No prohibition to avail capital goods credit when both dutiable and exempted goods are manufactured.

Case:- GARUDA COTEX SHADES LTD. Versus COMMISSIONER OF CENTRAL EXCISE , SURAT

Citation:- 2012 (284) E.L.T. 716 (Tri. – Ahmd.)

Brief Facts:-The brief facts that arise for consideration are that the main appellant company is a manufacturer and is engaged in processing, involving bleaching and dyeing of 100% cotton yarn, on their own account as well as on job work basis for other manufacturers and are registered with the Excise authorities. A search was carried out in the factory premises of the appellant, on a follow-up of operation which was directed against M/s. Sheena Textiles (100% EOU), Surat. After scrutiny of the documents which were recovered during the search, after recording of the statement, it was found that the main appellant herein had contravened the provisions of Central Excise Act and Rules made thereunder inasmuch as they did not pay the Excise duty of the goods which were cleared from the factory premises and recovered the amount in cash from their buyers and they availed the CENVAT Credit on capital goods, which was otherwise not available to them as on the date of receipt of the goods, the manufacturing process and the manufactured product were not excisable goods. Based upon such a conclusion, a Show Cause Notice was issued to the appellant. The appellant and other two appellants contested the Show Cause Notice on the merits of the case as well as on limitation. The adjudicating authority did not agree with the contentions raised by the appellant and confirmed the demand and imposed penalty on the appellant company and also imposed personal penalties on the individuals.

Appellant Contention:-The Appellants submit that the appellants are not seriously contesting the demand due to smallness of the amount. However, they pray for setting aside the penalty imposed under Section 11AC on the ground that the undervaluation is not on account of any suppression of facts, or wilful statement, collusion or fraud. As regards denial of CENVAT credit on the capital goods, it is his submission that the appellant had purchased these capital goods during the year 1998-1999, 1999-2000 and 2001-2002. It is his submission that during the relevant period, the appellants were engaged in processing of dyed cotton yarn and the finished goods manufactured by the appellant were exempt from payment of duty till February 2003. It is his submission that w.e.f. 1-3-2003, the said product became dutiable. It is his submission that prior to 1-3-2003, the appellants were also processing the goods on job work basis for operating under Notification No. 214/86-C.E. and after processing were sent to the principal manufacturer who undertake to pay the duty on the finished goods manufactured by the said principal manufacturer. It is his submission that the appellants were under a bona fide belief that the goods manufactured by them in their own capacity is exempt from payment of duty, did not avail the credit of Excise duty, paid on capital goods purchased during the period 1998-1999 to 2002-2003, though the goods manufactured on job work basis were liable to duty. After the product became dutiable, they filed a declaration with a specified period as per Rule 57J of Central Excise Rules, 2000/CENVAT Credit Rules, 2004 was prescribed, with the jurisdictional officers. It is his submission that the capital goods which were procured by the appellant were used also for the purpose of job work during the relevant period wherein the appellants have cleared the said goods on job work basis to principal manufacturer. It is his submission that it cannot be said that the said capital goods were used only for exempted product manufactured by them. He would submit that the adjudicating authority in Para 32 of the impugned order has specifically held that the CENVAT Credit of the inputs used in the manufacture of the goods on job work basis is allowed as the principal manufacturer is discharging the duty. It is his submission that the same analogy needs to be applied also to the capital goods credit. He would submit that the Larger Bench decision of the Tribunal in the case of Sterlite Industries (I) Ltd. - 2005 (183) E.L.T. 353 (LB), will be applicable in this case. It is his submission that the Larger Bench has settled the law that the goods which are cleared on job work basis and if the same are utilized by the principal manufacturer and manufactured further goods on which the Excise duty is discharged, it cannot be said that the goods manufactured on job work basis are exempted goods. He would submit that Hon'ble High Court of Bombay in the appeal filed by the Revenue in the case of Sterlite Industries (I) Ltd. - 2009 (244) E.L.T. A89 (Bom.) upheld the decision. It is also his submission that the co-ordinate Bench of the Tribunal in the case of Patel Alloys Steel Pvt. Ltd. - 2011 (269) E.L.T. 398 (Tri.-Ahmd.), has held that the credit cannot be denied on capital goods to the assessee who is carrying out the process of job work under Notification No. 214/86-C.E. It is his submission that the adjudicating authority has not properly dealt this issue in the impugned order. It is his submission that the depreciation, though was claimed earlier by the appellant, subsequently the Income Tax Officer has added the same for the purpose of arriving at the Income Tax liability of the appellant which, in turn, would indicate that the appellant has not availed the depreciation of the Excise duty paid on capital goods. It is his submission that the CENVAT credit of the capital goods was availed on 30-4-2004, is barred by limitation as the appellants have filed ST-3 returns and the information along with the declaration while availing the CENVAT credit.

Respondent Contention:-Respondent submit that the appellant was manufacturing dyed cotton yarn, which was fully exempted from payment of duty till 31-3-2003. It is his submission that the capital goods were installed during the year 1998-1999 to 2001-2002 and the goods manufactured from such capital goods were fully exempt. It is his submission that the provisions of Rule 6(4) of Cenvat Credit Rules, 2002 would be applicable and the appellants are not eligible for CENVAT credit as the capital goods were used in the manufacture of exempted goods only. For this proposition, he would rely upon the decision of Larger Bench of the Tribunal in the case of Spenta International Ltd. - 2007 (216) E.L.T. 133 (Tri.-LB). It is his submission that the appellants had claimed depreciation of the Central Excise duty paid on such capital goods and as such is not eligible to claim CENVAT credit as per Rule 4(4) of Cenvat Credit Rules, 2002. It is his submission that the appellant has taken the depreciation of the Excise duty paid on the capital goods during the year when the same was purchased, they are deprived from availing CENVAT credit of Excise duty paid on capital goods.

Reasoning of judgment:-Tribunal has given due consideration to the submissions made by both sides and perused the records. The undisputed facts are that the appellants were manufacturers, engaged in processing, involving bleaching and dyeing of the cotton yam for their own goods and also were engaged in job working of the same for various principal manufacturers. It is also undisputed that the appellant, during the relevant period, working as job worker for the principal manufacturer, were using the job work challans/annexures for the purpose of such job work. It is also undisputed that the appellants were utilizing the CENVAT Credit of the inputs which were consumed/used by them during the relevant period for the manufacturing of the goods under job work for the principal manufacturer. It is also undisputed that during the relevant period, they received the capital goods, but did not avail the CENVAT credit of Excise duty paid on such capital goods till 30-4-2003 when their own final products became dutiable with effect from 1-4-2003. As regards the demand of duty liability, interest thereof, we find that the issue is regarding under-valuation and the appellants are not seriously contesting the said demand. Since the appellants are not seriously contesting the demand, the impugned order to that extent is upheld and the appeal filed by the appellant to that extent is rejected. We hold that the appellant is liable for the duty and interest thereof. As regards the penalty imposed on such an amount, we find that the penalty has been correctly imposed on the appellant as they did not discharge the duty liability during the relevant period. As regards denial of CENVAT credit of the Central Excise duty paid on the capital goods, we find that the said capital goods were purchased during the period 1998-1999 to 2001-2002. It is also on record and undisputed that during the relevant period, the appellant was also availing CENVAT credit of inputs which were procured on payment of duty for the purpose of completing the job work of the goods received from the principal manufacturer. We find that the adjudicating authority's findings for denial of CENVAT credit on the capital goods is based only on the ground that the final product manufactured by the appellant during the relevant period was exempted and they could not have availed the CENVAT credit of Excise duty paid on capital goods. We find that the adjudicating authority has totally mis-directed his findings on this point. We reproduce the findings of the adjudicating authority in the Paragraph 32, which reads as under:

"Further, I find that I do not find any justification that the goods manufactured by Job worker basis are exempted goods. Notification No. 214/86-Cus., dated 25-3-1986 as amended was issued for saving the processor from paying the duty as the duty was intended to be recovered from the parent manufacturer and not from the processor, who is operating, manufacturing or processing on behalf of the parent manufacturer. It is the parent manufacturer who is to discharge duty liability on the goods which he gets manufactured/processed on his behalf from a job worker i.e. processor. Thus, I find that the goods manufactured/processed by job worker on behalf of the parent manufacturer who ultimately pays the duty on the goods does not fall under the purview of exempted goods or goods chargeable to Nil rate of duty. Thus, the situation as envisaged is totally inapplicable in terms of Rule 6(2) of CENVAT Credit Rules, 2002 in relation to the concept of exempted goods."

It can be seen from the above reproduced paragraph that the adjudicating authority in one breath holds that the Central Excise duty paid on the inputs which are utilized for manufacturing of job work goods, is eligible to the appellant as such goods which are manufactured under job work are not exempted. At the same time, he denies the CENVAT credit of the Excise duty on the capital goods, holding that the capital goods were used only for exempted goods manufactured by them. It is undisputed fact in this case that the said capital goods/machinery which is used for manufacturing of final product of the appellant was also used for manufacturing of the job work goods for the principal manufacturer. We are unable to understand the conclusion of the adjudicating authority on this point. If the job work is considered as non-exempted and the CENVAT credit is allowed on the inputs which are used on such job work items, we do not find any valid reason to deny the CENVAT credit of Central Excise duty paid on capital goods, which were received by the appellant during the relevant period and used in the manufacturing of very same job worked goods. We find strong force in the contentions raised by the ld. Counsel as to that the decision of the Larger Bench of the Tribunal in the case of Sterlite Industries (I) Ltd. (supra), has categorically settled the law as to that if an assessee is functioning under Notification No. 214/86-C.E. and if the ultimate principal manufacturer is discharging Central Excise duty liability after consumption of job worked goods, it has to be held that the said notification does not exempt the goods manufactured on job work by an assessee. The said ratio will fully cover the issue in favour of the assessee in this case, as regards the eligibility to CENVAT credit of the Central Excise duty on the capital goods, as it is undisputed that the appellant was using the said capital goods for manufacturing of his own product as well as the goods which were manufactured on job work basis under the provisions of Notification No. 214/86-C.E. It is settled law that if the capital goods are used for manufacturing of exempted goods as well as the goods which are liable to duty, then there cannot be any denial of CENVAT credit of Central Excise duty paid on the capital goods. Another reason given by the adjudicating authority for denial of CENVAT credit to the appellant is on the ground that the appellant had availed the benefit of depreciation of Central Excise duty paid under Income Tax Act. On perusal of the records, we find that the appellant had claimed depreciation in respect of the Excise duty on capital goods, but, they filed a revised income tax return. The Income Tax Officer vide assessment order as enclosed at Pages 6 to 11 of the compilation, the revised returns were not accepted and were discarded, but at the same time, Income Tax Officer added back the depreciation claimed by the appellant on the Central Excise duty on the ground that the same is not admissible to them as credit under Central Excise provisions has been claimed by the appellant. This would legally mean that the appellant had not claimed the benefit of depreciation as well as CENVAT credit on the Central Excise duty paid on the capital goods. This factual matrix is not rebutted by the Department in any way. Accordingly, in view of the foregoing, it is held that the impugned order to the extent it is confirming the demand of Central Excise duty of CENVAT Credit availed by the appellant on the capital goods is liable to be set aside. As regards the penalties imposed on the appellant as well as the individuals, it is found that as bulk of the demand is being set aside on the merits of the case itself, there is no reason for visiting the appellant with penalties under any Section or Rules. Since Tribunal has disposed off the appeals on merits of the case, they have not recorded any finding on the issue of limitation. All the appeals are disposed off as indicated hereinabove

Decision:-Appeal Disposed off.

Comment:-The essence of this case is that when it is concluded that intermediate goods manufactured by the job worker that are used by the principal manufacturer in clearance of final dutiable goods cannot be considered as “exempted goods” and so inputs credit is admissible to the job worker; then credit on capital goods that are being used in such job work will also be available even when the job worker clears some of its exempted products because there is no bar in availing capital goods credit when both dutiable and exempted goods are manufactured.

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PJ/case Laws/2012-13/1424

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