M/S Continental Carbon India Limited vs Cce & St, Ghaziabad

Excise Appeal No. 58111 of 2013 with Misc. Application No. 56316 of 2014 and Appeal No. 50355 of 2014

[Arising out of the Order-in-Original No. 11/Commr/GZB/2012-13 dated 25/02/2013 passed by The Commissioner of Customs, Central Excise & Service Tax, Ghaziabad.]

For Approval and signature :

Honble Shri Rakesh Kumar, Member (Technical)

Honble Ms. Sulekha Beevi C.S., Member (Judicial)

1. Whether Press Reporters may be allowed to see :

the Order for publication as per Rule 27 of the

CESTAT (Procedure) Rules, 1982?

2. Whether it would be released under Rule 27 of :

the CESTAT (Procedure) Rules, 1982 for

publication in any authoritative report or not?

3. Whether their Lordships wish to see the fair :

copy of the order?

4. Whether order is to be circulated to the :

Department Authorities?

M/s Continental Carbon India Limited Appellant

Versus

CCE & ST, Ghaziabad Respondent

Appearance

Shri Amit Jain, Advocate  for the Appellant.

Shri R.K. Gupta, Authorized Representative (DR)  for the Respondent.

CORAM : Honble Shri Rakesh Kumar, Member (Technical)

Honble Ms. Sulekha Beevi C.S., Member (Judicial)

Final Order No. 51874-51875/2015 Dated : 01/06/2015

Per. Rakesh Kumar :-

The facts leading to filing of these appeals are, in brief, as under.

1.1 The appellant are manufacturers of Carbon Black. They also have a power plant in the factory compound. The principal raw material for Carbon Black is Carbon Black Field Stock (CBFS) which is subjected to Thermal Cracking in a Reactor. In course of Thermal Cracking of CBFS for manufacture of Carbon Black, Off Gases emerge as an unavoidable and inevitable by-product. One of the main components of the off gases is carbon monoxide which is of hazardous nature and for this reason it cannot be released into the atmosphere, as such. Prior to 22/08/08, the off gases were being flared in the atmosphere. But, w.e.f. 22/08/08 when the capacity of their power plant was increased, the appellant started using the off gases in the boiler alongwith furnace oil for generation of steam. The steam generated is partly used for generation of electricity and partly is sold, as such. The electricity generated is also partly used in the factory for manufacture of carbon black and the surplus electricity is sold outside. The steam generated is mentioned in the Notification No. 4/06-CE (Sl. No. 31) as falling under Chapter 28 of the Tariff and is fully exempt from duty.

Sub-heading 27100000 of the Central Excise Tariff covers electrical energy but no rate of duty is specified under this heading. Department was of the view that both electricity and steam which are being sold out by the appellant are exempted goods within the meaning of this term as defined Rule 2 (d) of the Cenvat Credit Rules, 2004 and since common Cenvat credit availed services have been used in or in relation to manufacture of dutiable final product (carbon black) and exempted final product (steam and electricity) in respect of clearances of steam and electricity, an amount of 5%/10% of the sale value would be payable under Rule 6 (3) of the Cenvat Credit Rules, 2004. It is on this basis that a show cause notice dated 01/7/11 was issued for demand of Rs. 4,79,59,088/- for the period from 6th June, 2006 to March 2011 under Rule 6 (3) of the Cenvat Credit Rules, 2004 alongwith interest on it under Section 11AB and imposition of penalty on the appellant under Rule 15 (2) of Cenvat Credit Rules, 2004 readwith Section 11AC of the Central Excise Act. This show cause notice was issued by invoking extended limitation period under proviso to Section 11A (1).

Subsequently two more show cause notices dated 27/4/02 and 26/4/13 were issued for the period from April 2011 to March 2013 for demand of total amount of Rs. 2,00,31,455/- from the appellant under Rule 6 (3) of the Cenvat Credit Rules alongwith interest on it under Section 11AB and imposition of penalty on them under Rule 15 (2) of the Cenvat Credit Rules, 2004 readwith Section 11AC of the Central Excise Act.

1.2 The above show cause notices were adjudicated by the Commissioner by two separate orders. One order adjudicating the show cause notice dated 01/7/11 and the second order adjudicated the show cause notice dated 27/4/12 and 26/4/13 and by these orders, the Commissioner confirmed the demands under Rule 6 (3) of the Cenvat Credit Rules alongwith interest and imposed penalties of equal amount. Against these orders of the Commissioner, these appeals have been filed.

1.3 Miscellaneous application No. E/Misc/56316/2014 in appeal No. E/58111/2013 has been filed for extension of stay. Since the matter itself has been heard for final disposal, the miscellaneous application is dismissed as infructuous.

2. Heard both the sides.

3. Shri Amit Jain, Advocate, the learned Counsel for the appellant, pleaded that so far as input are concerned, the appellant take Cenvat credit only in respect of CBFS and they do not take any Cenvat credit for furnace oil or any other consumables whether used in the for manufacture of carbon black or generation of power, that as regards input services they take Cenvat credit in respect of three type of services, that first category of services are those which are exclusively used in or in relation to manufacture of carbon black, that the second category of services are those which are covered by Rule 6 (5) of the Cenvat Credit Rules, 2004 and in respect of these services, the credit has been taken only upto 31/3/11 and w.e.f. 01/4/11, Cenvat credit in respect of Rule 6 (5) services has not been taken, that third category of services are those services like Telecom Services, IT Services, Audit, Courier Service, Manpower Supply Services, repair and maintenance services etc., that the Revenue has not given any break up for these three services, that in respect of the services which are exclusively used in the manufacture of carbon black and the services covered by Rule 6 (5) the provisions of Rule 6 (3) would not be applicable, that the provisions of Rule 6 (3) would be applicable only in respect of the third category of services  IT Service, Courier Service and manpower supply service etc., that in respect of these services, the appellant had offered to reverse the Cenvat credit at the time of adjudication, but their request was rejected by the Commissioner on the ground that subsequent reversal of the Cenvat credit would not exempt them from the provisions of Rule 6 (3), that this view of the Commissioner is incorrect as w.e.f. 01/3/08 the provisions of Rule 6 (3) have been amended with retrospective effect giving a manufacturer an additional option to reverse the proportionate Cenvat credit in respect of inputs or input services used in or in relation to manufacture of exempted final products which is to be determined in accordance with the provisions of sub-Rule (3A) of Rule 6, that in any case, after the adjudication, the appellant have reversed the entire amount of Cenvat credit in respect of third category of services  Telecom Service, IT Service, Audit, Courier Service, Manpower supply service etc. and, hence, there is absolutely no justification for invoking Rule 6 (3), that in any case Rule 6 (3) is applicable when a manufacturer manufactures dutiable goods and exempted excisable goods by using common Cenvat credit availed inputs/input services, that exempted goods as per the definition of this term given in Rule 2 (d) of the Cenvat Credit Rules are the excisable goods fully exempt from duty or having nil rate of duty, and the goods which are not excisable would not be covered by the definition of exempted goods, that in the present case, neither electricity nor steam is excisable, that though electricity is covered by heading 27160000 there is no rate of duty mentioned and, hence, it is to be treated as non-excisable, that the Tribunal in the case of Ballarpur Industries Ltd. vs. CCE, Nagpur reported in 2006 (205) E.L.T.

483 (Tri.  Mumbai) has held that electricity cannot be treated as excisable goods or exempted goods, that Apex court in the case of Collector vs. Solaris Chemitech Ltd. reported in 2007 (214) E.L.T. 481 (S.C.) has also observed that electricity is non-excisable, that as regards steam, though there is an exemption notification which exempts steam falling under Chapter 28 from whole of duty, the steam is nowhere specified under any sub-heading of Chapter 28 and steam has to be treated as non-excisable, that since both the alleged exempted products  electricity and steam are non-excisable, provision of Rule 6 (3) readwith Rule 6 (2) would not be applicable, that the Department in earlier show cause notice dated 27/3/06 had treated steam as non-excisable, that in any case in the circumstances of the case, longer limitation period is not invokable as earlier, the Department had demanded an amount equal to 5%/10% of the sale value of steam by issuing show cause notice dated 27/3/06, that in the first show cause notice dated 01/7/11 there is calculation mistake as in a number of cases, the amount demanded under Rule 6 (3) has been calculated @ 50% and in some cases, percentage at higher than the 10% that the correct amount in the show cause notice dated 01/7/11 is Rs. 2,83,90,851/- and not Rs. 4,79,59,088/-, that this shows that the orders have been issued without any application of amount and in view of the above, the impugned orders are not correct.

4. Shri R.K. Gupta, the learned DR, defended both the orders by reiterating the findings of the Commissioner. Shri Gupta cited the judgment of Honble Bombay High Court in the case of Commissioner vs. Nicholas Piramal (India) Ltd. reported in 2009 (244) E.L.T. 321 (Bom.) and pleaded that since the appellant have used common Cenvat credit availed input services for manufacture of dutiable as well as exempted final products and have not maintained separate account and inventory of the same, the provisions of Rule 6 (3), would become applicable and they have no option to reverse the proportionate credit subsequently. He, therefore, pleaded that there is no infirmity in the impugned order.

5. We have considered the submissions from both the sides and perused the records.

6. The appellant in their factory manufacture Carbon Black, the main raw material for which is CBFS. Beside this, they have also have a power plant in the factory. The power generated by this power plant is mainly used for the manufacture of Carbon Black and the remaining power is sold outside. The period of dispute in this case is from June 2006 to March 2013. The appellant beside CBFS also purchase furnace oil to be used in the boiler of the power plant for generating steam apart of which is sold out and the remaining quantity is used for generation of electricity. There is no dispute that no Cenvat credit has been taken in the case of furnace oil. There is also no dispute that other than the CBFS, no Cenvat credit has been taken on any other input. The appellant have taken Cenvat credit in respect of certain services. In course of manufacture of Carbon Black from CBFS, an un-avoidable waste in form of off gases emerges which contain carbon monoxide. Because of the hazardous nature of the carbon monoxide, the off gases cannot be release into the atmosphere, as such. During the period prior to 22/08/08, the off gases were being flared.

However, w.e.f. 22/8/08 when the appellant expanded the capacity of their power generation plant, they started using off gases in the boiler alongwith furnace oil for generation of steam. Part of the steam is used for generation of power and the remaining steam is sold out. A part of the power generated in the power plant is used in the factory for manufacture of Carbon Black and the remaining power is sold out. The Departments case is that both steam and electricity are exempted excisable goods in as much as while steam classifiable under Chapter 28 is exempt from duty under Notification No. 4/06  CE (Sl. No. 31), the electricity is specifically covered by sub-heading 24160000. Accordingly, the Department has alleged that common Cenvat credit availed input services have been used in or in relation to manufacture of dutiable final product (Carbon Black) and exempted final product (steam and electricity) and therefore in respect of sale of steam and electricity an amount equal to 5%/10% of the sale value would be recoverable under Rule 6 (3) of the Cenvat Credit Rules. The appellants contention, however, is that the services being used are three type.

The first type of services are those which are directly used in or in relation to manufacture of Carbon Black and in respect of such services the provisions of Rule 6 (2) readwith Rule 6 (3) would not apply. We agree with this contention of the appellant that if certain services are exclusively used in or in relation to manufacture of Carbon Black Rule 6 (2) would not apply. The second category of the service according to the appellant are those which are covered by Rule 6 (5) of Cenvat Credit Rules, 2004 and in respect of these services, the Cenvat credit was being taken upto 31/3/11. In respect of these services also the provisions of Rule 6 (2) readwith Rule 6 (3) would not apply. According to the appellant the third category of services are Telecom, IT Service, Audit, Courier, Manpower Supply etc. which can be said to have been used for the whole plant. However, the grievance of the appellant is that the Department has not distinguished between the three type of services. On going through the impugned order, we find that this is so, as the Commissioner had not made any distinction between the services which according to the appellant had been used exclusively for manufacture of Carbon Black, the services covered by Rule 6 (5) and the other services.

In respect of first two category of services, the provisions of Rule 6 (2) readwith Rule 6 (3) would not apply. As regards the third category of services  Telecom Services, IT Services, Audit, Courier Service, Manpower Supply Services etc. which would be for the entire plant, the appellants plea is that after the adjudication of the matter, they have reversed the entire Cenvat credit taken in respect of these services alongwith interest and have furnished evidence in this regard in form of Chartered Accountants certificate. W.e.f. 01/3/08, the provisions of Rule 6 (3) had been amended to give an additional option to a manufacturer manufacturing dutiable final product and exempted final product by using common Cenvat credit availed input/input services and this additional option was to pay the proportionate credit in respect of input/input services used in or in relation to manufacture of and exempted final product or provision of exempted services and this proportionate credit was to be determined by the formula prescribed under sub-Rule (3A) of Rule 6. By Finance Act, 2010, the above amendment to Rule 6 (3) was given retrospective effect.

Therefore, during the entire period of dispute, the appellant were entitled to reverse the proportionate credit. The appellants plea, however, is that they have reversed the total credit on all the common input services. If this is so, there would be no case for invoking Rule 6 (3) against them. Honble Allahabad High Court, which is the Jurisdictional High Court, in the case of Hello Minerals Water Pvt. Ltd. vs. Union of India reported in 2004 (174) E.L.T. 42 (All.) has held that if the Cenvat credit initially taken is reversed subsequently it would amount to not taking Cenvat credit and same view has been taken by the Tribunal in the case of JCT Ltd. vs. CCE, Jallandhar reported in 2015 (318) E.L.T. 275 (Tri.  Del.). Therefore if the appellant have fully reversed the credit in respect of common services or in other words not taken any Cenvat credit in respect of the common services there would be no justification for invoking Rule 6 (2) readwith Rule 6 (3) and the duty demand would not be sustainable at all.

7. In view of the above discussion, without going into the question as to whether the steam and electricity are excisable goods or non-excisable goods, we set aside the impugned order and remand the matter to Commissioner for denovo adjudication. In denovo proceedings, the Commissioner should examine the appellants plea that the input services are of three types as described above. In respect of the services which are exclusively used for manufacture of Carbon Black and the services covered by Rule 6 (5) in respect of which Cenvat credit has been taken upto 31/3/11 the provisions of Rule 6 (2) readwith Rule 6 (3) would not apply. If in respect of the common input services of third category, the appellant have fully reversed the Cenvat credit, the provisions of Rule 6 (2) readwith Rule 6 (3) would not apply and the demand confirmed under Rule 6 (3) would not be sustainable. If the amount under Rule 6 (3) is held to be demandable, the Commissioner shall also go into the question quantification and also the question of limitation and penalty.

(Dictated and pronounced in open court.)

(Rakesh Kumar)

Member (Technical)

(Sulekha Beevi C.S.)

Member (Judicial)

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