Reversal of duty in case of manufacturing of both dutiable as well as non-dutiable goods even when duty is paid on exempted goods?

PJ/Case Law /2016-17/3384

Case- AVON CYCLES LTD. Versus COMMR. OF C. EX., LUDHIANA
Citation- 2016 (341) E.L.T. 305 (Tri. - Chan.)
Brief Facts- The facts in brief are that the assessee is manufacturing e-bikes. The same has been imported by the assessee and cleared the same on payment of duty. By way of Notification No. 25/2008, dated 29-4-2008, the e-bikes were exempted from levy of duty, but the assessee preferred to pay 10% value of the e-bikes on their clearance even after exemption notification on the premise that as assessee is manufacturing both e-bikes and parts thereof and parts are dutiable and assessee is not maintaining separate account of inputs of dutiable as well as exempted final products, therefore, as per Rule 6(3) of the Cenvat Credit Rules, 2004, the assessee is required to reverse 10% of the value of the exempted goods. The Revenue is of the view that as assessee is manufacturing e-bikes which has been exempted from levy of duty on 29-4-2008, therefore, they are not liable to pay duty on e-bikes and the Cenvat credit lying in their Cenvat account on 29-4-2008 shall lapse in terms of Rule 11(3) of the Cenvat Credit Rules, 2004. In these set of facts various show cause notices were issued to the assessees to deny Cenvat credit lying in their Cenvat account on 29-4-2008 as per Rule 11(3) of the Cenvat Credit Rules, 2004 and sought to demand duty on the e-bikes parts cleared by the appellant after 29-4-2008. The show cause notices were adjudicated, the adjudicating authority confirmed the demand along with interest and penalties were also imposed. Some of the said orders were challenged by the assessee before the Commissioner (Appeals) who granted relief to the assessee. Aggrieved from the order of Commissioner (Appeals) Revenue is before us and aggrieved from the adjudication order, the assessee is before Commissioner.

Appellant’s Contention- Ld. Counsel for the assessee submits that the assessee is importing e-bikes in CKD condition and filing bills of entry thereof and procuring battery to run these e-bikes from indigenous market and clearing both as e-bikes and spares. As the assessee is clearing e-bikes and spares, in that circumstances the allegation of the Revenue is not sustainable as appellant is clearing e-bikes and parts thereof. Admittedly, w.e.f. 29-4-2008 e-bikes became exempt from duty but parts remain to be dutiable and the assessee was not maintaining separate account of dutiable as well as exempted goods, therefore, the assessee was paying 10% of the value of e-bikes at the time of their clearance and clearing parts of e-bikes on payment of duty by utilising their Cenvat account. In that circumstances, the allegation of the Revenue is not sustainable that the credit lying in their Cenvat account on 29-4-2008 shall lapse in terms of Rule 11(3) of the Cenvat Credit Rules, 2004.

Respondent’s Contention-On the other hand, ld. DR submits that the assessee was manufacturing only e-bikes and same has become exempted. In the registration certificate also the appellant has shown that they are manufacturing e-bikes, in that circumstances the Cenvat credit lying in the Cenvat credit account on 29-4-2008 shall lapse in terms of Rule 11(3) of the Cenvat Credit Rules, 2004. Therefore, duty is demandable on clearance of parts of e-bikes by the assessee.
Reasoning of Judgement- The facts of the case are not in dispute that assessee is importing e-bikes in CKD condition and clearing the same along with indigenously procured battery and paying duty thereon. Therefore, the e-bikes has became exempt from duty w.e.f. 29-4-2008. It is also admitted fact that as assessee was not maintaining separate account of inputs, therefore, the assessee start paying 10% of the value of e-bikes as per Rule 6(3) of the Cenvat Credit Rules, 2004 on their clearances. In that circumstances, Revenue cannot allege that the Cenvat credit lying in their Cenvat account on 29-4-2008 shall lapse as assessee is clearing e-bikes and parts prior to 29-4-2008 on payment of duty. The ld. Commissioner (Appeals) has also observed the same in the impugned order which is reproduced as under :
“ I have carefully gone through the records of the appeals as well as the submissions made by the appellants in the grounds of appeals. The issue involved in both the appeals is identical therefore, these are being taken up for disposal under this common order. The main issue required to be deliberated upon is whether the accumulated credit lying their RG-23A Part-II accounts stands lapsed after the E-bikes were exempted from payment of duty under Notification No. 25/2008-C.E., dated 29-4-2008 effective from 29-4-2008. Department is of the view that since E-bikes are exempted w.e.f. 29-4-2008, therefore, credit lying in Appellants RG-23A Part-II stood lapsed in view of Rule 11(3)(ii) of the Credit Rules. On the other hand appellants have argued that they are manufacturing two products namely E-bikes and parts of E-bikes. The latter gets manufactured as per Section 2(f)(iii) of the Act read with Third Schedule to the Central Excise Act and Notification No. 2/2006-C.E. (N.T.), dated 1-3-2006 or Notification No. 14/2008-C.E. (N.T.), dated 1-3-2008. Notification No. 49/2008-C.E. (N.T.), dated 24-12-2008. Appellants have also argued that credit accumulated, due to higher credit admissible on inputs and less duty leviable on E-bikes, over a period of time and discharging of liability as per Rule 6(3) by the Appellants was correct and in accordance with prescribed law.
Adjudicating authority in paras 4.7 and 4.4 of the impugned orders, both dated 30-9-2010, has held that registration granted to the Appellants on 5-2-2007 was mentioning only E-bikes, falling under Central Excise Tariff Heading 8711 90 91 as their manufactured product, therefore, it cannot be considered that appellants were manufacturing E-bikes parts. In this regard, appellants has furnished a copy of their registration application, marked as Annexure-K to the appeal memorandum Serial No. 14 of this application and the declaration made by the Appellants while obtaining Central Excise Registration, is as follows :
“ Major excisable goods manufactured, warehoused or traded (description and CETSH) (Please see instruction No. 15)
(i) ELECTRICALLY OPERATED BIKES (E-BIKES) CH. HEADING 8711 90 91 (ii) __________ (iii) _________”
From the above proforma and declaration given by the Appellants, it is clear that this part of the registration proforma requires declaration of major excisable goods manufactured by the Appellants. However, it does not mean that declaration made by the Appellants only means electrically operated bikes (e-bikes) falling under Central Excise Tariff Heading 8711 90 91 are manufactured by them. Appellants have also enclosed Form ER-1 with their appeal memorandum which is a monthly return for production and removal of goods for the month of March, 2009. ER-1 filed by the appellants with the department, clearly indicates e-bikes parts, falling under Central Excise Tariff Heading 8714, cleared during the relevant period along with the rate of duty and amount of duty paid in the relevant columns of ER-1 returns filed. Further, the returns filed by the appellants indicate the quantity manufactured, quantity cleared and the assessable value. In view of the above factual details, it cannot be said that Appellants were not manufacturing e-bikes parts, falling under Central Excise Tariff Heading 8714, during the relevant period. Therefore, findings of the Adjudicating Authority that only e-bikes were manufactured and no other dutiable product was manufactured by the Appellants is not factually correct. Further, the batteries for E-bikes were become imported as e-bikes in CKD condition as observed from the bills of entry relied upon by the appellants. As no separate accounts were maintained by the Appellants for common inputs, therefore they were required to discharge amounts as per Rule 6(3) of the Credit Rules for common inputs. It is established that Appellants were clearing e-bikes parts on payment of Central Excise duty deemed manufactured goods then it has to be held that parts imported by the Appellants during the relevant period used for manufacturing both excisable e-bikes parts and fully exempted e-bikes, e-bike parts were always subjected to duty as deemed manufacture before and after issue of Notification No. 25/2008-C.E., dated 29-4-2008. It is also validly put forth by the appellants as per proviso 3(vi) above that credit lying in the statutory records was not exclusively from the parts lying in finished goods or works in progress or those lying as such on 29-4-2008 but also include accumulated credit for the earlier period because the duty on e-bikes was leviable @ 8% whereas Cenvat credit on parts was admissible @ 21% adv., which lead to accumulation of Cenvat credit in statutory records.
However, as per para 3(iii) above appellants started importing e-bikes in CKD condition w.e.f. 1-7-2008 vide Bill of Entry No. 531, dated 1-7-2008. It means parts in CKD condition which distinguished from other common parts like batteries, etc. The CKD parts were, therefore distinguishable and relatable to the finished e-bikes. The credit with respect to such CKD part lying as such or in works-in-progress or those contained in the finished e-bikes as on 29-4-2008 was required to be reversed under the Credit Rules. To that extent impugned order is required to be upheld along with interest due under Section 11AB of the Act. The remaining credit lying in their accounts as on 29-4-2010 on account of accumulated credit or due to common inputs cannot be treated to have lapsed on 29-4-2010 under Rule 11 of the Credit Rules.
Based on the above observations, the appeals filed by the Appellants are required to be allowable partially on merits. However, no penalty is imposable upon the appellants in this case because the entire facts were known to the department and proper ER-1 returns were also filed with the department indicating payment on duty on clearance of e-bikes part. Therefore, there was no suppression or misstatement on the part of the Appellants to evade any duty”.
We do agree with the observations made by the ld. Commissioner (Appeals) and hold that as assessee was not maintaining separate account for inputs used in manufacturing of e-bikes and parts thereof, therefore, provisions of Rule 6(3) are squarely applicable to the assessee as the assessee is manufacturing both dutiable and exempted final product and assessee is liable to pay 10% of the value of e-bikes at the time of their clearance and the Cenvat credit lying in their Cenvat account shall not lapse wholly but the Cenvat credit lying in their Cenvat account attributable to inputs, work in progress and finished e-bikes shall lapse. As we hold that the provisions of Rule 6(3) are applicable to the facts of the present case. Therefore, we hold that provisions of Rule 11(3) of the Cenvat Credit Rules are not applicable to the facts of the present case. In these circumstances, the appeals filed by assessee are allowed and appeals by the Revenue are dismissed.

Decision- Appeal allowed.
Comment- The gist of the case is that the assessee is manufacturer/supplier of both dutiable and non dutiable goods and not maintaining separate records therefore rule 6(3) is applicable and assessee is correctly following the provision by reversing 10% of value of exempted goods on their clearance.
According to rule 11 3 (ii), the accumulated credit should only lapse when final product has been exempted absolutely under section 5A of the Act but in the present case only e-bikes have been exempted and not the parts thereof. Therefore accumulated credit shall not lapse but the Cenvat credit lying in their Cenvat account attributable to inputs, work in progress and finished e-bikes shall lapse.
Prepared by- Akshit Bhandari

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PJ/Case Law /2016-17/3384

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