Whether an assessee can avail and utilize CENVAT Credit on the inputs which are currently not used in the manufacturing process of the finished goods ?

Case:- BHOR INDUSTIRES LTD. Versus UNION OF INDIA

Citation:-2014 (299) E.L.T. 281 (Bom.)

Brief fact:- By this writ petition under Article 226 of the Constitution of India, the petitioner has taken an exception to the Order-in-Original dated 18th June, 1993 passed by the Collector of Central Excise and Customs as well as the order dated 19th October, 1994. passed by the Customs, Excise and Gold (Control) Appellate Tribunal (for short CEGAT). With a view to appreciate the submissions made by the learned counsel appearing for the petitioner, a brief reference to the facts of the case will have to be made. 3. The case of the petitioner is that the petitioner is in the business of manufacturing cotton/man made coated fabrics in its plant at Bhor. The case of the petitioner is that the petitioner has been using as one of the inputs PVC resins and Polyurethane (PU) resins of all grades. According to the petitioner, at any one time, only one grade of resin is used. The petitioner has been permitted to maintain a common combined account for crediting and debiting Resin duty paid on all grades of resins in statutory form RG-23A. According to the petitioner, the utilization of the said duty credit towards payment of duty on coated fabric is without one to one correlation in respect of different Resins.
According to the case of the petitioner, it developed a new product of Lacquer based on synthetic polymer by use of PVC Resins in the year 1992. A classification list was filed with the sample. On 24th February, 1992 prescribed declaration of all inputs intended to be used in manufacture of the new product Lacquer based on synthetic polymer (LBSP) was filed. The said declaration provided that apart from other inputs, PVC Resins in different names, grades and numbers will be used as input. For clearance of LBSP manufactured with one grade of PU Resin as one of the inputs; CENVAT credit of duty is utilized from common combined account.
The Collector issued show cause notice dated 13th August, 1992 calling upon the petitioner to show cause as to why credit taken in respect of PVC resin received during the period from 24th February, 1992 to 4th May, 1992 amounting to Rs. 5, 57,177.80 as shown in the annexure to the notice should not be recovered from the petitioner under Rule 57-I of the Central Excise Rules, 1944 being the credits taken and utilized in contravention of Rule 57-I of the said Rules of 1944. By the said notice, the petitioner was also called upon to show cause as to why credits taken and utilized in respect of inputs during the afore-said period (other than PVC resins) which were not used in manufacture of LBSP cleared on payment of duty by overdrawing an amount of Rs. 8, 09,583.55 from the amounts in RG-23A Part-II should not be recovered from the petitioner under Rule 9(2) of the said Rules of 1944. By the said notice, the petitioner was also called upon as to why the Petitioner should not be called upon to deposit a sum of Rs. 25, 87,588.90 being the credit taken and utilized during the said period in respect of input of PU Resins other than Grade 5702 under Rule 57-I of the said Rules of 1944. Thus, the show cause notice related to total amount of Rs. 39, 54,355.25. The notice also called upon the petitioner to show cause as to why penalty should not be imposed under Rule 173Q of the said Rules of 1944. The petitioner repHed to the show cause notice by its Advocate's reply dated 5th Feb-ruary, 1993. The Collector passed Order-in-Original dated 18th June, 1993 by which he directed the petitioner to pay duty demand amount of Rs. 39,54,350.25 as per the break up given in the said order. The Collector imposed penalty of Rs. 20,00,000/- under Rule 173Q of the said Rules. In the appeal preferred by the petitioner, by judgment and order dated 19th October, 1994, the demand of sum of Ks. 8, 09,583.55 was set aside. As far as the demand of Rs. 5, 57,177.80 is concerned, the matter was remanded for fresh decision in the light of observations made in the said judgment. However, the demand made in the sum of Ks. 25, 87,588-90 on account of credit taken and utilized in respect of input polyurethane (PU Resins) other than Grade 5702 was confirmed. However, penalty amount was reduced from Rs. 20, 00,000/- to Rs. 5, 00,000/-.

Appellant’s contention:- The learned counsel appearing for the petitioner has taken the Hon’ble High Court through the impugned orders and other documents on record. The learned counsel submitted that the utilization of inputs was started at the end of February, 1992 and during the relevant period i.e. from 26th February, 1992 till 31st May, 1992, various inputs were utilized. He submitted that there was intention on the part of the petitioner to use the inputs of PU resin of various grades other than Grade 5702 and in any case, the said intention cannot be ruled out even though during the aforesaid period which was a short period, the said inputs were not actually used. He submitted that it is nobody's case that the said inputs cannot be used in manufacture of LBSP. He submitted that it is not the case that the inputs of various grades other than Grade 5702 cannot be used. He submitted that the provision of Rule 57F(3)(i) of the said Rules of 1944 could not have been applied. He pointed out that the CEGAT held that there is no bar on the availment of accumulated credit on inputs used in manufacture of one product if similar input has been used in manufacture of another product. He submitted that credit cannot be denied on the ground that PU Resin of a different grade has been used in manufacture of LBSP. He submitted that specified input has been used in manufacture of LBSP which is a specified final product and hence the accumulated credit on specified Input is available for utilization of duty payable towards LBSP. He placed reliance on circular dated 8th August, 1988 issued by the Central Board of Excise and Customs. He submitted that there is no one to one co-relation of input and final product under the Modvat scheme for utilization of credit and, therefore, the Central Board decided that the excise credit accumulated, if any, can be utilized towards payment of duty on the same final products even if manufactured out of non duty paid inputs. The learned counsel relied upon a decision of the Apex Court in the case of Collector of Central Excise, Pune and others v. Dai Ichi Karkaria Ltd. and Others reported at (1999) 7 SCC 443 = 1999 (112) E.L.T. 353 (S.C.). He relied upon a decision of this Court in the case of Bharat Bijlee Ltd. v. Union of India reported at 2003 (154) E.L.T. 564 (Born.) which holds that denial of credit on the ground that declaration did not give specific description of the inputs was held to be improper as no format has been prescribed for declarations. He relied upon certain decisions of the Tribunal with a view to persuade the Court to take a view that the recovery ordered is illegal. The learned counsel appearing for the Respondent Nos. 1 and 2 supported the impugned judgment and orders.

Respondent’s contention:-

Reasoning of judgment:- They have carefully considered the submissions. It will be necessary to make a reference to the declaration filed under Rule 57G for availing credit on duty on inputs. In the said declaration against the final product of 1135P, follow-ing inputs have been mentioned :-
"(1) PVC Resin (in different names, grades and numbers).
(2) Thermo Plastic Polyurethane Resin (in different names, grades and numbers).
(3) Kondicryl Resin (in different names, grade; and numbers).
(4) Stabipiast XK-I6/14.
(5) Mathyl Ethyl Kotong (MK),
(6) Polues."
In this petition, they are concerned with the recovery of Rs. 25, 87,588.90. It will be necessary to make a reference to the show cause notice. The allegation in the show cause notice is that credit taken and utilized during the said period of 24th February, 1992 till 4th May, 1992 for PU (Polyurethane) other than grade 5702 has been utilized by the Petitioner. It is stated in the Annexure to the notice that no separate record in relation to receipt and utilization of inputs and credits regarding LBSP has been maintained. It is observed that negligible quantity of PU Resin of Grade 5702 to the extent Of 1.7% has been used in LBSP. It is stated that only because of maintenance of common RG-23 A Part-II that the petitioner could use credits of PU other than grade 5702 towards the payment of duly on LBSP cleared from the factory. In the Annexure to the notice, there is a reference to the statements of the officers of the petitioner.
It will be necessary to make a reference to the findings recorded by the Collector. The relevant portion of the finding of facts reads thus :
“Duty demand of Rs. 25, 87,588.90 on account of misdeclaration of inputs : The assessee. I observe, manufactures LBSP by mixing PVC and polyurethane resins in the organic solvents viz. MEK/Toluene. They declared that "Thermoplastic Polyurethane resins - all grades, names and numbers" are inputs for LBSP. Once they make a declaration to such an extent, a duty is cast on them to adhere to such a declaration and all the declared inputs should actually go in (or manufacture of the final product viz. LBSP?. On investigation, the Department found that only certain inputs are actually going in for manufacture of LBSP.”
The Collector has referred to the statement of Shri V.R. Honatti, Production Manager of the petitioner who unequivocally stated that for manufacture of LBSP, they use PU resin Grade 5702. It is noted that Shri S.D. Ovalekar, Vice President (Operations) also supported the said statement. The Collector dealt with an argument that the words "intended to be used" in Rule 57G show that actual use of inputs is not necessary and only intention to use has to be reflected. This interpretation was rejected by the Collector.
The basis of the demand of Rs. 25,87,588-90 is in relation to the utilization of credit availed for PU resin other than Grade 5702 in payment of duty on LBSP, though such inputs have not been used in manufacture of the said product. The appellate authority noted that use of PU Resin other than Grade 5702 was not made, but it was pleaded by the petitioner that other grades could be used and the petitioner intended to use the same in manufacture of LBSP. The case of the petitioner noted by the CEGAT is that actual use need not be made as the petitioner was conducting various experiments. It was submitted that the Department has not contended that PU Resin of other grades cannot be used and, therefore, intention to use the same was established.
On this aspect, it will be necessary to make a reference to the statements of various officers of the petitioner, the copies of which have been placed on record. In the statement of Shri V.R. Honatti, he has stated that for LBSP, the petitioner was exclusively using PU Resin Grade 5702 and PU Resins of the Grades at Sr. Nos. 543, 544 and 545 are not being used as inputs. There is similar statement of Shri S.D. Ovalekar, Vice President (Operations).
At this stage, it will be necessary to make a reference to the relevant Rule and in particular Rule 57F. Sub-rule (3) of Rule 57F provides that credit of specified duty allowed in respect of any inputs may be utilized towards payment of duty of excise on any of the final products in or, in relation to manufacture of which such inputs are intended to be used in accordance with the declaration filed under sub-rule (1) of Rule 57G. Sub-rule (1) of Rule 57G provides that every manufacturer intending to take credit of the duty paid on inputs under Rule 57A shall file a declaration indicating the description of final products manufactured in the factory and the inputs intended to be used in each of the said final products. The submission made before this Court as well as the authorities below is that as it is not disputed that the grades other than Grade 5702 can be used for production of LBSP, it can be said that the said inputs were intended to be used. Thus, in short, the submission is that the said inputs could have been used for manufacture of the final product. The argument is that the said inputs could have been possibly used mere possibility cannot be equated with intention to use. In fact, as pointed out by the Collector and more particularly by CEGAT, the statements of the officers of the petitioner show that the inputs of only Grade 5702 were used by the petitioner. Perusal of the statements shows that the intention to use other grades is not at all reflected from the said statements. A mere desire to use the other grades in future or a mere possibility that the other grades may be used for manufacture of the final product is not sufficient for the purposes of Clause (i) of sub-rule (3) of Rule 57F. Therefore, the Collector and more specifically CEGAT were right in taking the view that the PU of other grades was never intended to be used.
In the case of Bharat Bijlee Ltd. (supra), this issue did not arise for consideration. The Division Bench was dealing with a declaration which did not give specific description of the inputs. The decision in the case of Collector of Central Excise, Pune v. Doi Ichi Karkatria Ltd. holds that Modvat is indefeasible. The said decision does not help the petitioner as the finding of fact by both the authorities is that it was not proved that the other grades were intended to be used. As far as Circular dated 8th August, 1988 is concerned, the same will not help the petitioner. This deals with a contingency where excise credit accumulated can be utilized towards payment of duty on the same final products even if manufactured out of non duty paid inputs. In the present case, the grades other than 5702 were intended to be used is not established as a matter of fact.
In the circumstances, the order of the appellate authority cannot be faulted with. As far as penalty is concerned, the same has been reduced to 1/4th by the Appellate Authority by bringing it down from Rs. 20,00,000/- to Rs, 5,00,0007/-. Hence, there is no merit in the petition and they pass the following order:
(i) The writ petition is rejected, Rule is discharged with no order as to costs.

(ii) Interim relief, if any, operative during the pendency of this petition will continue to operate for a period of twelve weeks from today.

Decision:- Petition rejected

Comment: The crux of the case is that for availing and utilizing CENVAT credit, only desire to use other inputs i.e. other than inputs mentioned in declaration for the availment of credit, in future or possibility thereof in the manufacturing of the finished goods was not sufficient base for Rule 57F (3)(i) of erstwhile Central Excise Rules,1944. Mere possibility or desire to use in future could not be equated with intention to use.

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PJ/CASE LAW/2014-15/2471

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