inputs were used both in dutiable and exempted goods is undisputed.

Prepared By: Meet Jain

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PJ/CASE LAW/2015-16/2767

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