Whether the log-yard located away from facory will be considered as part of factory?

Case: -1) GREENPLY INDUSTRIES LTD, 2) SHRI RAJESH MITTAL, 3) SHRI ARABINDA KUMAR SAHA Vs COMMISSIONER OF CENTRAL EXCISE, KOLKATA-II

Citation: - 2012-TIOL-1082-CESTAT-KOL
Issue:- Whether the log-yard located away from facory will be considered as part of factory?
Brief fact: - The Appellant are engaged in the manufacture of plywood and veneer falling under Chapter Sub Headings: 44121390 and 44083908 of the Central Excise Tariff respectively. In the manufacture of the said finished excisable goods, they use wooden logs and timbers as their principal raw material on which they avail CENVAT Credit. Due to various restrictions of using indigenous raw materials, the same are imported by the Appellant. The applicable Additional Duty of Customs was paid at the time of import and the CENVAT Credit on the said Additional Duty (CBD) is availed and utilized by them later in the clearance of the finished excisable goods.

After importing the said raw materials namely, logs and timbers which are of 35 ft. to 40 ft. in length are stored at their log-yard at Dostipur, which is located about 12 Kms. away from their factory. At this log-yard, the imported wooden logs and timbers are immersed in water for a period ranging from 15 days to 2 months and thereafter, cut into the required sizes of around 6 ft. to 8 ft in length so as to make it suitable for peeling in machines installed in their factory to be used in or in relation to the manufacture of the finished goods. It is the case of the Department that the Appellant had wrongly availed the CENVAT Credit on the Additional Duty of Customs (CVD) before receipt of the said inputs namely, wooden logs and timbers, in the factory, and had accordingly contravened the provisions of Rules 4(1) and 3(4) of the CENVAT Credit Rules, 2004. Consequently, the CENVAT Credit of Rs.1,72,88,203.00 on the CVD paid as reflected in the Bills of entry during the period from April, 2006 to September, 2007 are inadmissible to them. It is also the case of the Department that as the "CENVAT Credit was not admissible to them because of non-receipt of the inputs in their factory at the time of availing the CENVAT Credit in their books of accounts, hence, utilization of the said Credit towards the payment of duty on the finished goods was also irregular and in Contravention of the Rules 8(1), 8(3) and 8(3A) of the Central Excise Rules, 2002. Accordingly, the clearances affected during the period from 06.04.06 to December, 2007 by utilizing the CENVAT Credit had been held to be irregular and the duty was required to be paid only by debiting from their PLA Account. It is also the case of the Department that there was some removal of inputs involving the Credit of Rs.79,453.00 as such during the period, 2006-07 in contravention of sub-rule 5 of Rule 3 of the CENVAT Credit Rules, 2004.

A show-cause-cum-demand notice No.V(15)/02/CE/ADJN/Greenply/KOL VII/08 dated 28.03.08 was issued to the Appellant by the Commissioner of Central Excise, Kolkata-VII, proposing recovery of CENVAT Credit wrongly availed and also the duty wrongly paid by utilizing the said inadmissible CENVAT Credit during the relevant period.

The Commissioner of Central Excise had adjudicated the case and disallowed the CENVAT Credit of Rs.1,72,88,203.00 and imposed equivalent penalty on the Appellant. He had also confirmed the duty of Rs.5,87,85,830.00 under Rule 8(3A) of the CENVAT Credit Rules, 2002 which was paid by the Appellant by utilizing inadmissible CENVAT Credit. Also he had disallowed the CENVAT Credit of Rs.79,453.00 on the inputs cleared without debiting the CENVAT Credit and imposed an equivalent penalty. Besides, he had imposed a personal penalty of Rs.50.00 lakh on the Managing Director and Rs.25.00 lakh on the General Manager. Hence these Appeals filed against the Order-in-Original No.4/Commr/CE/Kol-VII/ADJN/2008-09 Dated: 22.10.2008 passed by the Commissioner of Central Excise, Kolkata-III.

Appellant Contention: - The learned Senior Advocate confines his arguments only to the question of inadmissibility of CENVAT Credit on late receipt of the inputs in the factory. He has not pressed the disallowance of the CENVAT Credit of Rs.79,453.00 directed to be paid on account of clearance of inputs as such, without reversal of the CENVAT Credit. The learned Advocate submits that due to Governmental restrictions for several years, indigenous timber logs are not available, and therefore, the entire requirement had to be fulfilled only by way of
Importation.

The Ld Sr. Advocate further submits that the factory premises of the Appellant is situated in an area of merely 3.95 acres, which is almost fully equipped by various plants, machinery and equipments for its manufacturing activities carried on at the factory and there is hardly any space at the factory for storage and handling of such large sized imported logs and any such large quantities. Besides, the factory is not equipped with any water pond whereas the Imported logs are required to be kept immersed in water so as to make the timber soft to facilitate the process of peeling, Keeping the requirement in mind, the Appellant accordingly maintains a log-yard at Dostipur, which is around 12 Kms. away from their factory and the total area of the log-yard is around 9.24 acres. The stock of imported logs normally maintained by the Appellant in this log-yard on an average is about 3 lakh cft.or about 3000 logs. Soon after the clearance of these imported logs from the Customs area, these are directly transported to the said log-yard by the transporters. In the Lorry Challans, numbers of logs as well as their identification numbers are duly mentioned. On reaching the log-yard at Dostipur, necessary entry in the Gate Register and the serial number of the entry in the Gate Register is also endorsed on the Challan. Simultaneously, the Appellant's own identification serial number called as "Mill Serial Number" is allotted to each log with markings thereon. These Mill Serial Numbers and details of measurement of each log are entered in the 'Measurement Book' at the log-yard.

They also submit that the said log-yard is used not only for the purpose of storage of the said logs, but also for undertaking certain pre-manufacturing process. He has submitted that after painting/marking "Mill Serial Number" on the logs, these are dropped in water ponds and kept immersed in the water and thereafter, the said logs are cut into 3-4 pieces by Surface Machine and the cut-pieces of the logs are called as 'blocks'. The length of the said block is around 6 ft to 8 ft after cutting the log into blocks. Each block is marked with the "Mill Serial Number" already allotted to the log as well as block numbers by giving "A", "B", "C" on the blocks. The blocks duly marked with "Mill Serial Number" and "Block Number" are transported along with the delivery challan to the main factory, for which the challans are prepared at the log-yards. All the challans are serially numbered and dated. The said challans indicate the Mill Serial Number as well as the Block Number along with the size of each such piece. When these blocks are received in their registered factory, the same are entered in the Gate Register maintained at the factory. At the back-side of each accompanying challan at the log-yard, serial number and date on the Gate Register are endorsed so as to maintain proper correlation. The said blocks are later used in the manufacture of final products namely, veneers and plywood.

Learned Advocate contends that there is a systematic procedure of keeping accounts of each of the log, and when it is converted into blocks, the same are also duly accounted for in the relevant registers maintained with the log-yard and also on the date of receipt at the factory premises. The only discrepancy that has been pointed out by the department is that the Cenvat credit on the respective bills of entry ought to have been availed in the books of accounts, after receipt of the inputs in the form of blocks in their factory, but not on the date of receipts of the bills of entry without receiving inputs in their registered factory.

The Appellant has advanced a three fold argument. At the first instance, he has submitted that the log-yard which is situated at about 12 Kms. away from the factory premises, could be treated as a factory for the purpose of CENVAT Credit, inasmuch as certain pre-manufacturing processes were carried out in the said log-yard namely, softening the log and immersing in the water for a period ranging from 15 days to 2 months and cutting the logs into different sizes so as to make it suitable to be used in the factory for the manufacture of finished goods. He has heavily relied on the definition of 'factory' contained in Section 2(e) of the Central Excise Act, 1944. The said definition of 'factory' reads as follows:-

"2(e) 'factory' means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on;"

He has submitted that 'factory' means any premises including the precincts thereof, wherein or in any part of which excisable goods are manufactured, or wherein or in any part of which any manufacturing process contended with the production of these goods is being carried on or is ordinarily carried on. In the present case, a part of the manufacturing process is being carried out at the log-yard, and hence the same ought to be treated as an extended factory or a factory this. He has relied upon the following case-laws:

(a) 2010 (257) ELT 321 (SC) = 2010-TIOL-59-SC-CX (Madras Cement Ltd. Vs. CCE);

(b) 2006 (194) ELT 3 (SC) = 2006-TIOL-04-SC-CX-LB (Vikram Cement Vs. CCE) ;

(c) 2003 (159) ELT 393 (Mangalam Enterprises Vs. CCE & C);

(d) 1998 (99) ELT 513 (Vadilal industries Ltd. Vs. CCE);
(e) 2004 (176) ELT 202 = 2004-TIOL-347-CESTAT-MUM (Nebula Chemicals Vs. CCE)

Advancing his second limb of argument he has submitted that their case is covered under
Rule 4(5) of the CENVAT Credit Rules 2004, wherein it is laid down that the goods may be sent for processing on job work basis at a place outside the factory and the said processed goods be returned to the original factory within 180 days from the initial date. The Learned Counsel for the Appellant submits that since in their case, the inputs were sent directly from the place of importation to the log-yard for the process of cutting and curing, there was no irregularity in availing the CENVAT Credit on the said inputs at their factory. Further, he has submitted that the whole process from the stage of importing the raw logs in their log-yard upto its receipt in the factory, had been duly accounted for and there is not a single whisper or allegation that all these inputs were cleared without payment of duty by the Appellant. Hence, availing of CENVAT Credit on the bill of entry at the factory at the same time when the inputs were received at their log-yard, cannot be considered as irregular and violative of the provisions of Rules 4(1) and 3(4) of the CENVAT Credit Rules. In support of his contention on the applicability of Rule 4(5), the learned Counsel has relied on the following judgments:-

(a) 2007 (220) ELT 471 (Tri-Mum) = 2007-TIOL-230-CESTAT-MUM (Indorama Textiles Ltd. Vs. CCE).
(b) 2011(266) ELT 217 (British biologicals V/s CCE)

Learned Advocate has further submitted that their case is also covered under Rule 8 of the CENVAT Credit Rules, 2004 where it is provided that permission could be granted for storage of inputs outside the factory premises. It is their contention that no prior permission is required under Rule 8 of the CENVAT Credit Rules for storage of materials in the factory premises. Further, it is submitted that there is no requirement under Rule 8 of the said Rules that the log-yard has to be registered with the Central Excise Authorities or that it has to be included in the Ground Plan of the factory. Appellant however, fairly accepts that there was a time-lag between the date of availing the credit on the strength of bill of entry and receipt of the inputs in the factory premises, for which the Appellant at best would be liable to pay interest far availing the credit in advance in the event their Log Yard is not considered as factory. Learned Advocate further submitted that all the records were duly maintained by them from the date of receipt of the inputs till the date of its consumption in the factory and hence, there is no contravention of Rule 9(5) of the CENVAT Credit Rules, as alleged.

Respondent Contention:- The Revenue has submitted that there is no dispute of the fact that the Appellant had availed CENVAT Credit on inputs before receipt of the same in their registered factory. The delay in receipt of the inputs in their factory, sometimes had even taken more than 6 months. the Credit amounting to Rs.15,95,283.00 availed on the strength of the relevant bill of entry in September, 2007 wrongly was reversed, as the inputs shown in the relevant bill of entry had not been received in their registered factory as on 6.10.07. Further, he has submitted that misleading challans were prepared for sending the partly processed logs from the log-yard to the factory, and they did not maintain the bill of entry-wise accounts in their registered factory premises. Also he has submitted that the Gate Register maintained at the factory premises fraudulently shows the receipt of inputs in the factory on the dates of receipt of the log-yard. Further, he has contended that proper accounts were not maintained at the log-yard relating to the said inputs.

Learned A.R. has submitted that in view of the specific provisions contained at Rule 4(1) of the CENVAT Credit Rules 2004, the Credit in respect of the inputs may be taken immediately on receipt of the inputs in the factory and the said provisions should be read in its context and literal interpretation of the said Rule is warranted in view of the ratio of the Hon'ble Supreme Court in the case of Trutuf Safety Glass Industries vs. Commissioner of Sales Tax, UP [2007 (215) ELT 14 (SC)] = 2007-TIOL-140-SC-CT and in the case of Baidyanath Ayurved Bhawan (P) Ltd. vs. Excise Commissioner, UP.[1999 (110) ELT 363 (SC)] . It is also his submission that CENVAT Credit availed in contravention of the provisions of the CENVAT Credit Rules leads to penal consequence under Rule 15 of the CENVAT Credit Rules and therefore, it is mandatory in character in view of the judgments of the Hon'ble Supreme Court in the case of State of Jharkhand vs. Ambay Cements [2004 (178) ELT 55 (SC)] = 2004-TIOL-89-SC-CT and Vidushi Wires Pvt. Ltd. vs. UOI [2003 (156) ELT 168 (Bom)] = 2003-TIOL-152-HC-MUM-CX. It is his contention that the burden of proof in availing the CENVAT Credit always rests on the assessee and not on the Department. They also submitted that the log-yard cannot be treated as an extension of the factory, as defined under Section 2(e) of the Central Excise Act. It is his submission that the said definition has to be read along with Section 6 of the Central Excise Act read with Rule 9 of the Central Excise Rules and with Notification No.30/2002-CE(NT) dated 17.09.2002, which prescribes the procedure for registration of a factory under the Central Excise Act. He has submitted that these provisions when read together and harmoniously, make it abundantly clear that a registration is valid only for the premises declared and the word, 'factory' has to be construed accordingly. The log-yard in question is, therefore, not a 'factory' within the meaning of the declaration under the legal provisions, and therefore, the same is clearly an undeclared premise. He has submitted that the fact that some of the manufacturing process was being carried out in the said premises without informing the Department and without following the legal provisions, is an offence and the Appellant cannot turn that fact to their advantage by contending that the log-yard is, in effect, an extension of the factory, which is situated 12 km. away from the factory. He has, further, submitted that in exceptional circumstances, storage of the duty-paid goods was allowed outside the factory premises, if an application was made in this regard. In the presentcase, there was no such application. Hence, there was no permission for storage of the goods in the said log-yard. Further, it is not a mere storage of inputs outside the factory, i.e. in the log-yard but admittedly, two processes were carried out in the log-yard, i.e.(i) inputs were immersed in water for a period of time; and (ii) the same were cut to smaller sizes. Hence, Rule 8 of the GENVAT Credit Rules cannot be made applicable to the facts of the present case. He has also submitted that the said log-yard cannot be treated as premises of a job worker under Rule 4(5) of the CENVAT Credit Rules 2004, as the Appellant cannot be treated as a job worker to themselves. Besides, the prescribed procedure for job work had neither been followed in their case, nor the processed inputs were received in the factory within the stipulated period of 180 days. Since the CENVAT Credit on the inputs were not admissible to them, the offences under Rule 8 of the Central Excise Rules were automatic. Also he has Submitted that the element of suppression and contravention of the Rules with intent to evadeduty had been established being dealt with at length by the Adjudicating Authority.

Reasoning of Judgment: A simple reading of the definition of 'factory' laid down at Section 2(e) of the Central Excise Act, 1944 makes it is clear that factory means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on. The Tribunal is not totally impressed with the arguments advanced on behalf of the Revenue in the context and the facts & circumstances of the present case. The Hon'ble Supreme Court in the case of Vikram Cement Vs. CCE, Indore (Supra) while approving the earlier judgement in Jaypee Rewa Cement Vs. Commissioner of Central Excise has allowed the CENVAT credit availed on the inputs namely, explosives used outside the factory premises i.e. in mines for manufacture of intermediate products, which in turn, are used in or in relation to the manufacture of the finished goods in the factory premises. The implications of these judgements are more or less are that the mines which are situated outside the Registered factory are considered as an extension of factory. Otherwise the inputs used outside the Registered factory premises could not have been said to be eligible to Cenvat Credit if the definition of 'factory' as argued by the Revenue is accepted.

In the present case, Tribunal find that the log wood imported by the Appellant are initially subjected to the process of curing and cutting in their own premises i.e. at the log yard, dedicated only for the said purpose, later the processed inputs are transferred to the registered factory premises for use in or in relation to the manufacture of the finished goods. In the extreme case accepting for a while the plea of the Revenue that the factory referred in the Rules is only a Registered factory even then, in the facts and circumstance of the present case, at best it could be a procedural aberration of not getting the log-yard registered as factory under the relevant provisions of the Central Excise Act and the Rules made thereunder, but that would not result into denial of the CENVAT Credit on the inputs duly received by the Appellant later in their Registered factory premises and used in or in relation to the manufacture of finished goods. Therefore, Tribunal are of the opinion that the definition of factory ought to be examined in the context and on the facts & circumstances of the present case and also by taking into consideration the ratio of the Hon'ble Supreme Court in the aforesaid cases. The admissibility of the CENVAT Credit availed by the Appellant on the inputs, thus rests on the above interpretation of the definition, 'factory', and also on the veracity of the claim of the Appellant that the entire quantity of the inputs on which CENVAT credit availed were first received in their log-yard and later, transferred to their registered factory premises to be used in or in relation to the manufacture of the finished goods.

Tribunal do not find any substance in the argument of the Appellant that the log-yard be considered as the place of job-work and they are covered under the job work procedure laid down under Rule 4(5) of the CENVAT Credit Rules for the simple reason that they themselves cannot be their job-worker as per the definition of 'job-work' and job-worker' laid down at Rule 2(n) of the CENVAT Credit Rules, 2004. Besides, their claim that the log yard be considered as a place of storage of inputs and no prior permission is required under Rule 8 of the CENVAT Credit Rules for the said purpose, is also devoid of merit in as much the inputs received in the log yard are not simply for the purpose of storage but the same are subjected to the process of curing and cutting, that is, some processes are carried out in the said premises and the inputs are converted into intermediate goods which are subsequently used in the manufacture of finished goods at their registered factory premises. Consequently, the case laws cited in support of these arguments are not relevant to the facts in issue and accordingly not applicable.

It has categorically submitted that records relating to receipt/storage/disposal of the inputs are duly maintained at their log-yard as well in their factory premises, and from these records they could demonstrate and establish to the satisfaction of the department that the receipt, storage and consumption of inputs are properly accounted for at every stage. Therefore, these issues need fresh consideration by the adjudicating authority to which both sides agree. Tribunal find that all other issues decided in the impugned Order are linked to the main issue of eligibility of CENVAT Credit availed on the inputs during the period from April, 2006 to December, 2007. Hence, the determination of the eligibility of the CENVAT Credit of the inputs will precede all other issues. Consequently, as agreed by both sides, Tribunal remand the case to the Adjudicating Authority for de novo consideration, by setting aside the impugned Order except to the extent of disallowance of CENVAT Credit amounting to Rs.79,453.00 with interest and imposition of penalty of equal amount being not pressed by the learned Advocate. It is made clear that all other issues are kept open. The Appeals are thus partly allowed by way of remand.

Decision:- Appeal partly allowed by remand.

Comments :- This is vey important decision wherein the definition of “factory” has been discussed and it has been interpreted that the log yard, which is situated away from the factory will be considered as part of factory only. Although all the issues are kept open by the tribunal and receipt and consumption of inputs is to be considered by adjudication officer. But it is clear from the judgement as well as various citations of Apex Court that the log yard will be considered as part of the factory.

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PJ/Case Laws/2012-13/1206

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