Whether Cenvat credit is available on raw materials and services used for non-excisable goods and traded goods ?

PJ/Case Laws/2012-13/1325

Case:-LOREAL INDIA PRIVATE LTD. V/s COMMISSIONER OF CENTRAL EXCISE, PUNE-I

Citation:- 2012 (28) S.T.R. 443 (Tri. – Mumbai)

Issue:- Whether Cenvat credit is available on raw materials and services used for non-excisable goods and traded goods ?

Brief Facts:- The Appellants are engaged in the manufacture of various types of Cosmetic preparations falling under Chapter 33 of Central Excise Tariff Act, 1985. They have their head office at Mumbai and Branches located at various parts of the country. Department has revealed from the scrutiny of the records that they were importing and trading in certain types of cosmetic preparations from their head office at Mumbai. The same were being imported by their head office and subsequently cleared directly to customers or to their branches located at various parts of the country. They were availing Cenvat credit on inputs and input services used in or relation to manufacture of the final products. Cenvat credit on inputs and capital goods was availed on the basis of duty paid on inputs and capital goods received by them in their factory. Cenvat credit on input services was availed on the basis of input services received by them for their factory as well as on input services received for their Head Office and various branches. As per provisions of Rule 2(1) and Rule 2(p) read with 2(h) of the Central Excise Rules, 2004, the Department felt that Cenvat credit can be availed on services which are used for providing any “output service” or used directly or indirectly, in or in relation to the manufacture of final product. However, the trading activity undertaken by the appellants from their head office at Mumbai is neither an output service nor a final product for them and as such they are not entitled to avail Cenvat credit on services used for such trading activity.

It was also revealed that from the scrutiny of records that some of the cosmetic preparations were not excisable goods as they contained alcohol. All such goods containing alcohol fall under the State list of the Constitution and are known as non-excisable goods for the purposes of Central Excise Act. Under Rule 2(p) of the Cenvat Credit Rules, “input” means all goods used in or in relation to manufacture of final products whether directly or indirectly and whether contained in the final product or not and Cenvat credit can be availed on the duty paid on any input received in the factory of manufacture of the final product. Final product as per Rule 2(h) of the Central Excise Rules, 2004 means excisable goods manufactured or produced from input, or using input services. Therefore, it was held by the department that raw materials which were used in the manufacture of non excisable goods do not qualify as inputs as per Rule 2(k) of the Cenvat Credit Rules, 2004 and cenvat credit availed by them on such raw material used for non excisable goods was not admissible to them.

Accordingly, department issued Show cause notice to appellant for demanding duty under Rule 14 of the Cenvat Credit Rules, 2004 and proviso to Section 11A(1) of the Central Excise Act and also proposed to impose penalty under section 15 of the Cenvat Credit Rules, 2004 and resulted in confirmation the same. The appellants are in appeal before the Tribunal against the impugned order.

Appellant Contentions:- The appellants submit that prior to the visit of the officers to their factory, they were under the bona fide belief that the goods containing alcohol were exempted under the Central excise as they were taxable under State excise duty and accordingly appellant were availing the credit on whole of the inputs and were reversing Cenvat credit equal to 10% of the total price excluding sales tax and other taxes of such goods. Department sent a letter to the appellant that the goods containing alcohol are non-excisable goods and they are not allowed Cenvat credit on the inputs which are used in the final product containing alcohol. Thereafter, appellant have paid excise duty, education cess, additional excise duty and interest amounting to Rs. 58,83,743/- as inadmissible credit on the raw material and input services used for non-excisable goods for the period April, 2004 to August, 2006. Appellant also submits that they have not at all gained by reversal amount under Rule 6(3)(b). They contended that they have not at all gained by reversal of 10% as the total amount reversed under Rule 6(3)(b) was Rs. 90,86,941/- whereas the Cenvat credit attributable to inputs used in the goods containing alcohol was Rs. 63,67,519/-. They contended that very fact the Cenvat credit equal to 10% of the price was more than attributable credit in the case of goods containing alcohol shows that there was no intention to take ineligible credit.
As regards the trading activity undertaken by the appellant, the ld. Advocate submitted that they were under bonafide belief that the credit attributable to the activities which are neither manufacturing nor service are not contemplated in Rules and therefore credit which could be attributable to trading activities can be availed due to interpretation of definition of the exempted goods and exempted services in Rule 2 of the Cenvat Credit Rules and the interpretation of Rule 6 of the Cenvat Credit Rules. By reading these two Rules, they were under the bonafide belief that they can legally avail Cenvat credit on all input services in case of input services used for dutiable as well as exempted goods services. They also contended that no method was provided in the Cenvat Credit Rules at the material point of time for bifurcation in case of common services and the department has relied on the provisions of Rule 6(3)(d)(iii) which was introduced w.e.f. 1.4.2007 only. Therefore, the ld. Advocate submits that they were under bonafide belief that they were entitled to whole of the credit common to manufacture, service and trading activity. He further submits that when the department explained the stand, they paid back the credit and they have done this even before the issue of show cause notice. He, therefore submitted that they don not have any intention to avail the ineligible credit, therefore, they are not liable to penalty under Rule 15 of the Cenvat Credit Rules.

Respondent Contentions:- The ld. Addl. Commissioner (A.R.) appearing for the Revenue reiterated the finding of the Commissioner and stated that the appeal filed by the appellants needs to be dismissed.

Reasoning of Judgment:- The Tribunal has considered the submissions made from both sides. Tribunal finds that the issue involved is whether the Cenvat credit available on raw materials and services used for non-excisable goods and traded goods is admissible to the appellants. Tribunal has relied on definition of input. The goods containing alcohol are not final product and not excisable goods under the Central Excise Act and for this reason inputs used for manufacture of alcohol goods do not qualify as inputs and Cenvat credit availed by them on inputs is not admissible. But appellant has reversed Cenvat credit which is more than the amount of credit availed by them on inputs. Therefore, appellant’s intention cannot be taken to avail ineligible credit and so the Tribunal has remanded the matter back to Commissioner for giving a finding on this aspect before taking any view on imposition of penalty.

The second issue is regarding whether Cenvat credit availed on services used for traded goods was admissible to them or not. Tribunal find that the trading activity undertaken by the appellants from their Head Office is neither an output services nor it is their final product. As such the appellants are not entitled to avail any Cenvat Credit on the services which are used for trading activity. They have paid back the credit on being pointed out by the department. Department raised demand under Rule 6(3)(d)(iii) of the Cenvat Credit Rules, 2004 for apportioning common services between dutiable and exempted services but there is force in the contention of the appellant that said Rule was introduced from 1.4.2007 and their demand pertains to prior period. Appellant has prepared work sheet for calculation of Cenvat credit for traded goods and filed to Commissioner but Commissioner has not rejected the work sheet but contended that the appellants have not furnished as to what is the basis of quantification of such work sheet and have failed to produce any documentary evidence. Tribunal has decided to remand the matter back to the original authority in view of the above observation and he should pass a fresh adjudication order, after giving an opportunity of being heard to the appellants to explain the calculations mentioned in the worksheet. The appellants should also co-operate with the adjudicating authority by submitting all the documents used for preparation of the work-sheet. The appeal is allowed by way of remand in the above terms.

Decision: - Appeal remanded.

Comment:This case draws analogy that penalty cannot be imposed on the assessee when facts indicate that there was no intention to evade duty. The assessee in the above case has reversed higher amount than the Cenvat credit availed on such inputs used in the manufacture non-excisable goods which shows that there was no intention to evade duty.

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PJ/Case Laws/2012-13/1325

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