Whether credit can be denied to the recipient without challenging duty payment at supplier’s end?

PJ/Case Law/2014-15/2148

Case:- COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD-III Vs NAHAR GRANITIES LTD.

Citation:- 2014-TIOL-582-HC-AHM-CX

Brief facts:- The respondent assessee purchased a product called Zinc Dross which was a by-product of a manufacturing activity carried on by the supplier of the goods to the respondents. It was not in dispute that that the supplier paid excise duty on the basis that the product was excisable. It was not in dispute that such duty was never claimed by way of refund and no dispute was raised at the end of the supplier about the dutiability of the said product. The department also accepted the assessment and classification supplied by the supplier and appropriated the duty as declared.
In case of Collector of Central Excise, Patna. v. Tata Iron and Steel Co. Ltd reported in 2004 (165) ELT 386 (SC) = 2004-TIOL-25-SC-CX, the question of dutiability of such product came up before the Supreme Court on the ground that such product was a mere by-product of the manufacturing activity. It was held that no excise duty would be leviable on Zinc Dross. It was observed that merely because the assessee was selling the said by-product, would not mean that the same was a marketable commodity. In short, the Supreme Court held that there was no excise duty liability on the sale of Zinc Dross. Accordingly, the revenue department has filed appeal that when no duty was required to be paid on zinc dross, the credit taken by the purchaser of goods was not proper.

Appellant’s contentions:- Shri Kogje, AR for the department drew the attention to Rule 3 of the Cenvat Credit Rules, 2004, and submitted that the manufacturer or producer of final products or a provider of taxable service would be allowed to take cenvat credit of the duty of excise specified in the First Schedule to the Excise Tariff Act. In the present case, since the product was not dutiable, no cenvat credit could be availed. The amount deposited by the manufacturer was not duty.
The respondent assessee on purchase of such goods utilised the same as input in its own manufacturing activity and claimed cenvat credit of the duty paid by the supplier. The Revenue contested this stand of the respondent on the ground that since no duty was payable on Zinc Dross by the manufacturer, in terms of Rule 3 of Cenvat Credit Rules, 2004, the assessee was not entitled to avail the credit of such duty. Ultimately, when the issue reached the tribunal, the tribunal in the impugned judgment relying on decision of Supreme Court in case of Commissioner of Central Excise & Customs v. MDS Switchgear Ltd. reported in 2008 (229) ELT 485 (SC) = 2008-TIOL-245-SC-CX, held that the assessee was entitled to cenvat credit.

Respondent’s contentions:- On the other hand, learned counsel Shri Nainawati for the respondent opposed the appeal contending that the department had accepted the assessment of the supplier of the goods. Such goods were received by the respondent as input and utilised for manufacture of output service. The conditions for availing cenvat credit were thus satisfied. He relied on decision of the Supreme Court in case of MDS Switchgear Ltd. (supra) as well as Sarvesh Refractories (P) Ltd. v. Commissioner of C.Ex & Customs reported in 2007 (218) ELT 488 (SC) = 2007-TIOL-233- SC-CX.

Reasoning of judgment:- Rule 3 of the Cenvat Credit Rules, 2004 allows a manufacturer or producer of final product or a provider of taxable service to take cenvat credit of the duty of excise specified in the First Schedule to the Excise Tariff Act. Rule 4 of the Cenvat Credit Rules, 2004 lays down the conditions for allowing cenvat credit. Sub rule (1) thereof provides that cenvat credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Proviso to sub rule (1) puts certain limitations on such immediate availability of cenvat credit. The Bench was however, not concerned with the proviso.
In terms of rule 3 and 4 of the Cenvat Credit Rules, 2004, a manufacturer would be entitled to avail the cenvat credit in respect of the inputs used for the manufacture of a final product or in providing taxable service of the excise duty specified in First Schedule to the Excise Tariff Act. Insofar as the respondent was concerned, he had purchased the inputs and utilised the same for manufacture of a final product. Such goods were duty paid. Rule 3 and 4 of the Cenvat Credit Rules, 2004, thus would enable him to avail the cenvat credit. It was a different thing that the supplier of the goods to the respondent paid excise duty on such product under mistaken belief. In law as declared by the Supreme Court in case of Collector of Central Excise, Patna. vs. Tata Iron and Steel Co. Ltd (supra), no duty was payable on such product. Strictly speaking therefore, such amount deposited by the original manufacturer would not par take the character of excise duty. However, when the department did not dispute the classification of such manufacturer, accepted the declarations and duties, cenvat credit on such duty could not be declined to the purchaser of the goods who otherwise fulfilled all conditions for availing cenvat credit thereof.
Case was substantially similar to one before the Supreme Court in case of MDS Switchgear Ltd. (supra). In the said case, the tribunal while accepting the department's allegation of inflation of the value of intermediate goods to load the assessable value, observed that if the department was of the opinion that the value of the final product was depressed, it could have charged the original manufacturer unit in under invoicing their product. This was however, not done. Valuation was duly approved and the payment duty was also accepted. The tribunal further observed that "We find absolutely no substance in the attempt of the learned Commissioner to convert a part of the duty so paid into deposit of duty. There was no legal basis for such presumption. The rules entitled the receipt manufacturer to avail of the benefit of the duty paid by the supplier manufacturer. A quantum of duty already determined by the jurisdictional officers of the supplier unit could not be contested or challenged by the officers incharge of recipient unit."
In view of the above findings, it was concluded that the quantum of duty already paid by the supplier of goods cannot be challenged at the service recipient’s end. Accordingly, the appeal filed by the revenue department was dismissed.

Decision:- Appeal was dismissed.

Comment:- The analogy drawn from the case is that if by product is purchased by a recipient manufacturer from a supplier who pays excise duty on the same under mistaken belief, cenvat credit on such duty could not be declined to the purchaser of the goods who otherwise fulfilled all conditions for availing cenvat credit thereof. In nutshell, credit cannot be denied to the receiver of goods if assessment of duty has not been challenged at the supplier’s end.

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PJ/Case Law/2014-15/2148

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