M/S Pipavav Shipyard Ltd vs Commissioner, Central Excise & Service ...

Appeal No.E/840/2012-DB [Arising out of OIO-22-23/BVR/COMMISSIONER/2012, dt. 22/08/2012, passed by Commissioner of Central Excise & Customs, Bhavngar]

M/s Pipavav Shipyard Ltd. Appellant

Vs

Commissioner, Central Excise & Service Tax, Bhaavnagar Respondent

Represented by:

For Appellant: Shri Vishal Agarwal, Ms.Dimple Gohil - Advocates For Respondent: Shri K. Sivakumar, Authorised Representative

For approval and signature:

Honble Mr. P.K. Das, Member (Judicial) Honble Mr. H.K. Thakur, Member (Technical)

1. Whether Press Reporters may be allowed to see the No Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?

2. Whether it should be released under Rule 27 of the No CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?

3. Whether their Lordships wish to see the fair copy of Seen the order?

4. Whether order is to be circulated to the Departmental Yes authorities?

CORAM:

HONBLE MR. P.K. DAS, MEMBER (JUDICIAL) HONBLE MR. H.K. THAKUR, MEMBER (TECHNICAL)

Date of Hearing/Decision:30.04.2015

Order No. A/10460/2015, dt.30.04.2015

Per: P. K. Das

The relevant facts of the case, in brief, are that the Appellant, a 100% Export Oriented Unit (EOU) was granted permission for manufacturing ship building and the services of ship repairs/refit within the private bonded warehouse as per Letter of Permission (LOP) issued by the Development Commissioner, Kandla. The Appellants fabricated a Dry Dock for manufacturing ship and repair service. The Appellant is registered with Central Excise authorities for manufacturing of ships and also registered with the Service Tax authorities for rendering repair service. The Appellants availed CENVAT Credit on input services, input and capital goods used for fabrication of the Dry Dock, amongst others. They utilized CENVAT Credit towards the output service mainly repair services and export of the goods and claimed refund of CENVAT Credit under Rule 5 of CENVAT Credit Rules.

2. Two Show Cause Notices were issued on 03.11.2011 and 07.02.2012 proposing to deny the CENVAT Credit on input service, input and capital goods for the period October 2010 to February 2011. It has been alleged that the final product ship is classifiable under Central Excise Tariff Heading 8901 chargeable to Nil rate of duty and therefore, there are not eligible to avail the CENVAT Credit for manufacturing of the exempted final product in contravention of Rule 6(1) of CENVAT Credit Rules, 2004. It has further been alleged that the Appellant availed the CENVAT Credit wrongly on the basis of ISD invoices, issued by their Head Office Mumbai, whose name was not mentioned in LOP. It has also been alleged that the Appellant availed, CENVAT Credit on the capital goods fixed with earth. By the impugned order, the Adjudicating Authority disallowed the CENVAT Credit of Rs.7,69,25,644.00 alongwith interest and imposed penalty of equal amount of CENVAT Credit.

3. The learned Advocate on behalf of the Appellant submits that the Show Cause Notice proceeded on a erroneous basis that the Appellant was exclusively engaged in the manufacture of exempted final product, ship. It is submitted that the Appellant utilized the credit of input service for outward service viz. ship repairing. That the Appellant a 100% EOU exported the ship under bond. Rule 6(1) would not apply as per provision of Rule 6(6)(d) of the said Rules, 2004. He referred to the decision of Honble High Court and Boards Circular. It is further submitted that they have paid the Service Tax on outward service of Rs.26.07 Crores and utilized the input service credit therein. He drew the attention of the Bench to the LOP issued by the Development Commissioner for manufacturing of ship building and repair of ship. The entire proceedings was initiated on the basis that the Appellant had shown the amount in their ER-1 returns instead of ST-3 returns. He referred the Board circular F.No.S/381/23/2010/862, dt.30.03.2010 clarified that credit availed by a manufacturer and service provider goes into a common pool and can be used for both purpose. Further, demand of CENVAT Credit on capital goods on the ground that the machinery assembled at the site, is covered in favour of the Appellant by the decision of the Tribunal in the case of Commissioner of Central Excise Vs JSW Ispat Steel Ltd  2013-TIOL-1758-CESTAT-Mum. He further submits that denial of CENVAT Credit on the input availed on the basis of ISD invoice issued by Head Office, whose name was not mentioned in the LOP is not sustainable, as the Head Office is registered with Service Tax authority. The learned Advocate filed Written Submissions along with compilation of case laws and Board circular.

4. On the other hand, the learned Authorised Representative for the Revenue reiterates the findings of the Adjudicating Authority. He submits that there is no dispute that the final product ship is Nil rate of duty and the Appellants is not eligible to avail CENVAT Credit, as per Rule 6(1) of Rules, 2004. He further submits that the Appellants themselves declared and availed CENVAT Credit in their ER-1 return for manufacturing exempted final product Ship. Rule 6(1) of the Rules, 2004 provides no credit is to be allowed for exclusive exempted final product. It is further submitted that the Appellant is EOU and there is no requirement of furnishing Bond. So, Rule 6(6)(d) of the said Rules would not apply. It is submitted that the address of Head Office was not mentioned in the LOP and therefore, the CENVAT Invoice issued by the Head Office as ISD cannot be accepted. He also submits that the Appellant is not eligible to avail the credit of capital goods used in the machinery fixed on earth, relied on the decision of the Honble Supreme Court in the case of Quality Steel Tubes (P) Ltd Vs Collector of Central Excise  1995 (75) ELT 17 9(S.C.)

5. After hearing both the sides and on perusal of the records, we find that the Deputy Development Commissioner, Kandla Special Economic Zone, by letter dt.04.04.2006, permitted the applicant for establishment of a new undertaking, under 100% EOU scheme for manufacturing of Ship Building, Ship Repairs/Refit. It was permitted on the condition that the Appellant shall export the entire production excluding reject and sales in the Domestic Tariff Area as per the provisions of EOU scheme, amongst others. By letter dt.08.01.2008, the Joint Development Commissioner, Kandla Special Economic Zone, authorized the Appellant for manufacturing further items namely, Ship, Vessels, Hulls, Offshore Structures includes FPSO, Rigs, Platforms etc. The jurisdictional Central Excise & Customs authority on 06.08.2007, granted permission to manufacture the goods and to render the services of repair within the private bonded Warehouse. The Appellants also executed a bond with Deputy Commissioner of Central Excise. They have obtained Central Excise registration under the Central Excise Rules on 06.09.2007 and also applied for registration as a service provider, which was granted on 08.02.2008.

6. The case of the Appellant is that Dry Dock is the heart of the shipyard used in ship building and repair service. The Honble Supreme Court in the case of Scientific Engineering (P) Ltd Vs Commissioner of Income Tax, Andhra Pradesh, (1986) 1 SCC 11 observed that a Dry Dock since it fulfilled the function of a plant must be held to be plant. The every part of this Dry Dock plays an essential part with which, the operation is performed. In the case of Commissioner of Income Tax Vs Anand Theatres, (2000) 5 SCC 393, the Honble Supreme Court observed that Dry Dock a concrete dry structure can be held a plant because the whole Dock was used for carrying on the entire operation. In the instant case, the Appellant fabricates Dry Dock for manufacturing ships, excisable goods and to provide output service namely repair service, which is covered under the definition of Input Service under Rule 2(l) of CENVAT Credit Rules, 2004 as under:-

(A) Input Service means any service, -

(i) used by a provider of taxable service for providing an output service, or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

7. The definition of input service under Rule 2(l) of the Rules precisely covers any service used by a provider of taxable service for providing an output service, any service used by a manufacturer in or in relation to manufacture of final product and inclusive part of the definition, services used in relation to setting up, modernisation, renovation or repair of a factory, premises of a provider of output service or an office relating to such factory or premises etc. The expression any service read with for providing an output service would cover wide encompass of the definition of input service. The Honble Supreme Court in the case of Indian Chamber of Commerce (AIR 1976 SC 348) observed that the expression for has to be interpreted as for the purpose of. CBEC Circular No.120/01/2010-ST, dt.19.01.2010, clarified that the definition of input service qua a manufacturer and provider of output service. In our considered view, CENVAT Credit availed on input service, input and capital goods for setting up Dry Dock would be allowed for providing output service namely repair/refit service. This is also covered in the inclusive part of the definition of input service. Hence, the finding of the Adjudicating authority, is that the Appellant is exclusively engaged in the manufacture of exempted final product Ships and CENVAT Credit on input, capital goods is inadmissible, cannot be sustainable.

8. The learned Authorised Representative contended that there is no requirement of furnishing the bond by an EOU and it does not cover under Rule 6(6) of the Rules. CBEC by Circular No.928/18/2010-CX, dt.28.06.2010, clarified that a 100% EOU are required to export the goods under bond in terms of customs and excise notifications. CBEC by Circular No.120/01/2010-ST, dt.19.01.2010, in the context of the problems faced by the exporter for availing of refund of excess credit, observed that the major reason causing delay in granting refund as well as rejecting the claim is that as per the wordings of the notification, refund is permitted of duty/tax if only such input/input services which are either used in the manufacture of export goods or used in providing the output services exported. As against this, the phrases used in the CENVAT Credit Rules, permitted credit on service used whether directly or indirectly, in or in relation to the manufacture of final product or for providing output service. The field formation tend to take the view that for eligibility of refund, the nexus between input or input services and the final product/services has to be closer and more direct than that is required for taking credit. It has been clarified that the input services should be directly used in the output service exported. As regards the extent of the nexus between the input/input services and export goods/services, it must be borne in mind that the purpose is to refund the credit that has already taken by them. There cannot be different yardsticks for establishing the nexus between taking of the credit and for refund of credit. Even if different phrases are used under different rules of CENVAT Credit Rules, they have to be read in a harmonious manner.

9. The learned Advocate relied upon the decision of Honble Karnataka High Court in the case of Commissioner of Customs, Banglore Vs ANZ International  2009 (233) ELT 40 (Kar.) where the appeal of the Revenue was dismissed. It has been held that a 100% EOU is entitled to take CENVAT credit on the duty of the inputs procured indigenously and when they are not in a position to utilise the same, they are entitled for the benefit of refund under Rule 5 of the Rules. In the present case, the Appellant stated that they have claimed the refund for the unutilised credit under Rule 5 of the said Rules. This decision of Hon'ble High Court was upheld by Honble Supreme Court as reported in 2009 (234) ELT A 16 (SC).

The relevant portion of the decision of Honble Karnataka High Court in the case of ANZ International is reproduced below:-

3.?With reference to the above said grounds urged in this appeal, we have carefully examined the same to find out as to whether the aforesaid substantial question of law would arise or not for our consideration in this Appeal. The CESTAT, having regard to the undisputed fact that the respondent is 100% Export Oriented Unit (for short ECU) in respect of which, benefit of CENVAT Credit Rules, 2004 is available for the inputs which will be used for manufactured goods of 100% export. Therefore, the Tribunal has applied Rule 6(6) and recorded the reasons stating that there is a provision of exporting the goods under bond. In the case of 100% EOUs, the input can be imported free of duty and they can obtain indigenously also free of duty. When duty is paid on the inputs, then the appellants are entitled for the Cenvat credit facility under the Rules Cenvat Credit Rules. There is nothing in the Rules which prohibits 100% EOUs availing Cenvat credit. Rule 5 of the said Rules provides for refund of Cenvat credit availed by the exporter where they do not utilize the goods as inputs for manufacture of 100% export.

The case on hand is the precise case wherein the respondent has availed the Cenvat credit facility. They were not in a position to utilize the credit, they applied for refund of the Cenvat credit availed by them. The reason is that all their products were exported and there was no domestic clearance. Therefore, in terms of Rule 5 of the Rules, they are riglitiy entitled for the refund of the duty paid to the department. The learned counsel for the appellant has pointed out that in the case of Sterlite Opitcal Technologies Ltd. v. CCE, Aurangabad - 2006 (201) E.L.T. 428 (Tri.-Mumbai), wherein it is held that letter of undertaking accepted in lieu of bond for export even though finished goods were exempted, refund of Cenvat credit on inputs and packing materials are admissible in terms of Rule 5 of the Rules. Therefore, the Tribunal has held that 100% EOU is entitled to take Cenvat credit on the duty of the inputs procured indigenously and when they were not in a position to utilize the same, they are entitled for the benefit of the refund under Rule 5 of the Rules. Therefore, the orders impugned in the Appeal before the CESTAT held to be bad in law and the same were set aside.

Therefore, we do not find that no substantial question of law does arise in this Appeal for our consideration to answer the same in favour of the Revenue. Accordingly, the appeal is devoid of merits and therefore it must fail and is dismissed.

10. In the case of Commissioner of Central Excise Vs M/s Drish Shoes Ltd  2010 (254) ELT 417 (H.P.), the Honble Himachal Pradesh High Court observed that the Rule 6(6) of CENVAT Credit Rules, 2004 applies both to exempted as well as dutiable goods as term used in later is excisable goods and not dutiable goods. In that case, the question of law was whether an assessee exclusively manufacturing wholly exempted goods (chargeable to Nil rate of duty) is eligible to avail CENVAT Credit of duty paid on the inputs and input services under Rule 6(1) of CENVAT Credit Rules, 2004 used in the manufacture of such exempted goods even if such goods are exported. In that case, the Respondent was engaged in the manufacture of finished leather and it had exported the manufactured leather. The Honble High Court held that an assessee manufacturing the goods chargeable to Nil rate of duty is eligible to avail CENVAT Credit paid on the inputs under the exception clause contained in Rule 6(6) of the said Rules, used in the manufacture of such goods, if the goods were exported. In view of the above discussion, the contention of the learned Authorised Representative for the Revenue is that there is no requirement of furnishing of Bond by 100% EOU, is not admissible.

11. As revealed from the Adjudication order that input service credit was denied mainly on the basis that the input service credit availed on the input services was shown in ER-1 return instead of ST-3 returns. The relevant portion of the Adjudication order is reproduced below:-

12.2.5 In the instant case, the Noticee has shown the CENVAT Credit availed on input services in their ER-2 return indicating that those services have been used by them in or in relation to manufacture of final products whether directly or indirectly. Had those services been used for providing output services, the Noticee would have shown the CENVAT Credit of Service Tax paid on such input services in their respective ST-3 returns. As already discussed, the criteria to qualify the services used as input service are different in case of Manufacturer and Output Service Provider. Therefore, if the service received were qualified as input service for providing output service viz. Transport of Goods by Road or Ship Management Service, the Noticee should have shown the same as CENVAT Credit in the relevant ST-3 returns filed with the jurisdictional Service Tax authorities.

12. CBEC vide Circular F.No.381/23/2010/862, dt.30.03.2000, clarified that cross utilisation of credit of input and input service. A manufacturer who is also providing a taxable service obtained registration from the Central Excise authority as well as Service Tax authority and required to file ER-1 and ST-3 returns separately. In some cases, these returns are filed in different jurisdictions the CENVAT credit on input, capital goods and input services which are used in manufacturing of goods or providing output service is available in a common pool and can be used for payment of excise duty or service tax. Ultimately, the CENVAT Credit taken during the period shown in ER-1 or ST-3 return could be same. It is clarified that if these returns are being filed separately the Service Tax Commissionerate, while undertaking service tax audit, the officers should verify the said return also for confirming the correctness of such credit.

13. The Larger Bench of the Tribunal in the case of Commissioner of Customs & C.Ex., Meerut-I Vs Modi Rubber Ltd  2000 (119) ELT 197 (Tri-LB), held that the declaration filed by the Assessee in terms of Rule 57Q of Central Excise Rules, 1944 is sufficient for the purpose of extending credit on lubricants under Rule 57A of the said Rules. In the case of Commissioner of Central Excise, Coimbatore Vs Lakshmi Technology & Engineering Indus. Ltd.  2011 (23) STR 265 (Tri-Chennai), the Tribunal held that the manufacturer entitled to use the credit from a common pool to which different categories of specified excise duties, customs duty and service tax allowed to be taken as credit. Similarly, a provider of taxable service is also entitled to take credit of specified excise duty, additional duty of customs and service tax in respect of input service and utilised credit from these sources for the purpose of paying service. Rules permit taking of credit under a common pool and permit the use of the credit from common pool for different purposes and there is no restriction placed to the effect that credit accounts should be maintained for use for manufacture of excisable goods and for use for providing services. In the case of Commissioner of Central Excise, Salem Vs Thangavel & Sons (P) Ltd.  2014 (7) 895-CESTAT Chennai, the Tribunal held that the Respondents are not only the manufacturers of excisable goods, but also the provider of output service and both the activities are carried out in the same premises. Respondents are eligible for availment of input credit, they can utilise the CENVAT credit available with them either for payment of excise duty on the final products or for payment of service tax on the output services as stipulated in sub-rule (4) of Rule 3 of CENVAT Credit Rules, 2004. The restriction on utilisation of CENVAT Credit stipulated relates only for specific type of duties i.e. education cess on excisable goods or payment of education cess on output service. There is no restriction for utilisation of common input credit availed on the inputs and also on input service for payment of excise duty or service tax. Hence, we do not find any reason to deny the input service credit on the ground that it was shown in the ER-1 return.

14. The Adjudicating authority denied CENVAT Credit on capital goods, being inadmissible used in immovable property come into existence. We find that the Tribunal in the case of Commissioner of Central Excise Vs JSW Ispat Steel Ltd  2013-TIOL-1758-CESTAT-Mum observed that merely because various machineries and equipments, appliances and parts have been assembled at site to set up the Oxygen plant and such plant being an immovable property, it will be preposterous to deny the CENVAT Credit on these individual machineries/equipments/appliances. The Honble Andhra Pradesh High Court in the case of Commissioner of Central Excise Visakhapatnam-II Vs Sai Sahmita Storages (P) Ltd  2011 (270) ELT 33 (A.P.) held that storage and ware housing service could not have been rendered without creating a ware house and consequently the credit of TMT bars used for construction of ware house would be admissible. Similarly, in the present case, the Appellant is unable to render the repair/refit service without the crane in Dry Dock and which can be treated as capital goods. The case law relied upon by the learned Authorised Representative is in context of excisability of goods, and the Tribunal already considered in earlier decision.

15. There is a denial of CENVAT credit availed on input service on the ground that credit was taken on the strength of invoices issued by the Appellants head office at Mumbai as ISD (Input Service Distributor). It is observed by the Adjudicating authority that the head office address was not mentioned in the LOP issued by the DGFT. We find that there is no dispute that the head office is registered as ISD with the Service Tax authorities. As per CENVAT Credit Rules, the Appellants are eligible to avail the credit on the invoices issued by the ISD. There is no reason to deny the credit on the ground that the address of the ISD was not mentioned in the LOP.

16. In view of the above discussion, we find that the denial of CENVAT Credit alongwith interest and penalties cannot be sustained. Accordingly, the impugned order is set aside. The appeal filed by the Appellant is allowed with consequential relief. The application filed by the Appellant for extension of stay order is dismissed as infructuous.

(Operative portion of the order pronounced in Court)

(H.K. Thakur) (P.K. Das) Member (Technical) Member (Judicial)

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