Admissibility of credit when process not manufacture

PJ/Case Study/2010-11/34

Case Study

Prepared By:

Sukhvinder Kaur LLB [FYIC]

Parag Ghate

Mayank Palgauta

Introduction:

In the case under study, the assessee was buying goods from a supplier situated in Jammu & Kashmir. The assessee was taking the credit on the said gods which were inputs for him on the basis of an invoice wherein the excise duty was charged. However, Department proceeded against the assessee on the ground that the process followed by the supplier did not amount to manufacture. Whether the Department can demand the assessee to reverse the credit taken with interest and impose penalty on the assessee was the question involved herein.

Relevant Legal Provisions:

ü Rule 15:- Confiscation and penalty

(2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

ü SECTION 11AC:- “Penalty for short-levy or non-levy of duty in certain cases”

Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reasons of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined:

Provided that where such duty as determined under sub-section (2) of section 11A, and the interest payable thereon under section 11AB, is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such duty, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. Of the duty so determined:

Provided further that the benefit of reduced penalty under the first proviso shall be available if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:

Provided also that where the duty determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the duty, as reduced or increased, as the case may be, shall be taken into account:

Provided also that in case where the duty determined to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the first proviso shall be available, if the amount of duty so increased, the interest payable thereon and twenty-five per cent. of the consequential increase of the penalty have also been paid within thirty days of the communication of the order by which such increase in the duty takes effect.

M/s Shri Pouches, v/s Assistant Commissioner, Central Excise Division, Ajmer

[Order-In-Appeal No. 441(CB) CE/JPR-II/2010]

Brief Facts:

o The appellant have contravened the provisions of Rule 3(1) of Cenvat Credit Rules, 2004, in as much as they have wrongly availed Cenvat Credit of Central Excise Duty amounting to Rs. 18200/- and Education Cess Rs. 364/- paid on the inputs viz Co Extruded Multilayer Laminated plastic film (Printed), received by them from M/s Montage Enterprises f-vt. Ltd., Jammu, which was otherwise not leviable to duty, as the process carried out by the consignor does not amount to manufacture, and consequently the credit of such amount not admissible to the appellant.

o As the provisions contained in Rule 9(5) of Cenvat Credit Rules, the burden of proof regarding the admissibility of the Cenvat Credit lies upon the manufacturer taking such credit. The details required for examination of admissibility or otherwise of the Cenvat Credit as mentioned were not brought to the notice of the department by the Assesses at the time of taking credit, which could only be known by the alert notice mentioned, and thus the said amount is recoverable with interest from the assesses, under Rule 14 of the Cenvat Credit Rules read with proviso to Section: 11A and 11AB of the Central Excise Act 1944 and the assessee appeal liable to penal action under Rule 15(2) ibid.

o Therefore, show cause notice was issued to appellant which was adjudicated vide impugned order requirement under the law that the appellant should tell the department that they have purchased the goods from that unit. The appellant was required to maintain the records and mention the transaction in his excise records. This has been done by them. Moreover, they were required to submit returns and tell the total amount of credit taken and this has also been done by them. Thus, there was no default at their end. As such there was no willful suppression on behalf of the appellant and hence extended period cannot be invoked against them.

o On the contrary, the Jammu Central Excise department was aware of the fact that the supplier is not undertaking manufacturing process and hence they should have forwarded the detail to their counterpart at Ajmer. The timely show cause notice should be issued by the department. Hence, the extended period cannot invoke against the appellant.

Submission of the Appellants:

¨ Appellant submits that in the impugned order-in-original, the learned Assistant Commissioner has held that the contentions raised by them, that they had taken reasonable steps to ensure the aspect of payment of duty on the input received from M/s Montage Enterprises Ltd have no force. It has been held that they should have ensured about the admissibility of Cenvat credit on the invoices issued by the consignor, from their personal knowledge, certificate from the Range Superintendent or certificate from a familiar person, before taking the credit. In this regard appellant submits that they have taken all reasonable steps to ensure that duty was paid by the supplier on the goods cleared to them. There is no dispute that duty has not been paid by the supplier. But the order is considering that they should know about the manufacture process of the supplier. But while purchasing the goods nobody tells about the process of manufacture. The only liability on the purchaser of goods cast by law is that the duty has been paid by supplier and there is no doubt about the same. As such, there is no contravention on part of appellant and hence the duty should not be denied and order-in-original is liable to be set aside.

¨ In continuation appellant submits that the learned Assistant Commissioner has rejected the plea that Cenvat credit was not deniable when duty was paid by the supplier on the goods which was neither disputed nor refunded to the supplier. The reason given is that the supplier had availed double advantage. In this regard appellant submits that it is the supplier who has not acted as per the provisions of Law. The default was committed at the supplier’s end. It has been held by hon’ble Delhi Tribunal that the consignee of the goods cannot be punished for the misconduct of the supplier.

¨ Appellant also cited the following judgments in reply to their show cause notice:-

o Commissioner of C. Ex., Vadodara-I vs Hylite Cables [2007 (212) ELT 284 (Tri.-Ahmd.)].

o Manaksia Ltd. vs. Commissioner of Central Excise, Rajkot [2008 (232) E.L.T. 497 (Tri. - Ahmd.)]

o Parasrampuria Synthetics Ltd. vs. CCE, Jaipur [2005 (191) ELT 899 (Tri.-Del.)]

o Bajaj Tempo Ltd. versus Commissioner of C. Ex., and Customs, Pune [1999 (106) ELT 145 (Tribunal)]

¨ And further submits that they had discussed the Board Circular no. 766/82/2003-CE dated 15.12.2003 which clarifies that Cenvat Credit should not be denied to the manufacturer as long as bona fide nature of the consignee’s transaction is not doubted. The analysis of this circular was done in the reply to show cause notice which is evidence of the allow ability of the Cenvat Credit to them. But this circular was not adhered to while passing the impugned order. Appellant also cited the Apex Court decision in the case of Collector of Central Excise, Vadodara vs Dhiren Chemical Industries [2002 (139) ELT 3 (SC)].

¨ Also further submits that in the impugned order it has been held that they had knowledge about the fact that the consignor’s unit fell in to J & K and was availing the benefit of Notification No. 56/2002, dated 14.11.2002. In this regard they submit that this finding is not sustainable as there is no discussion in the order-in-original as to how the learned Assistant Commissioner reached the said conclusion. Moreover, even if the supplier was doing so then also the taking of credit has no objection. The objection against the supplier is that the manufacturing process undertaken by the supplier does not amount to manufacture. Thus, appellant should know that the manufacturing process of supplier of goods and that too the same does not amount to manufacture. Thus, the order-in-original is asking us which even the law does not require. The same position has been brought by the number of decisions cited by appellant in this favour, that the duty paid wrongly at the end of supplier then the Cenvat credit cannot be denied to manufacturer who has purchased the goods. But the impugned order does not consider the same. Therefore, the impugned order is required to be set aside.

¨ The appellant further submit that whole state of affairs was in knowledge of the department as they knew the unit at Jammu was not undertaking manufacturing process and paying duty. The credit of the same is being passed on by the supplier. Thus, when the department was having knowledge of manufacturing process of the supplier than charge of willful suppression is not legally sustainable. Such an order is liable to be quashed.

¨ The appellant further submits that in the impugned order penalty has been imposed on them. In this regard the appellant submits that there was no willful suppression on the part of the appellant. The appellant have acted on the bona fide belief and therefore no penalty can be imposed as there is no willful suppression on the part of the appellant. Even the appellant has relied upon the Apex Court decision but that was not discussed at all while deciding the case. Such an order is wholly and completely erroneous.

¨ The appellant further submits that their supplier had intimated their jurisdictional Central Excise Division located in Jammu about the fact that the supplier was paying duty on his goods at the lime of clearance. It is further submitted that although show cause notice has been issued against the supplier and demand was confirmed against him. The hon’ble High Court of Jammu & Kashmir have granted stay and have allowed the supplier to go on paying excise duty. A copy of the said stay order passed in appeal no. OWP No. 1086/2007. Thus, no action was required to be taken by the learned Assistant Commissioner in the matter. Thus the impugned order-in-original is required to be set aside. Therefore, the appeal should therefore be allowed.

Issue Involved:

The issue involved in this case was that

Whether there will be existence of willful suppression on the part of purchaser if he has taken the goods after payment of excise duty to the supplier and take Cenvat credit on issued invoice under bonafide belief. The liability on the purchaser of goods cast by law is only that the duty has to be paid by supplier.

Discussion and Findings:

Ø The Commissioner (Appeals) had carefully gone through the case records and submission made in the appeal as well as during personal hearing. In this case show cause notice was issued for the reason that inputs received by appellant were not leviable to payment of duty as the process carried out by the consignor does not amount to manufacture. Therefore, as per Rule 9(5) of Cenvat Credit Rules 2004, the burden of proof regarding the admissibility of Cenvat Credit lies upon the manufacturer taking such credit.

Ø The Adjudicating Authority has observed “assessee in the instant case should have ensured about the admissibility of Cenvat Credit on invoices issued by the consignor from his personal knowledge, certificate from Range Superintendent or Certificate from a familiar person before taking credit.” And also observed that even after knowing the fact that the consignor’s unit falls into the Jammu & Kashmir and availing benefit of Notification No. 56/2002 dated 14.11.2002, appellant has availed credit on products not leviable to duty”.

Ø In this concern appellant has submitted that they have taken all reasonable steps to ensure that duty was paid by the supplier on the goods cleared to us but the order is considering that the appellant should know about the process of manufacture of goods supplied but while purchasing the goods nobody tells about the process of manufacture.

Ø The only liability on purchaser of goods cast by law is that they should know that the duty has been required particularly from purchaser of goods is not under law since it would not be correct procedure, also find from Board’s Circular No. 766/82/2003–CX dated 15.12.2003 where in Board has clarified in respect of invoice against which duty not paid at the months end that action against the consignee to recover the Cenvat Credit availing in such cases need not be restored to as long as the bonafide nature of the consignee’s/ transaction is not in dispute.

Ø From the fact of case, the Commissioner (Appeal) found no dispute regarding bonafide nature of consignments transactions as well as documents on which credit was taken, thus force in appeal to be accepted and impugned order is not just & fair under law as such liable to set aside on merit only.

Ø The Commissioner (A) did not proceed further on other ground of limitation. Since impugned order is not sustainable and hence there is no reason for imposition of penalty.

Decision:

The order passed by the learned Assistant Commissioner is set aside and also held that the imposable penalty is not sustainable as there is no willful suppression of facts made by the appellant.

Conclusion:

The Commissioner (Appeal) rightly set aside the order of the Adjudicating Authority demanding the cenvat credit taken by the appellant on the strength of the invoice. The appellant had taken all the reasonable steps to ensure that the consignor of goods was a manufacturer and was genuine. Despite the same, it was not possible for the appellant to ascertain that the process adopted by the consignor was not a manufacturing process. Therefore, appellant could not be held liable for the same. Moreover, when there is no willful suppression, then penalty cannot be imposed on the assessee.

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PJ/CASE STUDY/2010-11/34
18 December 2010

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PJ/CASE STUDY/2010-11/34
18 December 2010