Transfer of Credit under Rule 10 on shifting of factory.

Case:- COMMR. OF CUS., BANGALORE VERSUS HEWLETT PACKARD INDIA SALES LTD.

Citation:-2012 (279) E.L.T. 203 (Kar.)

Brief facts:- The Revenue has preferred this appeal challenging the order passed by the Tribunal (2007 (211) E.L.T. 263 (Tri.-Bang.). = 2007 (6) S.T.R. 155 (Tri.-Bang.)] holding that the assessee is entitled for the transfer of unutilized credit to the tune of Rs.15,85,47,475/-. The assessee M/s. Hewlett Packard Sales Private Ltd., is EHTP Unit functioning under 100% EOU scheme manufacturing personal computers and another their unit in Pondicherry in the name of Hewlett Packard India Private Limited., for manufacture of computers and printers. The Pondicherry unit availed input credit for the manufacture of computers and printers. There was amalgamation of the Pondicherry unit with the assessee unit at Bangalore vide order dated 28-5-2004 of the High Court of Karnataka. The Pondicherry unit stopped production with effect from October, 2004 onwards. They transferred the unutilized credit to the Bangalore Unit. On the direction of the Department the credit taken was reversed. Thereafter the assessee submitted a letter dated 28-12-2005 to the Pondicherry authorities and requested for permission to transfer the available Cenvat credit balance of Rs. 15,85,47,475/- to their Bangalore factory. A letter dated 10-3-2006 was also submitted to the jurisdictional Assistant Commissioner of Customs, Bangalore, informing that they would transfer unutilized balance of Cenvat credit from Pondicherry unit to EHTP unit at Bangalore. The Deputy Commissioner of Customs Bangalore directed the assessee not to transfer the balance of Cenvat credit in view of the fact that there was neither shifting of the factory building nor there was any transfer of inputs/raw materials or finished goods. Moreover, the Pondicherry Excise authorities had not permitted such transfer, which decision was contained in the letter dated 15-3-2006, 11-5-2006 and 22-5-2006. Aggrieved by the same, the assessee preferred an appeal to the Commissioner (Appeals). The Commissioner (Appeals) relying on Rule 10 of the Cenvat Credit Rules was of the view that permission was required in order to transfer the credit. He also recorded a finding that the assessee has not fulfilled any of the conditions laid down under Rule 10 of the Cenvat Credit Rules, 2004 (for short hereinafter referred to as 'the Rules'). Therefore, he held that they are not entitled for transfer of credit. Quoting Rule 9(2) of the Cenvat Credit Rules he held that in the event of manufacturer opting for exemption (based on value or quantity) an accumulated credit would lapse and would not be allowed to be utilized for payment of duty on any excisable goods. According to him, the final products manufactured by the Pondicherry unit were already exempted with effect from 9-7-2004. Therefore, he remanded the matter to the lower authority to issue a speaking order. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. Relying on Rule 10(1) of the Rules, the Tribunal held that the rule provides for transfer of Cenvat credit lying unutilized in the event of shifting of a factory to another factory on account of amalgamation and therefore the assessee is legally entitled for the transfer under Rule 10(1) of the Rules. It was further held that sub-rule (1) of Rule 11 provides for utilization of unutilized Cenvat credit by the transferee Company on such amalgamation. However, Rule 11(2) speaks of a situation when a manufacturer opts for exemption under a Notification based on value or quantity of clearances in a financial year, in which event the benefit of the transfer of the unutilized Cenvat credit is not available. As the instant case does not come within Rule 11(2) the applicable Commissioner was in total error in denying the benefit of Rule 11(c) to the assessee. Therefore the Tribunal held that the appellant was entitled to the benefit of transfer of utilization of unutilized Cenvat credit in terms of sub-rule (1) of Rule 11. Aggrieved by the said order the present appeal is filed.

Appellant’s contention:- The learned counsel appearing for the Revenue assailing the impugned order contended that the assessee is claiming exemption from payment of excise duty by virtue of a Notification dated 9-7-2004. Once such exemption is claimed sub-rule (2) of Rule 11 is attracted and unutilized Cenvat credit shall lapse. She also pointed out that after the Appellate Commissioner remanded the matter back to the assessing authority and he passed an order on merits. In tune with his rejection of the request of the assessee for availing the benefit, the assessee preferred an appeal to the Commissioner. By that time, the Tribunal has passed the impugned order. Following this impugned order the Appellate Commissioner has set aside the order passed by the assessing authority. Therefore she submits that this appeal which originated on the basis of reply letter rejecting the benefit of Cenvat credit, the Tribunal could not have entertained the same and granted the relief to the assessee and therefore she submits that the impugned order has to be set aside. The entire matter has to be remanded back to the assessing authority to consider the case on merits.

Respondent’s contention:-The learned counsel appearing for the assessee supported the impugned order.

Reasoning of judgment:-After careful study of the basis of the Tribunal for allowing the judgment in favour of assessee and also judgment of the Commissioner(Appeals) against the assessee , finally Hon’ble High court was come on the following decision by interpretation of some Notifications as followed:
Rule 10 of the Rules deals with transfer of Cenvat credit. It reads as under:
"Transfer of CENVAT credit. - (1) If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.
(2) If a provider of output service shifts or transfers his business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business, then, the provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated business.
(3) The transfer of the CENVAT credit under sub-rules (1) and (2) shall be allowed only if the stock of the inputs as such or in process, or the capital goods is also transferred along with the factory or business premise to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central excise or, as the case may be, the Assistant Commissioner of Central Excise.”
Sub-rule (1) of Rule 10 categorically declares the legal position. It states that when any manufacturer of final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger or amalgamation or transfer of the factory or joint venture with the specific provision for transfer of liabilities on such factories, then, the manufacturer shall be allowed to transfer the Cenvat credit lying unutilized in his accounts to such transferred sold, merged, leased or amalgamated factory. Therefore, the law provides for transfer of unutilized Cenvat Credit, in the event of an amalgamation in favour of the transferor Company.
Rule 11 deals with Transitional provision which reads as under:-
(1) “Any amount of credit earned by a manufacturer under the CENVAT Credit Rules, 2002, as they existed prior to the 10th day of September, 2004 or by a provider of output service under the Service Tax Credit Rules, 2002, as they existed prior to the 10th day of September, 2004, and remaining unutilized on that day shall be allowed as CENVAT credit to such manufacturer or provider of output service under these rules, and be allowed to be utilized in accordance with these rules.
(2) A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking CENVAT credit on inputs or input services before such option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export."
Sub-rule (1) makes it very clear that Cenvat credit availed by a manufacturer under the earlier Rules of 2002, if it remains unutilized prior to 10th September, 2004, the said unutilized credit shall be allowed as Cenvat credit to the manufacturer under the Rules of 2004 and allowed to be utilized in accordance with the said Rules. The Explanation to this general Rule is provided under sub-rule (2). If the manufacturer opts for an exemption from the payment of duty of excise leviable on goods manufactured by him under a Notification based on the value or the quantity of clearances in a financial year, then he would not be entitled to the benefit of both Rule 10 and Rule 11(1) of the Rules. Therefore, the said benefit is not available to the manufacturer who opts for exemption based on the value or quantity of clearances in a financial year. In all other cases the said benefit is available to the manufacturer.
It was in this background of the statutory provisions they had to see the nature of exemption which the assessee availed of and whether the Exemption Notification falls within the framework of value or quantity of clearances in a financial year? The Exemption Notification No. 6/2003-C.E., dated 1-3-2003 on which reliance is placed is a General Exemption No. 52 which reads as under :-
"Exemption and effective rates of basis excise duty for specified goods of Chapter 9 to 96. :-
In exercise of the powers conferred by sub-section (1) of section SA of the Central Excise Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts excisable goods of the description specified in column (3) of the Table below or specified in column (3) of the said Table read with the concerned List appended hereto, as the case may be, and falling within the Chapter, heading No. or sub-heading No. of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986)(hereinafter referred to as the Central Excise Tariff Act), specified in the corresponding entry in column (2) of the said Table,-
(a) from so much of the duty of excise specified thereon under the ' First Schedule (hereinafter referred to as the First Schedule) to the Central Excise Tariff Act, as is in excess of the amount calculated at the rate specified in the corresponding entry in column(4) of the said Table; and
(b) from so much or the Special duty of excise leviable thereon under the Second Schedule (hereinafter referred to as the Second Schedule) to the Central Excise Tariff Act, as is in excess of the amount calculated at the rate specified in the corresponding entry in column (5) of the said table, subject to the relevant condition specified in the Annexure to this notification, and referred to in the corresponding entry in column (6) of the said Table."
A bare perusal of the aforesaid Notification made it very clear that the said exemption had no reference to the value of the quantity of the goods in a financial year. It was an exemption from payment of duty in respect of the goods which were set out in the Table to the said Notification. Sub-rule (1) of Rule 11 had no application to the Exemption Notification, in the instant case, and therefore the appellate Commissioner as well as the assessing authority were totally in error in denying the benefit of transfer of unutilized Cenvat credit to the assessee. It was that error of law which was corrected by the Tribunal by placing proper interpretation on Rule 10, Rule 11 and the Exemption Notification. In that view of the matter, they did not see any justification to interfere with the well considered order passed by the Tribunal.
They concluded with the final decision that so far as the contentions of the Revenue that the appeal itself was not maintainable as it originated from a reply notice and the case was to be remanded back for fresh consideration in accordance with law on merits has no substance because once the legal position was clear and the assessee was entitled to the benefit of unutilized Cenvat credit the question of the authorities making a demand of duty excluding the benefit of Cenvat credit would not arise. However, this would not come in the way of the authorities initiating any action against the assessee if he had claimed the benefit more than what he was legitimately entitled to under the Rules, as that portion would not be the subject matter of the proceedings at all. In that view of the matter, they did not see any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the Revenue.

Decision:- Appeal rejected

Comment:-The crux of the case is that when the factory of a manufacturer of final products is transferred on account of change in ownership on account of sale, merger, amalgamation along with specific provisions for transfer of liabilities of such factory then, the manufacturer shall be allowed to transfer the CENVAT Credit lying unutilized in his accounts such transferred, sold, merged, leased or amalgamated factory subject to the condition that the stock of the inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to new site. Moreover, the benefit of transfer of unutilised credit cannot be denied merely on the ground that the transferring unit availed benefit of exemption notification because the restriction under Rule 11 is applicable only with respect to exemption that is availed is on the basis of the value of the quantity of the goods cleared in a financial year.

Prepared By:- Kushal Shah

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