Whether unutilized balance of Cenvat credit transferred without transferring capital goods is proper?

Case:- M/s Ispat Industries Ltd. Vs. C.C.E., Raigad

Citation:- 2013-TIOL-565-CESTAT-MUM

Issue:- Whether unutilized balance of Cenvat credit transferred without transferring capital goods is proper?

Brief Facts:- The appellant having unit at Dolvi are engaged in the manufacture of excisable goods viz H.R. Coils & sponge iron falling under Chapter 72 of C.E.T.A. 1985. The appellants have one of their unit located at Kamothe which was engaged in the activity of cutting/slitting of H.R.coils into sheets/plates/strips. The CBEC vide circular No.811/08/2005-CX dated 02.03.05 withdrew its earlier circular dated 7.9.01 wherein it was clarified that the process of cutting or slitting of H.R.coils into sheets/plates/strips would amount to manufacture. Consequently, Kamothe unit of the appellants surrendered their Central Excise Registration and transferred the unutilized balance credit to their unit situated at Dolvi and the unit at Dolvi availed the aforesaid credit. The appellants did not transfer any stock of inputs as such or in process or the capital goods. Therefore, the department initiated proceedings against the appellants for contravention of provisions of Rule 10 of the Cenvat Credit Rules, 2004 and accordingly the ld. Commissioner disallowed the Cenvat credit and imposed equal amount of penalty against Unit at Dolvi and Kamothe respectively. Hence, appellant filed appeal before Tribunal.

Appellant’s contention:- The appellant submits that as far as the findings of the ld. Commissioner in para 16 of the order that the Kamothe unit had at the time of shifting removed all the inputs( as such or in the form of work in process) to Dolvi on payment of duty equal to the credit availed even after that it was left with a balance of Rs. 2,01,49,097/- which was transferred to Dolvi unit, the contention of the appellants is that the denial of credit is solely on the ground that the inputs and capital goods ought to have been transferred. This reasoning is completely flawed as the Rule 10(3) used the expression inputs or capital goods and not capital goods. The contention is that their Kamothe unit had not availed any Cenvat credit on capital goods since they were taken on lease, hence the question of shifting the capital goods did not arise. The contention is that disallowance of the credit on the premise that capital goods had not been transferred is also beyond the scope of the allegations leveled in the notice.

The appellant also submits that even after transfer of all inputs, work in progress to Dolvi, the Kamothe unit had an unutilized Cenvat balance. The credit which had accumulated at Kamothe was on account of the fact that the appellants earlier had a factory at Taloja (this unit commenced business on 16.4.2002) and the same was shifted to Kamothe along with unutilized credit balance in April 2005. The credit which had accumulated at the Taloja unit was on account of exports made under Bond from that unit. The unutilized balance lying at Kamothe which was transferred to Dolvi was out of the credit which was transferred to it from Taloja.

The appellant further submits that the Commissioner has overlooked the provisions of Rule 10(3) of the Cenvat Credit Rules, 2004, inasmuch as the said rule clearly provides that in a case where unutilized credit has been transferred on account of shifting of a factory, the input or capital goods on which credit has been availed should be duly accounted to the satisfaction of the Asstt. Commissioner or Dy. Commissioner. It is submitted that the rule cannot and does not contemplate that where there are no inputs or capital goods available, unutilized credit cannot be transferred or that even where no cenvat has been availed on any input or capital goods the same should also be transferred. The appellants also submitted that the credit which was transferred had undisputedly got accumulated on account exports under bond by the Taloja unit.

Respondent’s contention:- The contention of the department is that the appellants closed their unit at Kamothe and removed all its inputs, both as such and in process to their unit at Dolvi on payment of duty equal to the credit availed on the inputs which is not in dispute. The contention is that however, after passing on the credit available on the said goods to their unit at Dolvi, they are left with the balance in their credit account. This credit was transferred by the unit at Taloja to their unit at Kamothe on the closure of the unit at Taloja. Thus the credit balance available with the Kamothe unit which was transferred by unit at Kamothe to unit at Dolvi was received from Taloja unit. The appellants have admitted this fact in para 3 in their appeal memorandum.

The Revenue also submit that the credit has been transferred without transferring any input as the same was not available with them which is in clear violation of sub-rule (1) read with sub-rule (3) of Rule 10 of Cenvat Credit Rules, 2004 and therefore Cenvat Credit of aforesaid amount is not admissible. The contention is that the activity of cutting and slitting of HR Coils into HR sheets/strips has been considered by the Hon'ble High Court of Delhi in case of M/s Faridabad Iron and Steel Traders Association (2204 178 ELT 1099) 2003-TIOL-79-HC-DEL-CX as a process not amounting to manufacture. The appeal filed by the Revenue against aforesaid order has been dismissed by the Hon'ble Supreme Court vide their judgement dated 13.7.2004. Subsequently, the Board vide Circular No. 811/08/2005-Cx. Dated 02.03.2005 withdrew the earlier circular issued by it on 07.09.2001 and clarified that the process of cutting and slitting of HR coils into HR sheets/strips does not amount to manufacture. In these circumstance, the unit at Kamothe have been found to be not a manufacturer of excisable goods. Therefore, the provisions of Central Excise Act, 1944 and Rules thereunder including Cenvat Credit Rules, 2004 will not apply to the appellants unit at Kamothe.

The Respondent also submit that the sub-Rule (1) of Rule 10 allows a manufacturer to transfer the unutilized credit in its records only when he shifts his factory to another site as stipulated in sub-rule (3) ibid. Without shifting plants and machinery to the new location, a manufacturer cannot be considered to have shifted his factory within the meaning of sub-rule (3) supra. The shifting of a factory contemplates shifting of entire manufacturing operations undertaken with the aid of plant and machineries at the earlier location to the new location. Without shifting plant and machinery it cannot be construed that the factory has been shifted. In the instant case, no plant and machinery has been shifted from the appellant unit, Kamothe to unit at Dolvi. Therefore, merely transfer of Cenvat credit available in records without transferring any input is not admissible under rules supra. Unit at Kamothe were aware of the fact that the excisable goods cleared on payment of duty by unit at Dolvi by utilizing the Cenvat Credit wrongly transferred by them actually amounted to clearance of such goods without payment of duty, which made the goods so cleared liable for confiscation. In light of the same, Unit at Kamothe have made themselves liable for penal action under Rule 26 of the Central Excise Rules, 2002.

The respondent further submit that it is evident from the records that the appellant have relied on the Hon'ble High Court's judgment in case of Commissioner of Central Excise, Pondichery vs CESTAT reported in 2009(240) ELT 367 (Mad.) 2009-TIOL-518-HC-MAD-CX and Shree Rama Multi- Tech Ltd. vs. Commissioner of Central Excise, Pondicherry reported in 2007 (217) ELT 136 (Tri-Chennai) 2007-TIOL-2333-CESTAT-MAD and AAR AAY Products Pvt. Ltd. vs Commissioner of Central Excise, New Delhi reported in 2003 (157) ELT 40 (Tri-Del) in support of their claim. In aforesaid judgements, since the factory was shifted it was held that the transfer of Cenvat credit is admissible. Above laws are not applicable in the instant case, as no plant and machinery as well as manufacturing operations were shifted from the appellant unit at Kamothe to the appellant unit at Dolvi. The appellants have also relied on Hon'ble tribunal order in case of Dr. Reddy's Laboratories Ltd. reported in 2005 (191) ELT 660 (Tri-Chennai), wherein inadmissibility of Cenvat Credit on input was upheld as the one factory was amalgamated into another. There is no such amalgamation in this case, therefore, this case law is also not applicable.

Reasoning of judgment:- The Tribunal heard both the parties, considered the submissions and perused the records. The Tribunal finds that the department has sought to deny transfer of unutilized credit which the appellants have transferred under the provision of rule 10 Cenvat Credit Rules, 2004 which is reproduced hereunder for reference of convenience:-

“Rule 10. Transfer of CENVAT credit.- (1) If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.

(2) If a provider of output service shifts or transfers his business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business, then, the provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated business.

(3) The transfer of the CENVAT credit under sub-rules (1) and (2) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central Excise or, as the case may be, the Assistant Commissioner of Central Excise."

The Tribunal finds that from the above it follows that the transfer of Cenvat Credit shall be allowed only if stock of inputs as such or in process, or the capital goods is also transferred along with the factory and the inputs or capital goods on which credit has been availed of are duly accounted for to the satisfaction of Dy. Commissioner/Asstt. Commissioner of Central Excise. The capital goods which were on lease were returned by the appellants to its owner, is not in dispute. Further on perusal or para 16 of the impugned order we find that the appellant shifted all their inputs both as such or in process, and its finished goods to their unit at Dolvi on payment of duty equal to the credit availed on inputs. We find that the department case is only that the capital goods has not been transferred alongwith inputs. It is pertinent that Rule 10(3) uses the expression “inputs or capital goods” and “not inputs and capital goods” as has been contended by the department. The appellants have transferred all duty paid inputs and work in progress to their Dolvi unit as already discussed. Further, if an assessee has to transfer inputs corresponding to the transfer of entire cenvat credit in that situation the assessee can at any time clear the inputs on payment of duty and avail the credit of the same a the different location. In such a situation the provision of Rule 10 would be rendered redundant. Further the Ld. Commissioner while confirming the demand has referred to the Order-in-Original, in this referral we find that the said order has been set aside by the Tribunal and the appeal filed by the department against the order of the Tribunal has been dismissed by the Hon'ble Bombay High Court vide order. In these circumstances, the Order-in-Original is not sustainable and according the same is set aside and the appeal is allowed.

Decision:- Appeal is allowed

Comment:- The crux of this case is that as per Rule 10, cenvat credit is allowed to be transferred to the new factory in case of shifting of the old factory. However, the condition is that the stock of inputs or capital goods on which credit have been availed should also be transferred. In the instant case, the capital goods were leased and so returned to the lessor and as it is not possible to transfer the capital goods, credit was held to be admissible.

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