Whether Credit disallowable when used in clearing goods on payment of duty but subsequently the final product held to be non excisable?

PJ/Case Laws/2012-13/1337

Case:-Markwell Paper Plast Pvt. Ltd. V/s Commr. Of. Cus. & Ex., Noida

Citation:- 2012 (85) E.L.T. (Tri. – Del.)

Brief Facts:- Appellant are engaged in manufacture of printed plastic laminated film, printed metalised film, other laminated metalised film in rolls and pouches falling under chapter 39 of the first schedule to the Central Excise Tariff Act, 1985. Appellant is registered with the Central Excise department and are availing facility of Cenvat credit under Cenvat Credit Rules, 2004. Appellant has cleared final products on payment of appropriate excise duty and appellant availed Cenvat credit on the duty paid inputs used in manufacture of the final product. Appellant has been filing return under the Central Excise Rules, 2002 and Cenvat Credit Rules, 2004. Department has issued show cause notice for disallowing Cenvat credit availed by them. Department said that the process of printing and laminating the bare polyester/metalised film did not amount to manufacture. Appellant contested that the final product is within the definition of Section 2(f) of the Central Excise Act, 1644 and appellant also claim that the final product was cleared on payment of excise duty so there was no jurisdiction for proposing to deny the Cenvat credit on the inputs used for the manufacture of the final product. The Adjudicating authority has confirmed demand with interest and penalties relying on the judgement of Supreme Court on Metlex (I) Pvt. Ltd. v CCE, New Delhi reported in 2004 (165) ELT 129 (SC). Appellant filed appeal before Tribunal.

Appellant Contentions:- Appellant submits that the impugned order is based on incorrect reading of the judgment of Supreme Court in the matter of M/s Metlex (I) Pvt. Ltd. (supra). Appellant further submits that as per the scheme of Excise Act and Cenvat Credit Rules, 2004 an assessee is entitled to avail Cenvat in respect of inputs used for manufacture of the final product which is excisable. Appellant further submits that the appellant cleared their final product to the customers on payment of excise duty which was accepted by the department without any protest. As such, now the department cannot be allowed to take the plea that the Cenvat credit availed on the inputs used for manufacture of final product was wrongly availed since the final product did not emerge out of the process of manufacture. Appellant further contended that the Commissioner (Appeals) has failed to take note of the various other pronouncement of the Supreme Court in the case of Laminated Packings (P) Ltd. v. CCE - 1990 (49) E.L.T. 326 (S.C.), wherein Supreme Court held that polyethylene laminated kraft paper produced from lamination on duty paid kraft paper amount to manufacture. The appellant have also relied upon judgment of Supreme Court in the matter of Empire Industries Ltd. v. Union of India - 1985 (20) E.L.T. 179 (S.C.) and CCE, Kanpur v. Krishna Carbon Paper Co. - 1988 (37) E.L.T. 480 (S.C.). Thus, it is contended that the impugned order is liable to be set aside.

Respondent Contentions:- Respondent reiterates that the case of the appellant is squarely covered by the judgment of the Supreme Court in the matter of M/s Metlex (I) Pvt. Ltd. (supra) wherein it has been held that mere lamination or Metalisation of a bare film does not bring about a new product and as such the process can not be termed to be manufacture. Thus, it is contended that the Commissioner has rightly disallowed Cenvat credit to the appellant. Respondent further submits that the Section 5(b) of the Central Excise Act, and Notification No. 22/2008-C.E. (N.T.), issued under the said provision and submitted that in view of the aforesaid notification non-reversal of Cenvat credit in these cases could have been allowed only upto 12-2-2004 and not thereafter. Thus, respondent contends that the plea of ld. Counsel for the appellant is without merit and there is no reason to interfere with the impugned orders.

Reasoning of Judgment:- We have considered the rival contentions and perused the record as well as the judgment relied upon by respective parties. It is evident that the Commissioner (Appeals) has based his finding on the judgment of Supreme Court in the matter of Metlex (I) Pvt. Ltd. (supra). Therefore, in order to appreciate the contentions raised by the parties, it would be useful to have a look on the relevant observations of the Supreme Court in the judgment which are reproduced as follows:

“In this case the Appellants purchase duty paid film. They merely laminate or metallise it. The product is a film to start with and remains a film after process of lamination or metallisation. Thus there is no new distinct product which has come into existence and it would have to be concluded that there is no manufacture.

It was however submitted that the case has proceeded on the admitted footing that there was a manufacture. It was submitted that the matter must be remitted back to decide whether there is manufacture. It was submitted that this aspect will have to be decided in terms of Note 12 to Chapter 39 and after looking at the process adopted by the Appellants. It was submitted that under the present Tariff there are separate sub-heading and thus after examining the process of the Appellants it may be possible to contend that a new and distinct product has come into existence.

We are unable to accept this submission. The question is whether an individual and distinct product has come into existence. It is settled law that the burden is on the department to prove that a new and distinct product has come into existence. The Appellants, in reply to the Show Cause Notice, took up the contention that there was no manufacture. If the Department still wanted to contend that manufacture had been undertaken, the Department had to prove it by cogent evidence. The Tribunal was clearly in error in seeking to cast the burden on the Appellants to show that there was no process of manufacture.”

In the judgment, the Supreme Court has observed that mere lamination or metallization of a film does not bring about a new distinct product as such said process cannot be termed as manufacture. The Supreme Court has referred to the plea of the department urging for remand of the case back for decision whether or not there was manufacture. The Supreme Court rejected the said plea of the department observing that if the department wanted to contend that the assessee has undertaken manufacture, the department was required to prove it by a cogent evidence and that the Tribunal was clearly in error in seeking to cast the burden on the assessee to show that there was no process of manufacture. From these observations, it is clear that the appeal of the assessee was allowed by the Supreme Court on facts because of the failure of the department to establish that the goods in question came into existence through a manufacturing process. That being the case in our considered view the judgment of Supreme Court in Metlex (I) Pvt. Ltd. cannot be applied universally de hors the facts. Whenever the question arises whether or not the product in question came into being from a process of manufacture the adjudicating authority is required to refer to the facts of the case to come to the conclusion as to whether the process amounted to manufacture or not. In the instant case the Commissioner (Appeals) has not cared to look into the process through which the finished goods were cleared by the manufacturing assessees emerge out of the process of manufacture. The appellants have explained the process of production of their final products as follows:-

(i) Printing of bare and metalised polyester film which is purchased from the market on payment of duty;

(ii) Lamination of said printed film either in two layers or three layers with the help of adhesive or other chemical.

This fact is not refuted by the department. Thus, it is clear that the appellant after purchasing the bare polyester/metalised film on payment of duty, first subject those film to printing as per the requirement of the customer and thereafter those films are laminated either in two layers or three layers. In our considered view the aforesaid process changes the character of the bare polyester film (inputs) in terms of its user as also the thickness and lamination. Therefore, this process falls within the definition of manufacture as defined under Section 2(f) of the Central Excise Act, 1944. In our aforesaid view we are supported by the judgment of the Supreme Court in the matter of Laminated Packaging (P) Ltd. (supra) wherein the Supreme Court has held that polyethylene laminated kraft paper produced out of lamination on duty paid kraft paper with polyethylene amounts to manufacture. The relevant observations of Supreme Court are reproduced thus :-

“After this impugned Act was passed, the same was challenged before the Bombay High Court by several writ petitions. Writ Petition No. 623 of 1979 along with others were disposed of by the Bombay High Court by judgment delivered by the division bench on 16/17th June, 1983 in the case ofNew Shakti Dye works Pvt. Ltd. & Mahalakshmi Dyeing andPrinting Works V/s. Union of India & Anr. [1983 E.L.T. 1736 (Bom.)]. By the said judgment, the Bombay High Court disposed of 24 writ petitions as the question involved in all those petitions was identical. In that case the constitutional validity of the impugned Act as well as the levy of duty on certain goods identical to the present goods involved in this application under Article 32 of the Constitution was involved. The Bombay High Court dismissed the said writ petitions. We will refer to the said decision later. We may, however, state that we are in respectful agreement with the conclusions as well as the reasoning of the decision of the Bombay High Court in the said petitions. Special leave to appeal to this Court has been granted from the said decision in the case of New Shakti Dye Pvt. Ltd. [1983 E.L.T. 1736 (Bom)]."

The result of above discussion is that the orders of respective Commissioners are not sustainable in law. Even otherwise if for the sake of argument it is assumed that the final products cleared by the manufacturing appellants emerged from a process not amounting to manufacture then also we find it difficult to sustain the impugned order for following reason :-

Undisputedly, the appellants used duty paid inputs for the production of their final product which was cleared to the customers on payment of excise duty. Admittedly, the department accepted the excise duty on the final product without any protest nor the appellants were informed that their final products was not subject to excise duty as it emerged from the process not amounting to manufacture as defined under Section 2(f) of the Central Excise Act. Learned Counsel for the respondent department has tried to justify the impugned order disallowing the Cenvat credit availed by the appellant on the inputs on the plea that the final product has not emerged from the process which could be termed as manufactured. Such an argument, in our view cannot be sustained as it is against the tenets of equity and justice. The department having accepted the excise duty on the final product cannot be permitted to deny Cenvat credit on the inputs used for the manufacture of the final product on such a technical plea. If such an argument is allowed to sustain it would negate the entire object of the Cenvat credit scheme which has been put in place with a view to protect the assessee from double taxation. Thus, on this count also, the impugned orders are not sustainable. In view of the above, Tribunal find ourselves unable to sustain the impugned orders which are accordingly set aside.

Decision: - Appeal allowed.

Comment:-This is yet another case that confirms the well settled position of law that Cenvat Credit cannot be denied when duty paid inputs were used in the manufacture of final product irrespective of the fact that subsequently the final product is held to be non excisable. The benefit of Cenvat Credit scheme is to remove the cascading effect and hence once duty paid inputs are used in clearing goods on which duty has also been paid, the question to deny cenvat credit does not arise.

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PJ/Case Laws/2012-13/1337

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