Prepared by: CA Neetu Sukhwani &
Prayushi Jain

Case study

 
Introduction:-
The appellant M/s. Nahar Granites Pvt. Ltd. is, inter alia, engaged in the manufacture of Zinc Oxide and Zinc Ash. As per revenue, the appellant is not entitled to cenvat credit of duty paid on zinc dross when the same was held to be fully exempted. As no duty was required to be paid in light of section 5A of the Central excise act, 1944, revenue contented that the appellant would not get the credit for the duty paid on the same. Aggrieved with the order in original of adjudicating authority, assessee filed the appeal to the Commissioner Appeals. However, as no relief was provided by the first appellate authority, the appellant further preferred appeal to the Ahmedabad Tribunal.

M/S NAHAR GRANITES LTD [Final Order No. A/10878/WZB/AHD/2013 dated 16.07.13]

Relevant legal provisions:-
ü  Section 5A of Central Excise Act,1944.
ü  Definition of ‘excisable goods’ under Section 2(d) of the Central Excise Act.
ü  Section 5B of the Central Excise Act, 1944.
ü  Circular No. 904/24/09-CX dated 28.10.2009
ü  Rule 11 of the Central Excise Rules, 2002.
ü  Rule 14 of the Cenvat Credit Rules, 2004.

Issue Involved:-
 
The following issue was made before the Appellate Tribunal:-
Whether credit deniable on zinc dross on the premise that the same was non-excisable and not leviable to duty?
 
Brief Facts:- Material facts involved in this case are M/s. Nahar Granites Pvt. Ltd. (hereinafter referred to as the Appellants) are, inter alia, engaged in the manufacture of Zinc Oxide and Zinc Ash falling under the chapter heading 28 and 26 respectively of the Central Excise Tariff Act.
 
Appellants have availed Cenvat credit on the aforesaid inputs used in or in relation to the manufacture of the above said finished product, in terms of Cenvat Credit Rules, 2004. For the manufacture of zinc oxide and zinc ash, the Appellants receive input good ‘Zinc Dross’ from various dealers/manufacturer under a cover of invoice issued under Rule 11 of the Central Excise Rules, 2002 on which the Dealer/Manufacturer have charged the duty. Illustrative copies of invoices under which the Appellants have received zinc dross on payment of Central Excise duty from the supplier during the period from December 2005 to 10.05.2008 were also collectively enclosed. The credit taken on zinc dross was utilized for payment of duty on their finished product mentioned above. Illustrative copies of the ER-1 returns filed by them during the period from December 2005 to 10.05.2008 were also collectively enclosed as.
The fact that on the quantity of zinc dross received by the Appellants from the suppliers, Central Excise duty was paid by such supplier is not in dispute. Further the duty so paid on the zinc dross received by the Appellants from the supplier was not claimed as refund by the supplier or any other person is also not disputed.

The fact that the quantity of duty paid dross received by the Appellants from the supplier was used by the Appellants in the manufacture of the finished product which was not exempt from duty is also not disputed.

Under the aforesaid circumstances the show cause notice dated 12.11.2010 was issued to the Appellants proposing demand for the period December 2005 to 10.05.2008 on the basis that zinc dross cleared by the supplier prior to 10.5.2008 is not excisable in view of the Hon’ble Supreme Court judgement in the case of CCE, Patnav. Tata Iron & Steel Co. Ltd., 2004 (165) E.L.T. 386 (SC).According to the Show cause notice, the dross is non-excisable commodity and therefore the duty paid by the supplier is not duty of excise specified in the First Schedule to Central Excise Tariff Act, 1985.   The said show cause notice was adjudicated by the Ld. Commissioner of Central Excise, Ahmedabad vide Order-in-Original No. AHM-CEX-003-COM-022-2012 dated 30.06.2012 confirming the demand and penalty against the Appellants. 

Without appreciating the submissions made by the Appellants The Ld. Commissioner confirmed the demand on the following grounds:-
The present issue for the period from 26.02.2004 to 10.05.2008 is decided by the Supreme Court in the case of CCE, Patna v. Tata Iron & Steel Co. Ltd. supra wherein it has been held that dross and skimming are not excisable goods merely because they can be sold, the same is binding to every manufacturer.
The case laws relied upon by the Appellants in the reply has not accepted by the Ld. Commissioner as the same were not squarely applicable to the facts of the case.
The amendment in the definition of the ‘excisable goods’ under Section 2(d) of the Central Excise Act, 1944 has effect from 10.05.2008 and the application of the same would not be for the period prior to 10.05.2008.

Manufacturer of excisable goods shall not pay duty of excise on goods exempted under Section 5A of the Central Excise Act, 1944. Reliance has been placed on the Circular No. 940/01/2011-CX dated 14.01.2011 issued from F.No. 262/117/2010-CX8, that in case the assessee pays amount as Excise duty on exempted goods, the same cannot be allowed as ‘Cenvat credit’ to the downstream units.

No Notification has been forwarded by the Government regarding non-reversal of Cenvat credit taken on the input ‘Zinc dross’ under Section 5B of the Central Excise Act, 1944.
The Appellants have deliberately suppressed the material facts from the department in as much as department was unable to know that the noticee have taken credit on the inputs which were actually not  liable for duty and therefore extended period of limitation is invokable in the present case

Being aggrieved by the aforesaid impugned Order-in-Original Dated 30.06.2012 passed by the Commissioner of Central Excise, Ahmedabad the Appellant filled the appeal to the first appellate authority, i.e., the Commissioner Appeals. However, the submissions made therein were not considered and the appeal filed by the appellant was rejected. Thereafter, the appellant preferred further appeal to the Tribunal.

Appellant’s Contention:- The appellant made following submissions before the Tribunal-
 
passed by the Ld. Commissioner is perverse and contrary to law as well as on facts and on this ground itself the impugned order is liable to be set aside.
 
1.    It was submitted that the impugned order in original passed by the Ld. Commissioner is perverse and contrary to law and facts at the outset and on this ground itself the impugned order is liable to be set aside.
 
2.    The circumstances under which credit can be varied / denied do not exist in the present case.
 
Under Cenvat Credit Rules, 2004, credit taken by a manufacturer can be denied or varied only in following circumstances :

i)              where the goods received by the manufacturer are excluded from the definition of ‘inputs’
ii)         where the goods are not used in the manufacture of the final products; or
iii)         where the inputs are used in manufacture of wholly exempted final product; or
iv)        where inputs are cleared as such; or
v)         where the inputs are not covered by specified duty paying documents; or
vi)        where the manufacturer of input has received refund of duty paid on input, from the       central excise department.

It was submitted that none of the above circumstances exist in the present case. The department has not granted refund of duty paid on zinc dross to the suppliers or any other persons.  Hence denial of credit to the Appellants is unsustainable.
The zinc dross on which duty has been paid by the supplier had been used by the Appellants in the manufacture of final product in their factory. This fact is not disputed in the show cause notice. Hence, there is no dispute that the zinc dross received by them are not excluded from the definition of input.  The zinc dross on which the Appellants have taken credit had not been used in the manufacture of wholly exempted final product. This fact is also not disputed by the department in the present show cause notice. It is also not disputed by the department that the zinc dross on which the Appellants have taken credit on had not been cleared by them as such.

The fact that zinc dross was received by the Appellants from the supplier under the cover of Central Excise invoice issued under Rule 11 by the supplier is also not disputed since the same invoices are referred to in the annexure to the show cause notice. Such documents cannot be treated as not covered by specified duty paying documents mentioned in the Rule 9 of Cenvat Credit Rules. Therefore, the fact that zinc dross received and used by the Appellants is covered by specified duty paying documents cannot be disputed by the department. The show cause notice has not disputed the fact that neither the supplier of zinc dross nor any other person had received the refund of the duty paid on such zinc dross, on which the Appellants have taken credit.
In view of the above undisputed factual position, there is no provision under the Cenvat Credit Rules by which the credit of duty paid on the zinc dross taken by the Appellants can be denied.

Hence, the proceedings initiated in the show cause notice are without any legal basis.

3.    Reassessment not possible at the recipient end while considering admissibility of credit of duty paid on inputs. Officer within the jurisdiction of the Appellants cannot contend that no duty was required to be paid by the manufacturer/supplier.
The Appellants are entitled to avail credit of duty paid on the inputs as specified in the documents under the cover of which such inputs were received. The department cannot re-open assessment at the input-receivers end.  The inputs cannot be re-assessed to deny credit to the manufacturer of the final product. The manufacturer has absolute right to take credit of the duty paid on the inputs based on the amount of duty indicated in the documents covering the inputs so long as the other conditions like specification of the goods as inputs, their use in the manufacture of final product are fulfilled. Only when duty paid on inputs is granted as refund to the manufacturer or supplier of the inputs, the department can vary the duty portion at the receivers end. 
The Hon’ble Supreme Court in the case of Commissioner of Central Excise & Customs Vs M.D.S. Switchgears, reported at 2008 (229) ELT 485 held that the quantum of credit cannot be denied / varied at the recipient’s end, by alleging that excess excise duty was paid  by the supplier – manufacturer. The Hon’ble Supreme Court dismissed the appeal filed by the Central Excise department against the order of the CESTAT reported at 2001 (132) ELT 405. The findings of the CESTAT in the decision reported at 2001 (132) ELT 405 were concurred by the Hon’ble Supreme Court in the aforesaid decision reported at 2008 (229) ELT 485. The relevant portion of the above mentioned decision of the Hon’ble Supreme Court  is as under:-       

“7. The Tribunal has come to the conclusion that in fact there was no loss of revenue. It accepted the appeal by recording the following reasons :
 
“Reasons given by the appellants for the alleged inflation of the value of the intermediate goods are logical. What was required of the Commissioner was to examine the quantum of the loading of the assessable value by the Modvat credit on the earlier inputs. That exercise has nowhere been done. If the department was of the opinion that the value of the final product was depressed, then they could have charged the Jalgaon unit with under-invoicing of their product. That has also not been done. The valuation as given by the Sinnar unit was duly approved by the department and the payment of duty was also duly accepted. We find absolutely no substance in the attempt of the learned Commissioner to convert a part of the duty so paid into ‘deposit of duty’. There is no legal basis for such presumption. The rules entitled the receipt manufacturer to avail of the benefit of the duty paid by the supplier manufacturer. A quantum of duty already determined by the jurisdictional officers of the supplier unit cannot be contested or challenged by the officers in charge of recipient unit [2000 (38) RLT 179].”

8. Counsel appearing for the Revenue could not assail any of the findings recorded by the Tribunal.

9. That being the position, we agree with the view taken by the Tribunal and find no merit in these appeals which are dismissed leaving the parties to bear their own costs.”
The High Court of Punjab and Haryana at Chandigarh in the case of CCE Vs M/s. Guwahati Carbons Limited, reported at 2010-TIOL-609-HC-P&H-CX held that credit cannot be disallowed on the ground that the supplier of input had paid duty in excess of actual liability and rejected the Reference Application filed by the revenue. The relevant portion of this decision in para 4 to 6 is as under:-

“4. Learned counsel for the appellant submits that the duty paid was more than due in as much as freight charges were wrongly included in the assessable value of goods. However, Learned counsel for the Revenue is unable to show any law that even if duty paid was in excess of the amount due, without excess amount being refunded, the assessee will be debarred from availing of the CENVAT Credit.

5. On the other hand, learned counsel for the Assessee relies on judgments of this Court in CCE v. Ranbaxy Labs Ltd. [2006] 203 ELT 213 = 2006-TIOL-438-HC-P&H-CXand CCE v. Swaraj Automotives Ltd. [2002] 139 ELT 504 and judgment of Madras High Court in CCE v. CEGAT, Chennai [2006] 202 ELT 753 =2005-TIOL-32-HC-MAD-CXand also circular issued by the Central Board of Excise & Customs, New Delhi being Circular No.877/15/2008-CX., dated 17.11.2008 to submit that credit could be availed to the extent of duty paid.

6. Since the view taken by the Tribunal is consistent with the view taken earlier by this Court, the questions proposed cannot be held to be substantial questions of law. The appeal is dismissed.”

The Bombay High Court in the case of CCE Vs Betts Limited followed the aforesaid decision of the Hon’ble Supreme Court in the case of MDS Switchgear and held that the credit cannot be denied / varied by the Officer having jurisdiction over the recipient’s factory by re-assessing the inputs received.

The findings of Tribunal in Kerala State Electronic Corporation Vs. CCE – 1996 (84) ELT 44 (T) are relevant and therefore reproduced below:

“4.        …. Rule 57A envisages credit of duty paid on the goods used in or in relation to the manufacture of the specified finished product and the Notification 177/86 issued in this regard sets out that MODVAT Credit will be allowed in respect of certain duties paid on the inputs so long as the assessee is able to establish that input in respect of which MODVAT Credit claimed is specified under Notification 177/86 and subject to compliance with the other provisions of the Rules. MODVAT Scheme is a self contained code and it does not confer any power on the authority having jurisdiction over a manufacturing unit to reassess duty on the inputs received for the purpose of MODVAT Credit. Even in cases there is any short or excess collection of duty on the inputs, the assessees are entitled to credit as specified in the duty paying documents. If the duty paid on the inputs is found to be short or in excess of what is payable under the law the resort can be had at the suppliers end under the provisions of Section 11A and Section 11B of the Central Excises and Salt Act, 1944 as the case may be way of demand by the authorities or refund claim by the supplier. The legislature visualised this situation where duty paid on the inputs may be found higher or lower and to take care of such a situation, they therefore provided a separate mechanism to ensure that MODVAT Credit is equal to the duty paid by providing for variation of credit under Rule 57E. So far as taking of MODVAT Credit at the time of receipt of thegoods is concerned the same is permissible to the extent specified in the duty paying document under which goods have been received.In view of above, the lower authority’s order is not maintainable and the same is set aside and the appeal allowed with consequential relief.”

The Hon’ble Tribunal in the case of CCE, v. Aggarwal Iron Industries, 2005 (184) E.L.T. 397 (Tri.-Del) has held that the buyer does not have any responsibility to ensure that correct duty paid by manufacturer of inputs is proper and thus should not be varied when original assessment remains the same. The relevant extract is reproduced below:

“…..It is well settled credit to be taken is the actual duty paid and that the buyer has no responsibility in regard to ensuring that duty has been correctly paid by the manufacturer of the inputs. The rule permits variation of Modvat credit only on account of a finding in a proceeding against the supplier of the inputs that the duty has not been correctly paid. Thus variation of Modvat credit amount can be consequential only. This is not the case here. The original assessment of inputs has not been varied. Therefore, there is no error in the order passed by the Commissioner. The Revenue appeal has no merit. It is rejected.”

The CESTAT in the case of CCE v. Anand Arc Electrodes Pvt. Ltd., 2010 (252) ELT 411, held as follows:

“……….it is well settled that the credit to be taken is the actual duty paid and that the buyers has no responsibility in regard to the ensuring that duty has been correctly paid by the manufacturer of the inputs. The rule permits variation of Modvat credit only on account of a finding in a proceeding against the supplier of the inputs that the duty has not been correctly paid. Thus variation of Modvat credit amount can be consequential only. This is a clear case here. The original assessment of inputs has not been varied. The assessee is not having any responsibility to ensuring that the correct duty paid by the manufacturer of the inputs. The assessee has taken the credit of duty on the duty paid documents and availed, the Cenvat credit on the basis of duty paid documents, which are not disputed. I hold that the assessee is entitled to take the Cenvat credit on the strength of duty paying documents, which was correctly taken by the assessee.”                                                                

To the similar effect are the following judgments :

·         Owens Bilt Vs. CCEreported as 1998 (101) ELT 642 (T)
·         CCE Vs. Nagappa Springs Pvt. Ltd. reported as 2009 (238) ELT 489
·         CCE Vs. Trinetra Texturisers reported as2004 (166) ELT 384 (T)
·         Mark Auto Industries Vs. CCE  reported as 2004 (175) ELT 375 (T).
·         SPIC (HCD) Ltd. Vs. CCE reported as2006 (201) ELT 386
·         CCE v. Jyoti Ltd. reported as2008 (223) E.L.T. 171 (Guj.)
·         CCE v. Purity Flexpack Ltd. reported as2008 (223) E.L.T. 361 (Guj.)

In the case of CCE Vs Nagappa Springs Pvt. Ltd., reported at 2009 (238) ELT 489 also took the same view s mentioned above. Para 3 of this decision is as under:-

3. Heard both sides. There is no dispute that the respondents had received drawn wires on payment of duty and that it had utilized the credit for payment of duty on springs manufactured by it. The statutory provisions allow an assessee to avail duty paid on inputs when it receives them in its factory. Even if the jurisdictional authorities at the supplier manufacturer’s end assessed the duty on the inputs incorrectly, the authorities having jurisdiction over the recipient manufacturer cannot reopen the assessment reflected in the invoices. As long as the respondent manufacturer had taken reasonable steps to know the licit origin, identity and the address of the manufacturer, the assessee can avail the credit as reflected in the invoices accompanying the inputs. In CCE & C v. MDS Switchgear Ltd., reported in 2008 (229)E.L.T.485 (S.C.), the Apex Court cited with approval the following excerpts from the Tribunal’s decision challenged before that Court : “the rule entails the manufacturer to avail of the benefit of the duty paid by the supplier manufacturer. A quantum of duty already determined by the jurisdictional officers of the supplier unit cannot be contested or challenged by the officers in charge of respondent unit [2000 (120)E.L.T.379 (Tribunal) = 2000 (38) RLT 179].” I do not find any provision in the statute which prohibits the respondent manufacturer of inputs from availing credit of duty paid by it as evidenced by the invoices covering the consignments of inputs. Revenue has not advanced any valid ground justifying a contrary view. In the circumstances, the impugned order does not call for any interference. The revenue appeal is dismissed.
(emphasis supplied)
 
In view of the decisions of the Hon’ble Supreme Court, High Court and CESTAT relied upon in para 8.7 to 8.11 above, the proposal to deny credit is not sustainable. 
Ld. Commissioner in the impugned order has given undue weightage to the amendment carried out in the definition of ‘excisable goods’ under Section 2(d) of the Central Excise Act after 10.05.2008. Section 2(d) after amendment reads as under:-

2(d) “excisable goods” means goods specified in [[the First Schedule and the Second Schedule] to the Central Excise Tariff Act, 1985 (5 of 1986)] as being subject to a duty of excise and includes salt;

Explanation.—For the purposes of this clause, “goods” includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.
Ld. Commissioner has further given reference of Circular No. 904/24/09-CX dated 28.10.2009 wherein it was clarified that with this amendment in Section 2(d) the baggase, aluminium/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of duty. Further reference of Circular No. 941/02/2011-CX dated 14.02.2011 is given in the impugned order on the same line to conclude that zinc dross was not liable for duty prior to the Budget of 2008.
It is humbly submitted that the said observation of the Ld. Commissioner in support with the aforesaid Circulars is a futile exercise as the same has not been disputed by the Appellants in the reply to the show cause notice. Therefore the detailed reference of the status of excisable goods after the amendment in the impugned order to draw the conclusion that the disputed goods were not liable for duty prior to the Budget of 2008 is not the disputed subject issue of the present matter.
Commissioner in the impugned order has given reference of Section 5A of the Central Excise Act, 1944 which is extracted herein below:-
Section 5A. Power to grant exemption from duty of excise. — (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette exempt generally either absolutely or subject to such conditions (to be fulfilled before or after removal) as may be specified in the notification, excisable goods of any specified description from the whole or any part of the duty of excise leviable thereon :
 
Providedthat, unless specifically provided in such notification, no exemption therein shall apply to excisable goods which are produced or manufactured —
(i) in a [free trade zone [or a special economic zone]] and brought to any other place in India; or
(ii) by a hundred per cent export-oriented undertaking and [brought to any place in India.
 
Explanation. — In this proviso, [“free trade zone”, [“special economic zone”]] and “hundred per cent export-oriented undertaking” shall have the same meanings as in Explanation 2 to sub-section (1) of section 3.

(1A) For the removal of doubts, it is hereby declared that where an exemption under sub-section (1) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacturer of such excisable goods shall not pay the duty of excise on such goods.
At  para 12.3 of the impugned order the Ld. Commissioner has viewed that a close reading of Section 5A(1) make it clear that in case of the absolute exemption from payment of duty to any excisable goods, the manufacturer of such goods cannot have any option to pay the duty. Further at para 13.4 of the impugned order it is observed that in the present case the suppliers of zinc dross are M/s. Jindal Steel Ltd., M/s. Kalptaru Power Transmission Ltd., M/s. Technocraft Industries (I) Ltd. and M/s. Welspun Gujarat Sthal Rohren Ltd. are a enormous companies which must be well aware of the fact that zinc dross was not liable for duty during the period from 26.02.2004 to 10.05.2008 in light of judgment of Hon’ble Supreme Court in the case of CCE Patna v. Tata Iron & Steel Co Ltd. supra.

The Appellants submit that from aforesaid findings of the Ld. Commissioner the only conclusion which can be invariably drawn is that the supplier/manufacturer of absolute exempted does not have option to pay duty. Therefore as per bare reading of Section 5A(1A) of the Central Excise Act, 1944 the supplier/manufacturer of the exempted good can be held  liable if there is non-compliance of the Section by any means and not the other units which have utilized the said good as input for the manufacture of the dutiable final product. The suppliers/manufacturer in the present case have undisputedly cleared zinc dross under a cover of invoice issued under Rule 11 of the Central Excise Rules, 2002 on which they have charged the duty and therefore, the credit has been availed by the Appellants/Buyer. The action taken by the Department against the Appellant cannot be held good in law as institution of case against the Appellant who is at the recipient end is contrary to the findings of the Ld. Commissioner.

Further the Ld. Commissioner has not accepted the case laws cited by the Appellants as the same were not squarely applicable to the present case. The judgments relied upon by the appellants are in reference with duty paid by the manufacturer at different rate of duty or duty paid under protest and are not in context paid on the exempted goods. The said observation of the Ld. Commissioner is bad in law as the basic legal principle set in the case laws cited herein above should have been looked into irrespective of difference in facts of the case. The legal principle is settled and clear that when Department is not objecting to payment of duty at the time of clearance of the goods, credit cannot be restricted or denied at the end of the recipient of goods. The said legal principle is squarely applicable in the facts of the present case. Even otherwise in catena of cases Tribunal has held that Cenvat credit is available to the receiver of goods in respect of duty paid on exempted goods by supplier. A few of them are cited below:

o    CCE v. Hoganas India Ltd. reported as 2007(212)ELT 37 (T)
o    Bharat Aluminium co. Ltd v. CCE reported as 2002 (147)ELT 443 (T)
o    CCE v. Tube Investment of India Ltd. reported as 2004 (176)ELT 669 (T)
o    Kwality Biscuits Ltd. v. CCE reported as 2006 (205) ELT 669 (T)
o    CCE v. Industrial Cables (I) Ltd. reported as 1999 (108) ELT 513(T)   

As a recipient of the inputs, the assessee have availed Cenvat credit on the basis of invoice issued under Rule 11 of the Central Excise Rules, 2002 which is a valid document for availing Cenvat credit. Since the assessee are recipient of the input ‘zinc dross’ for use in the manufacture of dutiable final product, the duty paid as indicated in the invoice is admissible to them as Cenvat credit in terms of Rule 3 of the Cenvat credit Rules, 2004 and the quantum of duty already determined by jurisdictional officer of supplier unit cannot be contested or challenged by officer in charge of recipient unit.

Further, Ld. Commissioner at para 13.5.2 and 13.5.3 of the impugned order have highlighted the Circular No. 937/27/2010-CX dated 26.11.2010 and Circular No. 940/01/2011-CX dated 14.01.2011 wherein it is clarified that where as assessee pays any amount as excise duty as such exempted goods, the same cannot be allowed as Cenvat credit to the downstream units, as the amount paid by the assessee cannot be termed as “duty of excise” under Rule 3 of the Cenvat Credit Rules, 2004. However, the said circular cannot be made applicable in the present case, as it is not the case that zinc dross is exempted by virtue of any exemption notification issued under sub section (1) of Section 5A of the Central Excise Act, 1944, but the same is held to be non-excisable by the Apex Court in the case of Tata Iron & Steel Co. Ltd supra. It is submitted that Cenvat credit availed by the assessee on the basis of invoices issued by the supplier which is a document specified in Rule 9 of the Cenvat Credit Rules,2004 for availing Cenvat credit, particularly when the usage of the input in the final product and duty paid nature of the nature of the input is not disputed, the same cannot be disallowed.
The above submission though specifically raised before Ld. Commissioner has not been considered by him. Hence, none of the findings of the Ld. Commissioner is in consonance with the law and therefore the order deserves to be set aside.


4.    The amount paid by manufacturer supplier on Zinc Dross is ‘duty’ of which credit is admissible

The Appellants submit that once it is an admitted fact that ‘duty’ has been paid by manufacturer on Zinc Dross and goods have been cleared under cover of invoice then department cannot deny the credit. What has been paid by the supplier is duty and it has no other characteristics. There is no provision to treat an amount paid as “duty” to treat as “deposit”.  The Appellants had paid the amount as “duty” to the supplier and the supplier in turn has paid such “duty” to Government.  The Appellants are therefore entitled to avail credit of such “duty”.  It is not open to the central Excise department to suo moto treat “duty” as “deposit” which prejudicially affects the rights of the person. The CESTAT in the case of M.D.S. SwitchgearsVs CCEreported at 2001 (132) ELT 405 specifically held so and the same was concurred by the Hon’ble Supreme Court in the decision reported at 2008 (229) ELT 485 (S.C). The findings of the CESTAT in the case of M.D.S. SwitchgearsVs CCEreported at 2001 (132) ELT 405 are as under:

“Reasons given by the appellants for the alleged inflation of the value of the intermediate goods are logical. What was required of the Commissioner was to examine the quantum of the loading of the assessable value by the Modvat credit on the earlier inputs. That exercise has nowhere been done. If the department was of the opinion that the value of the final product was depressed, then they could have charged the Jalgaon unit with under-invoicing of their product. That has also not been done. The valuation as given by the Sinnar unit was duly approved by the department and the payment of duty was also duly accepted. We find absolutely no substance in the attempt of the learned Commissioner to convert a part of the duty so paid into ‘deposit of duty’. There is no legal basis for such presumption. The rules entitled the receipt manufacturer to avail of the benefit of the duty paid by the supplier manufacturer. A quantum of duty already determined by the jurisdictional officers of the supplier unit cannot be contested or challenged by the officers in charge of recipient unit [2000 (38) RLT 179].”                                    
(emphasis supplied)
 
5.    No Revenue implication
The Government is not prejudicially affected in any manner.  If the amount is treated as “deposit”, then the Government has got no legal right to hold on the “deposit” even for a second.  Hence the Government should refund the “deposit” to the supplier and then recover the same from them.  Since the Government has not paid to the supplier, recovery from appellant is bad in law.  The Government has to simply square-off the entry in its books of account. Hence there is no revenue implication.

6.    No mechanism to recover so-called “amount” from Appellants.
Ld. Commissioner in the impugned order has held that the Appellants are not entitled for credit on “amount” paid by the manufacturer supplier by the name of excise duty. Thus, according to the Ld. Commissioner the said “amount” which is not available as credit is recoverable from the Appellants under Rule 14 of the Cenvat Credit Rules, 2004 and Section 11A(1) of the Central Excise Act, 1944. Rule 14 is reproduced below :

“Rule 14. Recovery of CENVAT credit wrongly taken or erroneously refunded.- Where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”
The term “CENVAT credit” has been defined in Rule 3(1) of the Cenvat Credit Rules, 2004 which inter alia refers to duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 leviable under the Central Excise Act, 1944.

Rule 14 read with Rule 3(1) empowers the department to recover credit of the duty specified in First Schedule to the Central Excise Tariff Act, 1985 and leviable under Central Excise Act, 1944 where such credit has been taken wrongly. 

As per the Ld. Commissioner the amount paid by the supplier is “amount” and not “duty”.  In other words, as per show cause notice, the Appellants have availed credit of “amount”.  But department is empowered to recover credit of “duty” and not credit of “amount”.  In other words, there is no mechanism in the Central Excise Act, 1944 and the rules made there under to recover such “deposit” from the Appellants.
In the following judgments, it has been held that the department cannot recover the amount if the amount is not “duty”:

·         Pushpaman Forgings Vs. CCE - 2002 (149) ELT 490 (T) [Maintained by Supreme Court in2003 (153) ELT A89 (SC)]
·         Hi-Line Pens (P) Ltd. Vs. CCE - 2003 (158) ELT 168 (T)
 
7.    Demand is entirely for the period beyond the normal period of limitation and the same is barred by limitation since there is no willful mis-statement or suppression of fact or contravention of the rules with intent to evade payment of duty.
The present show cause notice is dated 12.11.2010 and it proposes to deny credit availed on zinc dross received by the Appellants during the period from Dec 2005 – 10.05.2008. Thus, the entire demand is for the period beyond one year prior to the date of show cause notice.
The show cause notice alleges that the Appellants had not informed the Central Excise department that the zinc dross on which credit was availed was non-excisable. However there is no provision under the Central Excise Act and the Rules made thereunder requiring the assessee to disclose the above information. It is well settled that where particular information is not required to be supplied under law, if not supplied, does not amount to suppression.  Please refer:

·         Apex Electricals Vs. Union of India reported as 1992 (61) ELT 413 (Guj.)
·         Unique Resin Industries Vs. CCE reported as 1995 (75) ELT 861 (T)
·         Gufic Pharma Vs. CCE reported as 1996 (85) ELT 67 (T) and Affirmed by Supreme Court at 1997 (93) ELT A186.

Appellants submit that the Hon’ble Commissioner of Central Excise, Thane II in the matter of M/s. Slugs India Ltd. has decided the similar issue vide Order-in-Original No. 24/KLG/TH-II/2011dated 09.05.2011 in the favour of the Assessee. It was viewed that since the Cenvat credit is held to be admissible on the duty paid on exempted goods at receiver’s end, there is no reason to treat the documents/invoices issued by the supplier of non-excisable goods as invalid documents, particularly when the invoices are issued in terms of Rule 11 of the Central Excise Rules, 2002 for the purpose of availing Cenvat credit. Hence it was held that there can be no suppression of facts if facts which are not required to be disclosed are not disclosed as held in the case of Apex Electricals supra., therefore extended period of limitation under first proviso to section 11A(1) of the Central Excise Act, 1944 is not invokable in set of present facts.

8.    No evidence in the show cause notice to prove any deliberate action on Appellant’s part to evade payment of duty.
It is submitted that the onus is on the department to prove that Appellants had willfully suppressed facts with an intent to evade payment of duty. The show cause notice fails to prove that the Appellants have acted with any malafide intent. There is nothing on record to show the existence of fraud, collusion or suppression of materials facts or information. Therefore, as the ingredients of the proviso to Section 11A are not present, the proposal to invoke the larger period of limitation is liable to be dropped. Reliance is placed on the following cases in support of this submission:

·         Shahnaz Ayurvedics v. CCE – 2004 (173) ELT 337 (All.) affirmed by the Hon’ble Supreme Court in 2004 (174) ELT A34 (S.C.).
·         Devans Modern Breweries Ltd. v. CCE - 2006 (202) E.L.T. 744 (S.C.)

9.    In any case Appellants had bon fide belief that the duty paid on the zinc dross received by us from the supplier is available as credit. Hence the extended period of limitation is not applicable.
In any event of the matter and without prejudice to the above, Appellants were under bonafide belief in view of the various decisions referred to in paragraphs – to -- above that the Appellants were eligible to take credit. Under these circumstances, the extended period of limitation is not available to the department to deny credit on zinc dross. Hence the demand raised in the show cause notice is entirely barred by limitation.

The Supreme Court has consistently held that the department in order to invoke larger period under proviso to Section 11A(1), should establish that the assessee deliberately failed to disclose correct information with intention to evade payment of duty.  There must be some positive act from the side of the assessee to allege willful suppression.  The Supreme Court has held that when the information was in the knowledge of the department, larger period cannot be invoked.  Refer :

o    Anand Nishikawa Co. Ltd. Vs. CCEreported as 2005 (188) ELT 149 (SC)
o    Pushpam Pharmaceuticals Company Vs. CCE reported as1995 (78) ELT 401 (SC)
o    Tata Iron and Steel Co. Ltd. Vs. Union of India reported as1988 (35)ELT605 (SC).

The Hon’ble Supreme Court has consistently held that there has to be something more than mere inaction and some positive / deliberate act on the part of the assessee to evade payment of tax.  Please refer:

(i)         Continental Foundation Vs. CCE reported as 2007 (216) ELT 177 (SC)
(ii)        Padmini Products Vs. CCE reported as 1989 (43) ELT 195 (SC)
(iii)       Tamil Nadu Housing Board Vs. Collector reported as 1994 (74) ELT 9 (SC)
(iv)       CCE Vs. Chemphar Drugs reported as 1989 (40) ELT 276 (SC)
(v)        Jai Prakash Industries Limited Vs. CCE reported as 2002 (146) ELT 481 (SC).

In the present case, there is no evidence on record to allege that the so-called relevant information was deliberately not disclosed by the Appellants with an intention to evade payment of duty.  Mere failure, if any, is not sufficient if is not accompanied by an intention to evade payment of duty.
The Supreme Court has held that mere claiming exemption is not amounting to suppression with an intention to evade payment of duty.  Please refer: Tamil Nadu Housing Board Vs. CCE – 1994 (74) ELT 9 (SC).
Entire facts are recorded in the regular books of account and other records maintained by the Appellants in the usual course of business.  In other words, there was nothing covertness or clandestine in our activities. 
Furthermore, the Appellants state and submit that in any case the matter involves interpretation of the statutory provisions.  It is well settled that in a case involving interpretation of law, larger period cannot be invoked.
In view of the above, invoking larger period is incorrect and hence the show cause notice is liable to be dropped.

10.  Entire basis in the present show cause notice is due to change of opinion on the part of the Central Excise department. Hence, the extended period of limitation is not applicable.

As already submitted in paragraph 3.1 to 3.4 above, the Appellants have been issued with the two show cause notices dated 7.3.2007 and 16.8.2007 proposing to demand Central Excise duty on zinc dross cleared by the Appellants from our factory. Thus, the show cause notices alleged that zinc dross is by product, liable to Central Excise duty since the same was sold by the Appellants. For the purpose of alleging that zinc dross is marketable, the aforesaid show cause notices referred to the fact that JSW Steel had sold the zinc dross to the Appellants and the Appellants had also taken Cenvat credit of duty paid by JSW Steel on the said zinc dross. Even though the period involved was prior to 10.5.2008 and that the decision of the Hon’ble Supreme Court in the case CCE Vs Tata Iron & Steel Co. Ltd., reported at 2004 (165) ELT 386 (SC) (for short Telco) was available to the department it was contended by the department in the aforesaid show cause notices that zinc dross was excisable.

In the present show cause notice, in order to deny credit of duty has been paid by JSW Steel Ltd, the show cause notice makes an averment that for the period prior to 10.5.2008 in view of the aforesaid decision of the Hon’ble Supreme Court in the case TISCO, zinc dross is non-excisable and no duty is payable on the zinc dross. Thus the Central Excise department has changed its opinion taken by it in its show cause notices dated 7.3.2007 and 16.8.2007 and is taking diametrically opposite view in the present show cause notice in order to deny the credit. In such a situation, it cannot be alleged that there was suppression of fact by the Appellants during the period involved in the present show cause notice when credit of duty paid on the zinc dross received from the supplier was taken by the Appellants.  When there is a change of opinion by the department, it cannot be alleged that the assessee has suppressed the fact. In this regard, reliance is placed on the decision of the Hon’ble Supreme Court in the case of Prabhu Steel Industries Limited Vs CCE, 1997 (95) ELT 164. The relevant paragraphs of 3, 4 and 5 is as under:-

3. It is clear that unless the benefit of the largerperiod of limitation under the proviso to Section 11A of the Act is available to the Department, the matter is clearly barred by limitation and this alone is sufficient to allow the appeal. In order to avail the benefit of the larger period of limitation, the Department has to establish willful suppression of fact. The proviso to Section 11A reads thus :
 
“Provided that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any willful 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, by such person or his agent, the provisions of this sub-section shall have effect, [as if, ( )] for the words ”six months”, the words “five years” were substituted.”
 
4.From the admitted facts of this case there can be no doubt that none of the requirements of the above quoted proviso is satisfied in the present case to give to the Department the benefit of the larger period of limitation. The removal of the goods was in accordance with the approved classification list and all the material facts were before the concerned authorities. Simply because there was a change in opinion as to the correct description of the input, it cannot be said that the case falls within the ambit of proviso to Section 11A. Admittedly, there was no concealment of the true facts and the classification list submitted by the assessee had been duly approved under which the removal was made.
 
5. We are, therefore, satisfied that the proviso toSection 11A is not attracted in the present case. That being so, the show cause notice is clearly beyond the available period of limitation. This alone is sufficient to allow the appeal.
(emphasis supplied).

11.  Penalty is not imposable
The show cause notice proposes to impose penalty on the Appellants under Rule 15 of the Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944 for the alleged irregular credit taken by the Appellants on the zinc dross.

It is submitted that the show cause notice fails to specify the sub-Rule/sub-Rules of Rule 15 under which penalty is proposed to be imposed.
Penalty under Rule 15 of the Cenvat Credit Rules, 2004 is imposable only when credit has been wrongly availed or utilized by the assessee on account of fraud, willful mis-statement, collusion or suppression of facts or contravention of any of the provisions of the Central Excise Act or Rules made thereunder with intention to evade payment of excise duty. In such a case, penalty under Section 11AC of the Central Excise Act, 1944 is imposable on the manufacturer.

It is submitted that penalty under Section 11AC can be imposed only when there is suppression of fact or mis-statement of fact.  In other words, only when ingredient of proviso to Section 11A(1) of the Central Excise Act are applicable, penalty under Section 11AC can be imposed. 

In view of the submissions made in the forgoing paragraphs, it is submitted that the allegation of suppression, mi-statement with intent to evade payment of duty is not sustainable.
Further, the Appellants were under a bona fide belief that the credit of duty paid by the supplier on zinc dross can be taken. Therefore, it is submitted that penalty under Section 11AC of the Central Excise Act, 1944 cannot be imposed for this reason.

Further, it is submitted that the issue in dispute in the present case involves interpretation of provisions of law. Penalty is not imposable for this reason as well. Reference may be made to the following judgments wherein it has consistently been held that penalty is not imposable when the issue in question involves interpretation of the provisions of law:

(a)       C.C.E. Vs. Swaroop Chemicals (P) Ltd., reported as 2006 (204) E.L.T. 492 (Tri.)
(b)       Haldia Petrochemicals Ltd. Vs. C.C.E., reported as 2006 (197) E.L.T. 97 (Tri.). 
(c)       C.C.E. Vs. TELCO LTD., reported as  2006 (196) E.L.T. 308 (Tri.)
(d)       Siyaram Silk Mills Ltd. Vs. C.C.E. reported as 2006 (195) E.L.T. 284 (Tri.)
(e)       CCE Vs. Sikar Ex-Serviceman Welfare Coop. Society Ltd. reported as 2006 (4) S.T.R. 213 (Tri.)
 
(f)       Hindustan Steel Ltd. Vs. State of Orissa reported as 1978 (2) E.L.T. (J 159) (S.C.)
(g)       Fibre Foils Ltd. Vs. C.C.E. reported as 2005 (190) E.L.T. 352 (Tri.)
(h)      ITEL Industries Pvt. Ltd. Vs. C.C.E. reported as 2004 (163) E.L.T. 219 (Tri.)
(i)        Birla Corporation Ltd. Vs. C.C.E., reported as 2002 (148) E.L.T. 1249 (Tri.)

In view of the above judgments, the Appellants submit that where the issue involves interpretation of law, no penalty can be imposed on the assessee.  Proposal to impose penalty on the Appellants is therefore unsustainable in law.

Further, in the matter of M/s Hindustan Steel Ltd. V/s The State of Orissa reported at 1969 (2) SCC 627, the Hon’ble Apex Court has observed as under:
“……Penalty will not be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose penalty will be justified in refusing to impose penalty, where there is a technical or venial breach of the provisions of the act or where the breach flows form the bonafide belief that the offender is not liable to act in the manner prescribed in the statute.”
 …(emphasis supplied)

The above decision of the Apex Court, was followed by the Tribunal in the case of Kellner Pharmaceuticals Ltd. Vs CCE reported at 1985 (20) ELT 80. The Tribunal held that proceedings under Rule 173Q are quasi-criminal in nature and as there was no intention on the part of the Appellants to evade payment of duty the imposition of penalty cannot be justified. The ratio of these decisions squarely applies in all force to the present case. In the present case, there was neither any malafide intention nor any intention to evade payment of duty. In view of the foregoing, no penalty is imposable.

12.  Interest is not recoverableIt is a settled principle of law that in cases where the original demand is not sustainable, interest cannot be levied. Hence demand for interest is not tenable.

Reasoning of Judgment:- After hearing contentions of both the sides and perusing the records the honorable bench held that this issue involved in this appeal is whether cenvat credit can be taken by the recipient on the inputs on which no duty was payable at the supplier’s end. It has been concluded from various case laws cited by appellant that this issue has been decided in favour of recipient assessee when excess duty is paid or duty is paid under protest. In the case of MDS Switchgear Ltd. Vs CCE Aurangabad (2001 (132) ELT 405 (Tri- Mumbai) following was held in the paragraph 7 of the order:
“7.Reasons given by the appellant for the alleged inflation of the value of the intermediate goods are logical. What was required of the commissioner was to examine the quantum of the loading of the assessable value by the modvat credit on the earlier inputs. That exercise has nowhere been done. If the department was of the opinion that the value of final product is depressed then they could have charged the Jalgaon unit with under invoicing of their product. That has also not been done. The valuation as given by the Sinnar unit was duly approved by the department and the payment of duty was also duly accepted. We find absolutely no substance in the attempt of the learned Commissioner to convert a part of the duty paid by the so paid into “deposit of duty”. There is no legal basis for such presumption. The rules entitled the recipient manufacturer to avail of the benefit of the duty paid by the supplier manufacturer. A quantum of duty already determined by the jurisdictional officers of the supplier unit cannot be contested or challenged by the officers in charge of the recipient unit{2000(120)E.L.T 379(T)=2000(38) R.L.T(179)}

The above interpretation made CESTAT was upheld by Hon’ble Supreme Court in their judgment dated 07.08.2008 reported at 2008(229) ELT 485 (S.C.). A similar view has been taken by Hon’ble High Court of Mumbai in the case of CCE Pune Vs Ajinkya Enterprises {2012-TIOL-578-HC-MUM-CX}. In view of the settled law it is held that appellant has correctly taken the cenvat credit on the inputs received in the absence of any action taken by the revenue at the supplier end.  

Decision:-Appeal was allowed.

Conclusion:- Thegist of this case is that cenvat credit cannot be denied to a manufacturer of dutiable final products on the inputs that have been validly procured under the cover of a proper invoice on the sole contention that the supplier of inputs was not required to pay excise duty on the clearances of such goods. It is well settled that denial of credit at the recipient’s end when no action has been taken at the supplier’s end is not sustainable. As far as receipt of inputs under proper invoice and the payment of excise duty is not disputed, the credit should not be denied.
 

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