Admissibility of credit on Grinding wheels

PJ/Case Study/2010-11/31

CASE STUDY

Prepared By:

CA Pradeep Jain and

Sukhvinder Kaur, LLB [FYIC]

Introduction: -

Under the Cenvat Credit Scheme, the assessee is allowed to take credit of goods which are specified as capital goods or inputs which are used in or in relation to the manufacture of goods. With the amendment in the Central excise tariff, the tariff heading of various products were changed. Consequently, the amendment was done in the definition the capital goods. However, the show cause notice was issued to the Noticee in the case under study on the basis of the definition existing before the amendment was made. Whether such show cause notice is sustainable is the issue involved in this case under study?

Relevant Legal Provisions: -

Rule 2 (a) the Cenvat Credit Rules, 2004

(a) "capital goods" means:-

(A) the following goods, namely:-

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90,⁴[heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804] ^Old[heading No. 68.02 and sub-heading No. 6801.10] of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipment;

(iii) components, spares and accessories of the goods specified at (i) and (ii);

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof; and

(vii) storage tank,

used-

(1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or

(2) for providing output service;

(B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act;

In the case of M/s Angel Pipes & Tubes (P) Ltd

[Order-in-Original No. 185/2010-CE-DEMAND, Dated: 31.08.2010]

Brief Facts: -

- During the period from April, 2009 to March 2010, the manufacturer had availed cenvat credit on items namely Coated Abrasive, Grinding Wheel, Flap Wheel falling under sub-heading 6805-1010, 6804-2210, 6804-1000, 6805-2040.

- Department contended that the said items were neither inputs nor capital goods as defined under the Cenvat Credit Rules, 2004. It was contended that these items were not the spare or components of any capital goods.

- Accordingly, show cause notice was issued alleging irregular availment of credit. It was alleged that they had deliberately suppressed the said facts with intent to evade payment of duty in contravention of Rule 2 and 3 of CCR, 2004. Penal action was also proposed.

Noticee’s Contentions: -

v Noticee replied that the said items were used for grinding/polishing of their final products viz. pipes manufactured by them. They were in the nature of tools used for giving a smooth and polished finish to the pipes. They are fitted on grinding machines. Therefore, they can be said to be accessories of the machines used for manufacture of their finished goods i.e. pipes. Therefore, they are involved in the manufacturing of our final product. The capital goods namely Coated Abrasive, Grinding wheel, Flap wheel falling under subheading no. 6805-1010, 6804-2210, 6804-1000, 6805-2040 of the schedule to the Central Excise Tariff Act, 1985 are specifically mentioned as capital goods in the definition of the capital goods during the relevant period when the demand is issued to them.

v Relying upon the definition of the term capital goods in Rule 2 (a) the Cenvat Credit Rules, 2004, it was submitted that the definition of capital goods specifically mentions the item falling under the heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804, they fall under the definition of capital goods/inputs under the Cenvat Credit Rules, 2004. Hence the demand against them should be dropped.

v It was submitted that impugned show cause notice was giving the old definition of the capital goods whereas the definition of the capital goods has been amended and the new definition includes the goods falling under sub-heading no. 6805 1010, 6804 2210, 6804 1000 and 6805 2040 and therefore, they are capital goods in terms of Cenvat Credit Rules, 2004. It was submitted that the definition of capital goods also covered the spare, component and accessory of capital goods. The said wheels are used as a spare to grinding machines. In this way also, it is once again covered in the definition of capital goods and hence the credit was allowed to them.

v Alternatively, it was submitted that if the said items cannot be categorized as capital goods even then they will fall under the definition of inputs because of their usage. The said items are used in the manufacture of final product as they help in giving the product its final shape and look. Thus, credit on the said items will be available by considering them to be inputs under Rule 2 (k) of the Cenvat Credit Rules, 2004.

v Noticee relied upon the following judgments wherein the impugned items have been held as inputs or tools:

¨ Commissioner of C. Ex., Chandigarh-I v/s Eastman Cast & Forge Ltd [2002 (141) ELT 631 (P & H)]: -

Aloric Belt, Shaka Hearth and Grinding Wheel were used for manufacturing or processing of finished goods under the explanation to Rule 57Q of the Central Excise Rules, 1944, eligible for Modvat credit. No referable question of law arises. Petition filed by the revenue rejected. (Paras 1, 2, 5)

¨ Commissioner of C. Ex., Chandigarh-I v/s Khanna Malleable [2002 (140) ELT 340 (P&H): -

The Commissioner has found that the grinding wheel is a “necessary input used in relation to the manufacture of a final product.” It has been affirmed by the Tribunal. Nothing has been pointed out to show that this finding is wrong. The total amount involved is Rs. 8,656/- only. No question of law thus arises for reference to High Court. The petition of the Revenue is dismissed. (Paras.3, 4, 5)

¨ Telco Ltd v/s Commissioner of Central Excise, Lucknow [2005 (187) ELT 0503 (Tri-Del)]:-

Stay and dispensation - Pre-deposit - Modvat - All items such as Assembly Wheel Cover, Tool Bag, Carpet, Radio Cover etc. in respect of which Modvat credit availed of by appellant, being accessories specifically covered as inputs under Rule 57 A of Central Excise Rules, 1944 - Prima facie case of waiver of pre-deposit in favour of appellant - Modvat credit admissible - Stay granted. Appeal allowed. [Para 3]

¨ Commissioner of Central Excise, Indore v/s Puchi Strips & Alloys Ltd [2002 (150) ELT 753 (Tri-Del)]:-

PVC power cable, Grinding wheel, Pulse generator, A.O.L. Housing and Thyristor pannel as capital goods under Rule 57Q of the Central Excise Rules, 1944. Modvat Credit permissible. Appeal filed by the revenue rejected. ( Para 1 )

¨ Batliboi & Co. v/s Commissioner of Central Excise, Baroda [1998 (97) ELT 307 (Tribunal)]:-

Wheels is used for smoothening the surface of the components manufactured. Grinding wheels are parts of the grinding machines used by the appellants and they have to be considered as input. Eligible for modvat credit. Impugned order is set aside. Appeal of the assessee allowed. (Para.2)

¨ Commr. of C. Ex., Shillong v/s Aunachal Plywood Indus. Ltd [1998 (103) ELT 641 (Tribunal)]:-

Coated abrasive paper is an input under Rule 57A for the purpose of availing the Modvat credit. It is not known in the market as a tool and it is certainly used in relation to the manufacture of the final product. (para 4)

¨ Commissioner of C. Ex., Shillong v/s Sarda Plywood Industries Ltd [1998 (98) ELT 538 (Tribunal)]:-

Coated abrasive paper used for polishing rough surface of plywood to make it smooth is eligible for Modvat credit as per Rule 57A of Central Excise Rules, 1944. (para 4)

¨ Rathi Udyog Ltd v/s Commissioner of C. Ex., Meerut [2000 (121) ELT 524 (Tribunal-LB)]:-

Machines, machinery, plant, equipment, apparatus, tools or appliance are self-contained, complete units or whole unit capable of performing functions and not parts of such machine, machinery, appliance, tools etc. The grinding wheels in question are not such complete units which can perform functions independently, they do not come within the scope of exclusion clause contained in explanation to Rule 57A. Therefore, the only requirement to be satisfied is that they are used in or in relation to the manufacture as envisaged in the main part of Rule 57A. These grinding wheels are parts of grinding machines and these are used for smoothening the surface of components. Therefore, they clearly perform a function in relation to the manufacture of the goods. They are eligible for modvat credit under Rule 57A. The appeals are also allowed resultantly. (para 10,12)

¨ Gujarat Macinery Mfg Ltd v/s Commr. of C. Ex. & Cus, Vadodara [1999 (112) ELT 513 (Tribunal)]:-

The grinding wheel being a part of the machinery is not included in the definition of the input for the purpose of Rule 57A. Parts of the equipment are not covered by the explanation clause to the definition of the inputs. The grinding wheel is an input and the contention of the appellant is correct. Appeal allowed. (Para. 8)

v In view of the above judgments, it is crystal clear that the cenvat credit on the said items is available by considering the same as inputs used in manufacture of finished goods, therefore, the same will be available to them.

v Noticee further submitted that in Maruti Suzuki Ltd. v/s. Commissioner of, Central Excise Delhi-III [2009(240) E.L.T. 641(S.C.)] it was held that-

Cenvat/Modvat - Input, scope of - Crucial requirement that all goods “used in or in relation to the manufacture of final products” qualify as “input” - Expression not a standalone item but to be read in entirety as “used in or in relation to manufacture of final product whether directly or indirectly and whether contained in the final product or not“ - Inputs falling in inclusive part must have nexus with manufacture of final product - Functional utility of item would constitute relevant consideration - All the three parts of definition, namely specific, inclusive and place of use to be satisfied before an input becomes an eligible input - Rule 2(g) of Cenvat Credit Rules, 2002 - Rule 2(k) of Cenvat Credit Rules, 2004.

v So it is very much clear from the above legal decision that Cenvat Credit on goods which are used in relation to the manufacture of final product is allowable.

v With regard to allegation of suppression of facts with the intent to evade payment of duty and with intent to avail cenvat credit wrongly it was submitted that the Noticee had not suppressed any material facts with intent to evade payment of duty. They have acted under bona fide belief that the Cenvat credit was admissible to them. Moreover, they were filing periodical returns and when the said record was asked from them, they have provided the same without suppressing any record.

v It was further submitted that when there is no requirement to intimate the department about the taking of cenvat credit, then it cannot be said that they have deliberately suppressed the facts. There are number of decisions where in it is held that to invoke extended period and allege the willful suppression, there must be some more thing than mere non declaration. The Noticee have done everything which they were legally required to do. But when there is no requirement to give the copies of invoices and details in ER-1 then the same are not provided. As such the willful suppression cannot be alleged on them. Furthermore, they have given all the records to the Superintendent when he has asked the same. This also confirms that there was no willful suppression on their part as alleged by the impugned show cause notice

v With regard to recovery of Cenvat credit along with interest in terms of Rule 14 of CCR, 2004 r/w proviso to section 11A (1) and 11AB of the Central Excise Act, 1944, it was submitted that the interest is not recoverable as the demand itself is not sustainable. Even if for the argument sake, it is accepted that the demand is confirmed against them then also interest is not recoverable as they have never utilized this credit. The loss of revenue occurs when the credit is utilized. Therefore, looking to the principle of reasonableness also, no interest should be recovered from us. Hon’ble Punjab and Haryana High Court in the case of M/s Maruti Udyog Ltd. [2007 (214) ELT 173 (P & H)] has held that assessee is not liable to pay the interest as the credit was taken as an entry in the Modvat record and was not in fact utilized. This order was upheld by the Supreme Court in 2007 (214) ELT A50 (S.C). The analysis of these decisions makes it ample clear that in the cases where credit taken is debited before utilization; there is no loss of revenue and as such, the demand of interest and penalty on such amount is not legally tenable. Since we have also not utilized the credit till date, the benefit of these decisions should be extended to the Noticee.

v Further, in continuation to above it is submitted that interest is to be calculated from the date of utilization of credit. It has been held by hon’ble Mumbai Tribunal in the case of Godrej Soaps Limited [2004 (170) ELT 102 (Tri-Mumbai)]. In this case it was held that interest is to be calculated from the date of utilization of Credit rather than from the date of taking Credit. In the light of above decision it is clear that interest is payable from the date of utilization of credit. Since we have never utilized the credit, interest cannot be demanded from us in the light of above stated decision. As it can be analyzed from the returns that the balance for the period is more than Rs. 4813/- that is the Noticee have yet not utilized the Cenvat credit. Therefore the impugned show cause notice should be quashed and the demand of interest should be set aside.

v Noticee submitted that with regard to imposition of penalty under Rule 15(2) of the Cenvat Credit Rules, 2004 read with section 11AC of the Central Excise Act, 1944, the penalty was not imposable as the demand will be dropped on the basis of their submission. However, for argument sake the contention of the department is accepted, which is not the case, and it is presumed that the demand is confirmed against them then also the penalty will not be imposed on them. This is due to the fact that their act was based on bonafide belief as per decisions given by various appellate authorities from time to time as cited above. It has been held in various cases that no penalty is warranted when the assessee has acted on the basis of bonafide belief. Even the highest court of India – Hon’ble Supreme Court has held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bonafide belief.

v Further, in continuation to above, it was submitted that the confirmation of penalty is not tenable in the light of decision of CCE, Goa Vs M/s Betts India Pvt Ltd [2008-TIOL-2057-CESTAT-MUM] wherein it is held that where the issue pertains to interpretation of any provision, penalty is not imposable. Reliance was also placed on M/s Arani Agro Oil Industries Ltd Vs CCE, Visakhapatnam [2008-TIOL-1883-CESTAT-BANG] wherein it was held that where the assessee had a bonafide belief of eligibility due to interpretation of provisions, penalty is not imposable.

v Noticee also submitted that it has been proposed to impose penalty on them under Rule 25 of the Central Excise Rules, 2002. In this respect, it was submitted that they have rightfully taken Cenvat credit and that no penalty is imposable on them. Further, the show cause notice proposes to levy penalty under Rule 25 of the Central Excise Rules without specifying the particular clause under which the penalty is sought to be levied. There are number of clauses in Rule 25.

v Noticee submitted that it is well settled fact that unless the show cause notice specifies the particular clause under which the penalty is sought to be levied, the penalty proposal is not sustainable in the eyes of law. This view is backed by the case of Amrit Foods vs CCE [2005(190) ELT 433 (SC)] in which it was held that no penalty can sustained unless it is specified under which clause the said penalty is proposed to be recovered from the assessee. Similar view has been expressed in the case of CCE vs AL- AMIN Exports [2007(211) ELT 305 (Tri.-Ahmd.)]. Even the clauses that are mentioned in the Rule 25, the purpose for which the SCN is issued the noticee are not covered in any of the above clauses.

Issue Involved: -

The issue involved in this case is that

Whether Cenvat credit was admissible on the items Coated Abrasive, Grinding Wheel, Flap Wheel falling under sub-heading 6805-1010, 6804-2210, 6804-1000, 6805-2040?

Reasoning of the Order: -

Ø The Deputy Commissioner found force in the contention of the Noticee that the new definition of capital goods included the goods falling under sub-heading 6805, 6804 and therefore, the impugned items were capital goods in terms of Cenvat Credit Rules, 2004.

Ø It was found that the heading no. 6805 and 6804 were added vide Notification No. 07/2007-CE, dated 21.02.2007 and all the impugned items in the present case were falling under heading 6804 or 6805and therefore, these items are covered in the definition of capital goods.

Ø Accordingly, it was held that the cenvat credit was admissible to the Noticee and the demand was not sustainable.

Order: -

Proceedings initiated against the Noticee vide the impugned show cause were dropped.

Conclusion: -

The Deputy Commissioner rightly held that the impugned items were capital goods under the definition given in Cenvat Credit Rules, 2004. The Department should fully verify the aspects of a matter before issuing the show cause notice.

In the instant case, the show cause notice was issued by considering the old definition and new definition clearly included the grinding wheel falling under 6804. The matter is dropped but the basic question is who will punish the audit people who have raised the audit para under old definition in order to achieve their targets. This has lead to issue of show cause notice. This has wasted the valuable time and money of both i.e. manufacturer as well as of the department. There should be accountability on the part of department. If the demand is dropped finally then the officer raising the point should be held responsible. This is way that the unnecessary demand can be avoided.

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PJ/CASE STUDY/2010-11/31
27 November 2010

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PJ/CASE STUDY/2010-11/31 27 November 2010

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PJ/CASE STUDY/2010-11/31
27 November 2010