Intention to use capital goods in manufacture of dutiable and exempted products on receipt essential factor for determining credit eligibility.

Case:-BRINDAVAN BEVERAGES PVT. LTD. VERSUS COMMISSIONER OF C. EX., MEERUT
Citation:- 2014(310) E.L.T.398 (Tri. Del.)
Brief facts:-The appellant having their manufacturing unit at Bareilly are engaged in manufacture of Fruit pulp based drinks being sold under the brand name - ‘MAAZA’ as well as aerated waters chargeable to Central Excise duty. During the period from September 2004 to August 2005, the appellant installed certain machinery in one of their plants, which was being used exclusively for manufacture of MAAZA which was fully exempt from duty. In respect of this machinery, they took capital goods Cenvat credit of Rs. 1,64,08,716/-. Their unit was visited by the Jurisdictional Central Excise officers sometime in January 2006 and it came to the officer’s notice that the machinery, in question, in respect of Cenvat credit as mentioned above had been taken, was being used exclusively in the manufacture of fruit pulp based soft drink named MAAZA, which is fully exempt from duty and on this basis it appeared that in terms of Rule 6 (4) of Cenvat Credit Rules, 2004, the appellant would not be eligible for capital goods Cenvat credit in respect of this machinery. Inquiry was made with Shri K.K. Chandrakar, General Manager of the appellant company, who in his statement dated 5-1-2006 stated that they are having 5 plants out of which 3 plants produced only dutiable goods, one plant can manufacture only exempted goods and the remaining one plant, in which the machinery, in question, has been installed, can produce only exempted goods and the remaining one plant can produce both dutiable as well as exempted goods. He also stated that in respect of the plant which can produced dutiable as well as exempted goods, they have taken capital goods Cenvat credit, though this plant is being used only for manufacture of fruit pulp based soft drink - MAAZA, a fully exempted final product. He stated that they have not availed Cenvat credit in respect of the machinery installed in the other plant which is to be used exclusively for manufacture of exempted goods. According to the appellant, they started the production of aerated waters from the above-mentioned plant from the financial year 2006-2007. The Department was of the view that the appellant would not be eligible for the Cenvat credit in respect of the machinery installed for manufacture of fruit pulp based soft drink which is fully exempt from duty, as, since the installation of this machinery till 2005-2006, this machinery was exclusively used for manufacture of exempted final product. On this basis a show cause notice dated 13th March 2006 was issued to the appellant for recovery allegedly wrongly availed capital goods Cenvat credit amounting to Rs. 1,64,08,716/- along with interest and also for imposition of penalty on them under the provisions of Rule 15(2) of Cenvat Credit Rules, 2004 read with Section 11AC of Central Excise Act, 1944. This show cause notice was adjudicated by the Commissioner vide order-in-original dated 15-11-2006 by which the above-mentioned Cenvat credit demand was confirmed along with interest and penalty of equal amount was imposed on the appellant under Section 11AC.
The appellant filed an appeal before the Tribunal against the order dated 15-11-2006. The Tribunal vide final order No. 231/2008-EX, dated 1-5-2008 dismissed the appeal. Against this order of the Tribunal, the appellant filed appeal before Hon’ble Allahabad High Court under Section 35G of Central Excise Act, 1944. Hon’ble High Court vide judgment dated 24-2-2014 set aside the Tribunal’s order and remanded the matter back to the Tribunal for fresh consideration on the ground that while the Tribunal has denied the benefit of capital goods Cenvat credit on the ground that the certificate of the manufacturer of the machinery, relied upon by the appellant, also confirms that the plant is usable for manufacture of aerated waters only after modification, the perusal of the manufacturer’s certificate dated 4-1-2007 shows that in this Certificate, the manufacturers of the machinery have confirmed that the machinery, in question, installed and operating at Bareilly plant, is designed to handle carborated/aerated waters also after software changes and minor adjustment and that the manufacturers of the machinery have supplied several similar equipment which are operating at various sites across the world. Accordingly Hon’ble High Court observed that what the manufacturers of the machinery have certified is that the machinery, in question, is designed to handle carborated/aerated soft drink by software changes and minor adjustment and the certificate never said that the objective can be achieved only after modification and, as such, the certificate did not use the word ‘modification’ which has crept in the order of the Tribunal. Hon’ble High Court also observed that the appellant have now filed a certificate dated 25-9-2009 of the manufacturers of the machinery which indicates that no modification in the machinery can be done in India since it has been manufactured at Germany and had been imported into India. Accordingly, Hon’ble High Court directed the Tribunal to decide the matter afresh keeping in view the above observations and also taking into account the certificate dated 25-9-2009 produced by the appellant before Hon’ble High Court.

Appellants contentions:-Shri A.P. Mathur and Shri Jitendra Bharti, Advocates, the learned Counsels for the appellant, pleaded that the machinery. In question, installed during September 2004 to August 2005 period were meant for being used for manufacture of fruit pulp based soft drink (MAAZA) as well as aerated waters, that for this reason only, the capital goods Cenvat credit in respect of the machinery, in question, has been taken, while no capital goods Cenvat credit had been taken in respect of the machinery installed in another plant, which was to be used exclusively for manufacture of exempted goods, that the manufacture of aerated waters (dutiable final products) was started in October 2006 after minor adjustments and software changes, that no modification has been done in the machinery, that from the very beginning, the intention of the appellant was to use this machinery for manufacture of dutiable final product as well as exempted final product and, therefore capital goods Cenvat credit would be admissible and the prohibition of Rule 6(4) of Cenvat Credit Rules, 2004 would not be applicable, that earlier judgment dated 1-5-2008 of the Tribunal had been passed on the basis of wrong assumption that the machinery, in question, as such cannot be used for manufacture of aerated waters except after modification, which is a wrong assumption as is clear from the certificates of the manufacturer of machinery, that for availing capital goods Cenvat credit, when a manufacturer does not exclusively uses a machinery for manufacture of exempted final products, it is not necessary that the manufacture of exempted as well as dutiable final product should take place at the same time, that if the same machinery has been used for manufacture of dutiable final product and exempted final products at different points of time, the Cenvat credit would be admissible, that for availing capital goods Cenvat credit in respect of some capital goods received in a factory, what is relevant is as to whether at the time of receipt of capital goods, the manufacturer intended to use the capital goods exclusively for the manufacture of exempted final product or for manufacture of dutiable as well as exempted final products both and in the latter case, the Cenvat credit would be admissible even if at the time of receipt of the capital goods the same are used for manufacture of exempted final product, that the judgment of the Tribunal in the case of CCE, Indore v. Surya Roshni Ltd. reported in 2003 (155)E.L.T.481 (Tri. - Del.)is not applicable to the facts of this case, as in that case, M/s. Surya Roshni Ltd. had not filed any declaration by which it could be gathered that at the time of receipt of the machinery, they had intention to use the same for manufacture of dutiable goods also, whereas in the case of the appellant, there is a declaration from the very beginning that they would be manufacturing dutiable goods (aerated waters) also and that in view of the above submissions, the impugned order is not correct.

Respondents contention:-Shri Amresh Jain, the learned DR, defended the impugned order by reiterating the findings of the Commissioner in it and emphasized that the machinery, in question, is meant for manufacture of fruit pulp based soft drinks (MAAZA), that it cannot be used for manufacture of aerated waters without major modification, that in any case, since at the time of receipt of the capital goods during April 2004 to August 2005 period and till September 2006, the same were being used exclusively for manufacture of MAAZA which is fully exempted goods, in view of judgment of the Tribunal in the case of CCE, Indore v. Surya Roshni Ltd. (supra), they would not be eligible for Cenvat credit, as the eligibility for Cenvat credit of the capital goods received by an assessee is determined on the basis as to whether at the time of receipt of the capital goods, the same were being used exclusively for manufacture of exempted final product or the same were being used for manufacture of dutiable final products, that the judgment of the Tribunal in the case of CCE, Indore v. Surya Roshni Ltd. (supra) has been affirmed by the Apex Court vide judgment reported in 2003 (158) E.L.T. A273 (S.C.) by which the appeal filed by the appellant was dismissed, that the Tribunal’s judgment in the case of CCE, Indore v. Surya Roshni Ltd. (supra) has been further affirmed by Larger Bench judgment of the Tribunal in the case of Spenta International Ltd. v. CCE, Thane reported in 2007 (216)E.L.T.133 (Tri. - LB), wherein the Tribunal has held in clear terms that eligibility of the capital goods for Cenvat credit in respect of any capital goods received by an assessee is to be determined with reference to the dutiability of the final products on the date of the receipt of the capital goods and that in view of the above submissions, there is no infirmity in the impugned order.

Reasoning of judgment:- In the present case the capital goods had been received during period from September 2004 to August 2005 when the Cenvat credit had been taken and according to the appellant at that time, they had intention to use these goods for the manufacture of fruit pulp based soft drink (exempted goods) as well as for manufacture of aerated waters (dutiable goods) and for this reason only, they had availed capital goods Cenvat credit, while initially using the machinery only for manufacture for the exempted final product. This aspect has to be verified on the basis of records. If the appellant at the time of receipt of the capital goods during September 2004 to August 2005 period, had filed any declaration to the Department or had sent some letter to the Department intimating that they would be using this machinery for manufacture of dutiable final product (aerated waters) as well as exempted final product (the fruit pulp based soft drinks), or there is any other evidence indicating that at the time of receipt, the appellant had plans to use the machinery, in question, for manufacture of dutiable as well as exempted final products [like the machinery, without any modification, being capable of manufacture of both the dutiable final products (aerated/carborated waters) as well as exempted final products (MAAZ) along with declaration/intimation of dual use], they would be eligible for Cenvat credit. In this regard, as per the directions of Hon’ble Allahabad High Court in its order dated 24-2-2014, the manufacturer’s certificates certifying that the machinery, in question, can also manufacture Aerated waters after some minor adjustment and software change, may also be examined. But if there is no such evidence, it would have to be presumed that at the time of receipt, they had plans to use the capital goods, in question, only for manufacture of the fruit pulp based soft drinks (exempted final product) and it is only subsequently they decided to switch over to manufacture of dutiable final product (aerated waters) and in that event, in accordance with the Tribunal’s judgment in case of Surya Roshni Ltd. (supra) and Spenta International Ltd. (supra), they would not be eligible for Cenvat credit. Accordingly, the impugned order is set aside and the matter is remanded to the Commissioner for denovodecision, keeping in view the above observations. The appeal stands disposed of, as above.

Decision:-Appeal allowed by way of remand.

Comment:- The essence of the case is that according to rule 6(4) of Cenvat credit, the credit can be denied only when the capital goods are used solely for the manufacture of exempted goods and not when they are used for dutiable as well as exempted final products and the important fact that is to be examined is the intention of the manufacturer to use the said capital goods at the time of their receipt in the factory premises. Although, this decision is favourable to assessee but at times it may be extremely difficult to prove that there was intention to manufacture both dutiable and exempted products.
Prepared by:- Neelam Jain

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