Whether entire credit can be denied when a part of capital goods removed as such?

PJ/CASE LAW/2015-16/2990

Case:-COMMISSIONER OF C. EX. & S.T., VAPI VersusN.R. AGARWAL

Citation:-2015 (326) E.L.T. 364 (Tri. - Ahmd.)

Brief Facts:-This appeal has been filed by the Revenue against OIA No. KRS/107/VAPI/2008, dated 31-3-2008 issued on 7-4-2008. The issue involved in this appeal is whether the appellant is required to pay duty under Rule 3(4) of the Cenvat Credit Rules, 2002 with respect to those capital goods on which Cenvat credit is taken but are cleared as waste and scrap after its long usage in the factory of manufacture.

Appellant’s Contention:-Shri G.P. Thomas (AR) appearing on behalf of the Revenue relied upon the judgment of Madras High Court in the case of CCE, Salem v. Rogini Mills Limited [2011 (264)E.L.T.367 (Mad.)] to argue his point that at the time of removal of capital goods after use the quantum of credit taken is required to be reversed based on depreciated value of the capital goods, as per the provisions of Rule 3(4)(c) and 3(5) of Cenvat Credit Rules, 2004.

Respondent’s Contention:-Shri S. Suriyanarayanan, (Advocate) appearing on behalf of the respondents on the other hand relied upon the following case laws to put forth his view point that at the relevant time capital goods removed as such would mean that the capital goods are not installed on which Cenvat credit was taken :-
(a)       Raghav Alloys Limited [2011 (268)E.L.T.161 (P & H) = 2012 (26)S.T.R.87 (P & H)
(b)       Cummins India Limited [2007 (219)E.L.T.911 (Tri.-Mum.)]
(c)        Navodhaya Plastic Inds. Limited [2013 (298)E.L.T.541 (LB)
It was the case that only a part of the capital goods (De-linking Cell) was cleared as waste and scrap as per second paragraph of the show cause notice, dated 23-9-2004. It was also argued by learned advocate that adjudicating authority has gone beyond the scope of show cause notice while arguing that capital goods were never put to use. Learned advocate made the Bench go through paragraph 16 of the OIO, dated 20-12-2006 and argued that only De-linking cell was removed by the respondent which was a part of De-linking Plant imported by respondent; that entire Service Tax credit of Rs. 13,79,969/- was availed with respect to De-linking Plant and no separate CVD was paid with respect De-linking Cell. It was the case that Cenvat credit for the entire De-linking plant cannot be disallowed merely on the ground that a part of De-linking plant was sold as De-linking Cell for which separate CVD paid at the time of import is not calculated by the Revenue.

Reasoning of judgement:- Heard both sides and perused the case records. The issue involved in the present proceedings is whether the Cenvat credit is required to be reversed with respect to capital goods which are used in the manufacturing activities and after a long period of use, a part of total capital goods, on which credit is taken, is cleared as waste on payment of Excise duty based on transaction value of the scrap sold. It is observed from the judgment of Punjab & Haryana High Court in the case of CCE, Chandigarh v. Raghav Alloys Limited [2011 (268)E.L.T.161 (P&H)] that during the relevant period no Cenvat credit was required to be reversed if the capital goods are cleared after utilisation and are not cleared as such. In this regard Para 8 of this judgment is relevant and is reproduced below :-
“8. We have heard arguments of both the ld. Counsel. The Tribunal has rightly noted that unlike inputs, which get consumed 100% with the same are taken up for use in relation to manufacture of finished goods, capital goods are used over a period of time. The capital goods loose their identity as capital goods only when after use over a period of time, the same has become in-serviceable and fit to be scrapped. The object of Cenvat credit on capital goods is to avoid the cascading effect of duty. If even after use for a couple of years, the Cenvat credit is required to be reversed then it would certainly defeat the object of the scheme. To avoid misuse of the scheme in the Rules, it has been provided that if the machines are cleared as such the Assessee shall be liable to pay duty equal to amount of Cenvat credit availed. The machines which are cleared after utilization cannot be treated as machines cleared as such. With effect from 13-11-2007, a proviso has been added to Rule 3(5) of the Cenvat Credit Rules providing that if the capital goods on which Cenvat credit has been taken are removed after being used, the manufacturer shall pay the amount equal to Cenvat credit taken on the said capital goods reduced by 2.5% for each quarter of year or part thereof from the date of taking the Cenvat credit. The Board has also in the Circular, dated 1-7-2002 clarified that in the case of clearance of goods after being put into use, the value shall be determined after allowing the benefit to depreciation as per rates fixed in Board’s Letter, dated 26-5-1993. The Respondent has utilized the machinery for nine years and paid duty on transaction value. The machine cleared after putting into use for nine years cannot be treated as Cleared ‘as such’. Insertion of proviso w.e.f. 13-11-2007 makes it clear that there is difference between machines cleared without putting into use and cleared after use. The Bombay High Court has upheld the view of the Tribunal in the case of Cummins India Limited v. CCE, Pune-III - 2007 (219)E.L.T.911 (Tri.-Mumbai). The Tribunal in the case of Nahar Fibres has also dismissed Appeal of the Revenue and there is nothing to show that the said decision of the Tribunal has been set aside by any Court.”
In the present proceedings there is no evidence relied upon in the show cause notice that part of capital goods cleared was not put to use. The ratio of relied upon case laws by Respondent is squarely applicable tothe facts of this case.
It is also observed from the case records that Cenvat credit of Rs. 13,79,969/- was taken by respondent with respect to the entire De-linking Plant imported whereas a part of De-linking plant was sold which is described as ‘De-linking Cell’ on which respondent paid duty amount of Rs. 1,84,000/-. There is no allegation in the show cause notice, dated 23-9-2004 that De-linking plant was sold as such and not after use. There is no specific finding of the lower authorities that De-linking plant was sold as such in the guise of scrap. There is no evidence on record that entire De-linking plant on which Service Tax credit Rs. 13,79,969/- was removed by the respondent. Thus for removing a part of De-linking plant after use on payment of duty, entire Cenvat credit cannot be denied. In view of the above observations the appeal filed by the Revenue is required to be rejected.

Decision:- Accordingly, appeal filed by the Revenue is rejected.

Comment:-The crux of the case is that when inputs or capital goods on which CENVAT credit has been taken are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such inputs or capital goods. Cenvat credit is not required to be reversed if capital goods were cleared after utilization Cenvat credit. Further, for removing a part of the capital goods as such, entire Cenvat credit cannot be denied. Therefore in the present case entire cenvat credit can’t be denied.

Submitted By:- Somya Jain

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PJ/CASE LAW/2015-16/2990

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