The separate inventory is essential for dutiable and exempted products.

PJ/Case law/2014-15/2226

Case:- M/s LAKSHMI STEEL ROLLING MILLS Vs COMMISSIONER OF CENTRAL EXCISE, LUDHIANA

Citation:-2013-TIOL-1536-CESTAT-DEL

Brief Facts:- The facts giving rise to this appeal are, in brief, as under.

The appellant were manufacturers of non-alloy steel rounds and MS bars chargeable to Central Excise duty under Chapter 72 of the Central Excise Tariff. During the period of dispute they were availing SSI exemption 8/2003-CE. However, throughout during the period of dispute, they were manufacturing branded goods i.e. the goods bearing the brand name of other person in respect of which they were paying duty and availing Cenvat credit.
On scrutiny of ER-3 returns filed by the appellant it was found that while their Cenvat credit balance as on 31/3/07 was nil, as at that time they had reversed the entire Cenvat credit in respect of inputs including the inputs meant for manufacture of branded goods as per the provisions of Rule 11 (2) of Cenvat Credit Rules, the Cenvat credit account as on 1/4/07 showed the opening balance of Cenvat credit of Rs. 3,21,569/-. The department was of the view that once the appellant had reversed this credit on 31/3/07, they cannot take the credit of this amount again on 1/4/07.
Second allegation against the appellant was that the scrutiny of ER-3 returns showed that in 2007 they had cleared 15.7 M.T. of rolled products involving duty of Rs. 59,112/- without payment of duty, claiming that duty in respect of these goods had already been paid in 2005, as in the year 2005 during the stock taking by the departmental officers, shortage of 15.70 M.T. had been detected and at that time, the appellant had paid this amount but according to the appellant this was not real shortage and the goods which were alleged to be found short in 2005 but were available in the factory, had actually been cleared in 2007. However, according to the department, the dispute of shortage of 15.7 M.T. had travelled upto the appellate Tribunal and the allegation had been upheld and hence the goods cleared in 2007 were totally different. On this count, there was duty demand of Rs. 59,112/- in respect of 15.7 M.T. of finished product alleged to had been cleared without payment of duty.
Third allegation against the appellant was that in the PLA they took credit of Rs. 5,167/- without actual payment under TR-6 challans and out of this, they had utilised Cenvat credit the credit of Rs. 1,286/-. On this basis, this amount had been demanded. However, this amount had been reversed.
After issue of show cause notice containing above three allegations, the Jurisdictional Assistant Commissioner vide order-in-original dated 17/7/09 confirmed the duty/Cenvat credit demands of Rs. 3,21,564/-, Rs. 59,112/- and Rs. 5,167/- alongwith interest and imposed equal amount of penalty on the appellant under Section 11AC. On appeal being filed to Commissioner (Appeals), the Commissioner (Appeals) vide order-in-appeal dated 16/7/10 upheld the above order in too. Against this order of the Commissioner (Appeals), this appeal had been filed.

Appellant Contention:The appellant pleaded that so far as Cenvat credit demand of Rs. 3,21,564/- was concerned, the credit had been taken in respect of inputs meant for being used in the manufacture of branded goods, to be cleared on payment of duty, that since the very beginning, the appellant were also manufacturing the goods bearing the brand name of other persons and while availing the SSI exemption in respect of unbranded goods, had been paying duty on the goods bearing the brand name of other persons, that in respect of the branded goods cleared on payment of duty, they were availing Cenvat credit to which the department never objected. For this purpose they were maintaining separate account and inventory of the inputs meant for branded goods and unbranded goods and during the period when the SSI exemption was being availed, the Cenvat credit was being taken only on the inputs were meant for branded goods. On 31/3/07, they had the stock of inputs meant for branded as well as unbranded goods and at that time for compliance with the provisions of Rule 11 (2) of Cenvat Credit Rules, they reversed the entire Cenvat credit, While at that time, out of the Cenvat credit reversed, the credit of Rs. 3,21,564/- was in respect of the inputs meant for branded goods, that it was this Cenvat credit, which was taken by them again on 1/4/07 in accordance with the provisions ofRule 3 (2) of Cenvat Credit Rules which provides that a manufacturer of final product shall be allowed to take Cenvat credit of duty paid on inputs lying in stock or in process or contained in the final products lying in the stock on the date on which any goods manufactured by the said manufacturer cease to be exempted goods or become excisable. The department's allegation that the appellant were not maintaining separate account and inventory of the inputs meant for branded and unbranded goods was incorrect. The branded goods being outside the purview of SSI exemption, as the clearances of branded goods were neither counted for determination the value of exemption during the financial year not for calculating the aggregate value of clearances of all excisable goods during previous financial year, the prohibition in para 2 (iii) of SSI Exemption Notification regarding non-availment of Cenvat credit while availing SSI exemption, was applicable only in respect of the goods which were being cleared by availing the SSI exemption and was not applicable in respect of branded goods, which were not covered by the SSI exemption and which were cleared on payment of normal duty, that in view of this, so far as the cenvat credit demand of Rs. 3,21,569/- was concerned, the same was not sustainable. As regards the duty demand of Rs. 59,112/- in respect of goods alleged to had been cleared without payment of duty, this demand was without any basis, as the duty in respect of these goods had already been paid in 2005 when the Department had wrongly alleged that these goods had been found short while the same were available, that duty in respect of the same goods could not be demanded twice. As regards taking of wrong credit in the PLA of Rs. 5,167/-, while the same was admitted, this credit had been taken due to mistake and had been utilised only to the extent of Rs. 1,286/-. This credit had already been reversed, but since its utilisation was only to the extent of Rs. 1,286/- imposition of penalty of Rs. 5,167/-under Section 11AC was not sustainable, more so, when penalty of Rs. 1,286/- had also been imposed and that in view of the above submissions, the impugned order upholding the Cenvat credit demand of Rs. 3,21,564/- duty demand of Rs. 59,112/- and upholding the penalties of Rs.3,21,564/-, Rs. 59,112/- and Rs. 5,167/- was not sustainable.

Respondent Contention:The learned Departmental Representative, defended the impugned order by reiterating the findings of the Commissioner (Appeals) in it and pleaded that so far as the Cenvat credit demand of Rs. 3,21,564/- was concerned, the appellant, as reported by the Range Officer, were not maintaining separate account and inventory of the inputs meant for branded and unbranded goods. While availing SSI exemptions, the appellant could not avail Cenvat credit even in respect of branded goods. The proviso to para 2 (iii) of the notification providing that nothing in this clause shall apply to inputs used in the manufacture of branded goods had been introduced only w.e.f. 11/2/09 and the same was not there during the period of dispute. In view of this, the Cenvat credit demand of Rs. 3,21,564/- had been correctly upheld. As regards duty demand of Rs. 59,112/-, this demand was in respect of the 15.7 M.T. of finished products cleared in 2007 without payment of duty. The goods cleared in 2007 had no link whatsoever with the alleged shortage of the same quantity detected in 2005. In that in any case, the matter of alleged shortage 15.7 M.T. of finished goods in 2005 had travelled upto the Tribunal and their allegation had been upheld by the Tribunal and the duty paid at that time was in respect of goods clandestinely cleared in 2005 and, hence, the goods of same quantity cleared in 2007 had obviously been cleared without payment of duty, and as regards the wrong credit entry of Rs. 5,167/- this credit had been taken in the PLA without pay any amount under TR-6 challans and, hence, penalty had been correctly imposed on them. She, therefore, pleaded that there was no infirmity in the impugned order.

Reasoning of Judgment:The Tribunal had considered the submissions from both the sides and perused the records. As regards the allegation of wrong Cenvat credit of Rs. 3,21,564/-, according to the appellant this credit was in respect of the quantity of inputs lying in stock as on 31/3/07, which was meant for use in the manufacture of branded goods. The appellant were manufacturing branded goods as well as unbranded goods. There was no dispute that in respect of the branded goods, the SSI exemption was not available and the value of clearances of branded goods was not only excluded from the aggregate value of clearance during the financial year eligible for the exemption, but was excluded from the aggregate value of clearances of all excisable goods during the previous financial year. Moreover para 4 of the SSI exemption under Notification No.8/2003-CE says that the exemption contained in this notification shall not apply to the specified goods bearing brand name, whether registered or not, of another person except for the exception mention in it. Admittedly, the appellant's case was not covered by the exceptions in para 4 and, as such, in respect of the branded goods being manufactured by the appellant, the provisions of the Notification No.8/2003-CE did not apply. When this was so, no clause of this exemption notification including para 2 (iii) would apply and, hence, in respect of branded goods being manufactured by the appellant, they would be eligible for Cenvat credit. According to the appellant, they were maintaining separate account and inventory of the inputs meant for branded and unbranded goods while according to the Department, this was not so. If, however, the appellant's contention in this regard was correct and the credit under dispute was in respect of the inputs meant for branded goods, which were lying in stock as on 31/3/07, they would be eligible for this credit, as they were not required to reverse the credit availed in respect of inputs meant for use in the branded goods which throughout the period of dispute were dutiable and not eligible for SSI exemption. However, this aspect had to be verified and for this purpose, this matter had to be remanded.
As regards duty demand of Rs. 59,112/- this demand was in respect of 15.7 M.T. of final product cleared in 2007, the appellant's plea was that these were the same goods which were alleged to had been found short in 2005 and in respect of which duty had been paid at that time. I do not accept this plea, as in 2005, shortage of 15.7 M.T. of finished products had been found and in respect of this shortage, the appellant had paid the duty. This matter had travelled up to the Tribunal, where the allegation of unexplained shortage had been upheld. When the Tribunal had upheld the allegation of clandestine removal detected in 2005, the appellant at this stage cannot say that in 2005 there was no shortage and the goods of same quantity cleared in 2007 were the same goods, which were alleged to had been found short and in respect of which duty had been paid. Thus, the duty demand of Rs. 59,112/- and penalty of this count was upheld.
As regards credit entry of Rs. 5,167/- in the PLA, there was no dispute that this had been reversed. However, since, out of this credit only an amount of Rs. 1,286/- had been used for payment of duty, only the penalty of Rs. 1,186/- under Section 11AC can be upheld and, as such, penalty of Rs. 5,167/- was not sustainable.

In view of the above discussion, the duty demand of Rs. 59,112/- alongwith interest and penalty of equal amount was upheld and duty demand of Rs. 1,286/- alongwith penalty of equal amount was also upheld but the penalty of Rs. 5,167/- was set aside. As regards the Cenvat credit demand of Rs. 3,21,564/- alongwith interest and penalty of equal amount, the impugned order was set aside and the matter was remanded to the original Adjudicating Authority for denovo decision, after ascertaining as to whether or not the appellant throughout were maintaining separate account and inventory of the inputs meant for manufacture of branded and unbranded goods, and also keeping in view the observations in this order.

Decision:Matter remanded.

Comment: The crux of this case is that in respect of the branded goods of other person, the SSI exemption is not available under Notification No.8/2003-CE dated 1.3.2003. Therefore, in respect of branded goods being manufactured by the assessee, they would be eligible for Cenvat credit. But if a person is availing SSI exemption in respect of unbranded goods then he cannot take credit in respect of such inputs. But to implement the same, he has to maintain the separate inventory of inputs and finished goods.

Prepared by:- Hushen Ganodwala

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