Whether option of paying 10% of exempted value for availing credit deniable on basis that percentage of dutiable goods is very less?

Case:-M/s OBERTHUR CARD SYSTEM PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, NOIDA

Citation:-2013-TIOL-938-CESTAT-DEL

Brief facts:- The appellants are manufacturer of Smart Cards and SIM Cards falling under Tariff Item No. 852352 and 85235210 respectively of First Schedule to the Central Excise Tariff and they are also availing the Cenvat credit facility on inputs viz. Plastic cards and modules (micro controller for smart cards, secure micro controller for smart cards). The Smart/SIM card is made of plastics and is embedded with a hologram to avoid counterfeiting. The second component is module which consists of memory storage and is microprocessor component. The smart cards manufactured by the appellant are of two types i.e. recorded and unrecorded. Recorded smart cards were exempted from payment of duty from 19th July 2007 onwards vide Notification No. 31/2007 dated 19th July 2007 whereas unrecorded cards continued to be dutiable. The appellants were availing the facility of paying an amount equivalent to 10% of the value of exempted goods following Rule 6(3) of the Cenvat Credit Rules. Investigation was taken up by the DGCEI and the officers observed that the quantity of unrecorded smart cards manufactured by the appellants is very less and therefore the appellant is a manufacturer of exempted goods only and therefore not eligible for Cenvat credit on quantity/input or input services which are used in the manufacture of exempted goods. Accordingly, a Show Cause Notice dated 23rd February 2009 was issued to the appellants demanding the Cenvat credit under Rule 14 of the Cenvat Credit Rules read with Section 11A(1) of the Central Excise Act along with interest. It was also proposed to impose the penalty under Rule 15 of the Cenvat Credit Rules read with Section 11AC of the Act. The Show Cause Notice was contested by the appellants and the Commissioner vide impugned order has confirmed the recovery of Cenvat credit along with interest and also imposed the equal amount of penalty on the appellants under Rule 15 read with Section 11AC of the Central Excise Act. The appellants have challenged this order before this Tribunal.

Appellant’s Contention:-The Appellant submits that input utilised by them in the manufacture of dutiable goods and exempted goods were the common inputs. The entire raw material i.e. plastics and the modular which are imported/procured locally is used to first manufacture the unrecorded smart cards. Thereafter, these unrecorded smart cards undergo the personalisation process subsequent to which the recorded smart cards come into existence. He further submits that since the inputs used for dutiable as well as the exempted goods are common, the appellants have opted for not maintaining the separate accounts and were paying amount @ 10% of the value of the exempted goods cleared from the factory. He submits that with effect from 1st April 2008 an additional option was incorporated under Rule 6(3) for proportionate reversal of the credit attributable to input and input services utilised in the manufacture of exempted goods. He submits that there is no provision under Rule 6 prescribing any minimum limit of dutiable production by the assessee. He further points out that the appellant is eligible for availing the Cenvat credit on the inputs as they are paying 10% of the price of exempted goods under the provisions of Cenvat Credit Rules. In respect of the exports made by them, they are eligible for Cenvat credit even for exempted goods under Rule 6 (6)(V) of Cenvat Credit Rules. He also submits that Show Cause Notice in this case was issued on 23rd February 2009 for a period 19.7.2007 to 31st June 2008. Therefore the demand is also hit by time limitation.

Respondent’s Contention:-The Respondent reiterates the finding of the Commissioner and submits that the total quantity of dutiable goods manufactured by the appellant is less than 1% and therefore the appellants is primarily a manufacturer of exempted goods and not liable to take Cenvat credit under Rule 6 of the Cenvat Credit Rules. She submits that the appellants have taken the production of dutiable goods only to avail the benefit of Cenvat credit even though they did not have any demand/orders for the said goods. She submits that from the month of September 2007 to March 2008 there was almost Nil production in respect of dutiable goods. Similarly in the month of May 2008 and June 2008 there was no production of dutiable goods. A small quantity of dutiable goods were manufactured in August and April 2008 and two pieces on November 2007. She submits the exactly percentage of dutiable goods to the total production comes to 18% which proved that the appellants were engaged solely in the manufacture of exempted goods and 18% goods were manufactured only to avail the Cenvat credit. The appellants have also submitted that flow chart showing process of manufacture of the smart cards from the inputs viz. the module and plastic card. The following six processes are involved in manufacture of the smart cards :-

"(i) Lamination of modules: To laminate the bottom surface of modules with hot melt tape which helps module to stick on the card body.
(ii) Milling operation: To create the cavity on the card surface in which laminated module to be embedded.
(iii] Embedding operation: To fix the module in the cavity made on the surface of card body.
(iv) Sim-punch or Plug-in: To create the plug around the chip on the card body.
(v) Personalization: To feed the data in the memory of the chip and to print some information on the card body as customer required.
(vi) Fulfillment: If required some fulfillment operation like 'Scratch labeling' on the card surface to cover some information and 'Wrapping of cards' to be performed."

Reasoning of Judgment:- After hearing both the sides, Tribunal find that the appellants are manufacturers of smart cards falling under Chapter 85 of the Central Excise Tariff. The smart cards manufactured by them are of two types recorded and unrecorded. Recorded smart cards are totally exempted from Central Excise duty whereas unrecorded smart cards are dutiable. It is the contention of the Revenue that the appellants are exclusively engaged in the manufacture of exempted goods inasmuch as during the period August 2007 to June 2008 99% cards manufactured by them were of exempted category whereas 0.18% card were of a dutiable category. The appellants are availing Cenvat credit on the input received by them. The main inputs of these smart cards are plastic cards and modules. It is the contention of the Revenue that these inputs are exclusively user based and cannot be interchangeably used in the manufacture of dutiable cards. Since both the inputs plastic cards and the module are specific and tailor made as per the requirement of the users and these inputs cannot be used for unrecorded smart cards and therefore inputs are not the common inputs. Revenue is relying on the Statement of Shri Naveen Verma, Finance Manager and Vikas Kumar Sharma, Tax Officer of the appellants. On the other hand, it is the contention of the appellants that prior to 19.7.2007 both the goods recorded/unrecorded smart cards were dutiable and they were paying duty and availing the Cenvat credit on the plastic card and module. After the recorded smart cards were exempted they continued to avail the Cenvat credit of duty paid on inputs as they were manufacturing both dutiable as well as exempted finished goods. It is also the contention of the appellants that at the time of receipt of the input at the factory it is not possible for them to know which duty paid input would be used in manufacture of dutiable finished goods and which duty paid inputs would be used to manufacture exempted goods. There are common input, for recorded smart card as well as unrecorded smart cards. As regards the plastic card it is admitted by the appellants that sometimes they know that said plastic body would be used for recorded smart card as in those cases it bore the printed matter i.e. name, design, logo of the customer/buyers for which such recorded cards are being manufactured. But in majority of the cases where the plastic cards are being imported by them without any such printed matter and these processes are being carried out locally, it would not be possible to know as to which plastic card would be used to manufacture recorded or unrecorded smart cards. Therefore, it is the contention of the appellants that module in all the cases and the plastic card in majority of the cases are common inputs for the purpose of manufacturing recorded or unrecorded smartcards. We find that the Commissioner has held in the impugned order that both the inputs plastic card and modules are not the common inputs for the purpose of manufacture of recorded smart cards and unrecorded smart cards as these inputs are user specific and tailor made. The Commissioner had relied on the statement of Shri Naveen Verma and Vikas Kumar Sharma two officials of the appellants. On going through the statement of Shri Naveen Verma, Finance Manager of the appellant we find that he has stated that chips/modules are common inputs for both dutiable and exempted finished goods but the other major input that is plastic card are exclusively user based inputs and they cannot be used interchangeable for exempted as well as dutiable final products. We observe that there is no doubt about the module being a common input for the purpose of manufacture of dutiable as well as exempted goods as Shri Naveen Sharma has nowhere stated that this input is solely for exempted goods and the Commissioner's finding relying on this statement holding that module is not a common input is not sustainable. As regards the other input i.e. plastic card it is an admitted position by the appellant that in some cases they know that the said plastic body would be used for recorded smart cards as in those cases it bore the printed matter i.e. name, design, logo of the customer and buyer for which such cards are being manufactured. We find in respect of those plastic card on which name, design, logo of the customers are printed those plastic cards cannot be treated as a common input for both dutiable as well as exempted goods, But in respect of other plastic cards on which no such personal information i.e. name, design and logo and customer recorded those cards have to be treated as common inputs for the purpose of manufacture of both dutiable as well as exempted goods. We find that under Rule 6 of the Cenvat Credit Rules the manufacturer has been given an option to pay an amount equal to 5% or 10% of the value of the exempted goods and exempted services. This option has been availed by the appellants in the present case. We also note that there is no percentage fixed in the Cenvat Credit Rules to decide that if dutiable goods are much below that percentage, the manufacturer will be treated as exclusive manufacturer of exempted goods. In absence of any such limit mentioned in the rule Commissioner cannot deny the benefit of Rule 6(3)(1)/ Rule 6[3][b] during the relevant period to the appellants. In the impugned order the extended time limit has been invoked against the appellant on the ground that the appellants have intentionally availed ineligible credit on the inputs which were used exclusively in the manufacture of exempted goods and they had willfully misstated the inputs for dutiable goods as well as non dutiable goods as common input. As discussed in foregoing para, we find that module as well as plastic card in majority of the cases the plastic card are inputs for the manufacture of recorded as well as unrecorded smart cards. Therefore allegation of suppression or mis declaration of inputs is not sustainable in respect of modules and majority of the plastic cards against the appellant. Accordingly they will also not be liable to any penalty under Section 11AC of the Central Excise Act. As regards the admitted position by the appellants that in some cases there are plastic cards which are exclusively going to be used in the manufacture of recorded smart cards, on such quantity of the plastic cards no Cenvat credit is admissible to the appellants as these were not the common inputs for dutiable as well as exempted goods and on such inputs demand is required to be confirmed against the appellants along with interest and equal amount of penalty imposable under Section 11AC of the Act. As regards the contention of the appellants regarding availability of Cenvat credit in respect of export of the exempted goods, we find that in view of the decision of the Hon'ble Bombay High Court in the case of Repro India Ltd. Vs. UOI - 2009 (255] ELT 614 = (2007-TIOL-795-HC-MUM-CX) they will be eligible to avail the Cenvat credit on the inputs gone into the manufacture of exempted goods exported by the appellants. In view of findings in para-12 above, we remand the matter back to Commissioner for determination of demand of Cenvat credit, interest and penalty after affording an opportunity of hearing to the appellants. The appeal is disposed of in above terms.

Decision:-Appeal disposed of.

Comment:- The essence of this case is that under Rule 6 of the Cenvat Credit Rules the manufacturer has been given an option to pay an amount equal to 5% or 10% of the value of the exempted goods and exempted services and there is no percentage fixed in the Cenvat Credit Rules to decide that if dutiable goods are below some specific percentage, the option of Rule 6 would not be available to the assessee. In absence of any such limit mentioned in the rule, Revenue cannot deny the benefit of Rule 6(3)(1)/ Rule 6[3][b] availed by the assessee during the relevant period. It is also clear form this case is that extended time limit will be invoked against the assessee if he intentionally availed ineligible credit on the inputs which were used exclusively in the manufacture of exempted goods.

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PJ/Case Law/2013-14/1649

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