M/S. Vaibhav Ispat Pvt. Ltd vs Cc & Ce, Meerut-I

CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI

Date of Hearing: 09.04.2015

Date of Decision:12.05.2015

Excise Appeal No. 57744/2013-EX(DB)

[Arising out of Order-in-Original No.05/Commr/Meerut-I/2013 dated 29.01.2013 passed by the Commissioner of Central Excise, Meerut-I]

M/s. Vaibhav Ispat Pvt. Ltd. Appellant

Vs.

CC & CE, Meerut-I Respondent

For approval and signature:

Honble Shri Rakesh Kumar, Member (Technical)

Honble Shri S.K. Mohanty, 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 should 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 Departmental authorities?

Appearance: Rep.by Shri K.K. Anand, Shri Amit Singh, Shri Vivek Tomar,

Ms.Pareena Swarup, Ms. Surabhi and

Ms. Priyanka Goel, Advocates.

Rep. by Shri Ranjan Khanna, DR for the respondents.

Coram: Honble Shri Rakesh Kumar, Member (Technical)

Honble Shri S.K. Mohanty, Member (Judicial).

Final Order No.51590/2015 dated: 12.0.50215

Per Rakesh Kumar:

The facts leading to filing of this appeal are, in brief, as under:-

1.1 M/s. Vaibhav Ispat Pvt. Ltd. (hereinafter referred to as appellant company) are manufactures of M.S. Ingots chargeable to central excise duty under sub-heading no.7204.1090 of the Central Excise Tariff. There is no dispute that their manufacturing unit is located in the area specified under notification no.50/2003-CE dated 10.06.2003 and the goods manufactured by them are covered for exemption under this notification. This exemption notification is applicable to the following units viz.:-

(a)New Industrial units set up in areas mentioned in Annexure-II and Annexure-III which have commenced commercial production on or after the 7th day of January, 2003, but not later than the 31st day of March, 2010] and

(b)Industrial units existing before the 7th day of January, 2003 in areas mentioned in Annexure-II, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty-five per cent on or after the 7th day of January, 2003, but have commenced commercial production from such expanded capacity, not later than the [31st day of March, 2010];

According to the appellant company, they are a new industrial unit, which had commenced commercial production on 30th day of March, 2010. On this basis, they are claiming the duty exemption under this exemption notification. There is no dispute that the appellant company under their letter dated 26.03.2010 had filed the required declaration for availing exemption notification no.50/03-CE dated 10.06.2003, wherein they had declared the product to be manufactured by them and that they intended to start commercial production on or before 31.03.2010.

1.2 According to the department, an information was received that the appellant were wrongly availing this exemption notification inasmuch as they had failed to commence commercial production on or before 31.03.2010 and had actually commenced commercial production only after 31.03.2010 and hence, they were not eligible for exemption under this notification, but were still availing exemption. The departmental officers accordingly visited the appellants unit on 7.1.2011. In course of inquiry with the Director of the Appellant Company, Shri Sompal Singh, the officers learnt that the land for the unit had been purchased from UPSIDC in 2006, that the units is manufacturing M.S. Ingots from steel scrap and sponge iron, that there is only one furnace installed in the unit with two crucibles each of 6 M.T. capacity and there is also a third stand by crucible, that the total capacity of the unit is 12 MTs., that earlier a load of 3000 KVA has been sanctioned to them but later on, they got the additional load of 2000 KVA and accordingly their total sanctioned loaded is 5000 KVA and that they had purchased the furnace from M/s.Inductotherm (India) Pvt. Ltd., Ahmedabad (hereinafter referred to as IIPL) in Feb., 2010 and in this furnace, two crucibles can be operated at a time.

The officers at the time of visit found that furnace was installed and that beside, the 5000 KVA power connection, they also had a generator of 82.5 KVA capacity and that they had also installed two cranes in March, 2010. Inquiry was made with the furnace supplier, IIPL, Ahmedabad in course of which, statement of Shri Tarun Sangal, Sr. Manager of IIPL was recorded, wherein they confirmed the supply of furnace with three crucibles of 6 MT. capacity each to the appellant company in March, 2010 in pursuance of the Purchase Order dated 29.11.2009 placed by the appellant company. Shri Tarun Sanghal in his statement dated 15.3.2011 stated that the furnace supplied with 2 crucibles of 6 MT. each capacity with one stand by crucibles and that two crucibles can be operated at a time. He stated that the furnace supplied was installed and commissioned in two parts  one inverter and three crucibles were commissioned on 30.3.2010 and the second inverter was commissioned on 20.05.2010 and that their engineers had visited the appellant unit from 20.03.2010 to 1.4.2010 and second time, from 25.5.2010 to 5.6.2010.

According to Shri Sompal Singh, the plant was handed over to the appellant company on 30.3.2010 to start commercial production, though their engineers had stayed till 1.4.2010 for observation. He also stated that the furnace had been commenced commercial production on 30.3.2010 by their engineers and it was possible to produce M.S. Ingots from 30.03.2010 onwards. Inquiry was conducted with Chief General Manager, Uttrakhand Power Corporation Ltd. (UPCL) and on inquiry, it was learnt that the power consumption of the appellant company on 29.03.2010, 30.03.2010 and 31.03.2010 was 340 units, 6000 units and 30,420 units respectively while the production of 11.68 MT had been shown on 29.03.2010, the production of 11.67 MT was shown on 30.03.2010 and the production of 17.52 MTs was shown on 31.03.2010. The Department was of the view that the appellant had not commenced commercial production as looking to the records of the operation of the furnace, it could not be said that the unit had commenced commercial on or before 31.03.2010. In course of subsequent inquiry, it was learnt that since the power consumption of the furnace installed for production of M.S.

Ingots varies from 600 units to 1200 units PMT, it was not possible to produce 11 MT of M.S. Ingots by consuming 340 units of power. On inquiry, it was also found that the concerned officers of the appellant company accepted that there was no production of M.S. Ingots on 29.03.2010, but they claimed that the same has been wrongly shown in the records. However, in respect of the operation of the furnace on 29.03.2010 and 31.03.2010, while the appellant company claimed that they had manufactured 29 MT of M.S. Ingots, according to the department, from the mode of the operation of the furnaces and power consumption, it was not possible to manufacture the quantity of M.S. Ingots claimed to have been manufactured by the appellant and according to the Department also, the production shown by the appellant on 30.03.2003 and 31.03.2003 is also bogus production and as such, they had not commenced commercial production on or before 31.03.2000. It is on this basis that a show cause notice dated 30.12.2011 was issued to the appellant for denial of the exemption under notification no.50/2003-CE and for recovery of duty amounting to Rs.5,27,66,984/- from them for the period from March, 2010 to September, 2011 along with interest on it under Section 11 AB and also for imposition of penalty on them under Section 11 AC.

1.3 The above show cause notice was adjudicated by the Commissioner of Central Excise, Meerut-I vide order-in-original dated 29.01.2013 by which the above mentioned duty demand was confirmed against the appellant along with interest and besides this, penalty of equal amount was imposed on them under Section 11 AC. The Commissioner held that the appellant had not commenced commercial production on or before 31.03.2010 and hence, they are not eligible for the duty exemption under notification no.50/2003-CE. The Commissioner also observed that all the production recorded for 29.03.2010 to 31.03.2010 is nothing but book entry and sale of certain quantity from this entry can be managed by the assessee by arranging goods even from open market to claim exemption on fake grounds and in illicit manner and as such, the claim of the appellant company for the exemption notification is not bonafide. Against this order of the Commissioner, this appeal has been filed.

2. Heard both the sides.

3. Shri K.K. Anand, Ms. Pareena Swarup and Ms. Priyanka Goyal, Advocates, the ld. Counsels for the appellant, pleaded that the appellant company had set up a unit at C-8, UPSIDC Industrial Estate, Bahadra, Dist. Haridwar, Uttrakhand for manufacture of M.S. Ingots from M.S. Scrap and Sponge Iron , that the induction furnace had been procured from M/s. Inductotherm India Pvt. Ltd (IIPL) in Feb. 2010, that the furnace had been installed in last week of March, 2010 and had been commissioned and had started commercial production before 31st March, 2010, that the appellant under their letter dated 26.03.2010 had made a declaration to the Jurisdictional Asstt. Commissioner, Central Excise for availing the exemption under notification no.50/03-CE and in this regard had furnished the necessary information, that Khasra number of the Plot on which the factory is located, is specified in the notification no.50/03-CE and the goods manufactured are also covered for exemption under this notification, that during the last week of March, 2010 the appellant unit had received 100.260 MTs of M.S. Scrap, 236.50 MTs of Sponge Iron and 47 MTs of Silco Magnese, that power consumption on 29.3.2010, 30.03.2010 and 31.03.2010 was 340 units, 6052 units and 30420 units respectively and the production recorded on 30.03.2010 and 31.03.2010 was 11.675 Mts. and 17.52 MTs. respectively, that there was no production on 29.03.2010, thought earlier, some production had been shown by mistake on this date also, that the induction furnace had been installed by an engineer of IIPL, that as per statement dated 15.3.2011 of Shri Tarun Sangal of IIPL, he had received the order for supply of the furnace in November, 2009 and had supplied the goods in seven consignments under invoices on 19.2.2010 to 20.05.2010 and that the furnace supplied is 3000 KW dual Mode with two crucibles and one standby crucible each of 6 MT. capacity, that the panel in dual mode can operate two crucibles of 6 MT. each simultaneously, that the equipment was commissioned in two parts  one inverter and three crucibles were commissioned on 30.03.2010 and the second inverter was commissioned on 20.05.2010, that the plant was handed over by the furnace suppliers- IIPL to the appellant on 30.03.2010 to start commercial production but their engineer had stayed that till 1.4.2010 for observation, that the furnace was handed over for commercial production on 30.03.2010 and there was no deficiency which could restrict the production of M.S.

Ingots, that since manufacturing unit set up by the appellant company is a new unit set up after 7.1.2003 and had commenced commercial production before 31.3.2010, the same is eligible for the exemption under notification no.50/03-CE, that during March, 2010, about 30 MTs. of M.S. Ingots manufactured by the appellant were cleared on payment of duty, that sale of M.S. Ingots is not disputed by the department, as in the show cause notice issued to the appellant, the Department has demanded duty of Rs.90,805 on clearance of 30 MTs of M.S. ingots during March, 2010 and the Commissioner in the impugned order has confirmed this duty demand, that, therefore, the Department can not allege that there was no production of M.S. Ingots during March, 2010, that the Commissioners finding that the production claimed to have been made during March, 2010 was bogus production and was shown only in the records is totally incorrect and is not compatible with his decision to confirm duty demand on this production, that the appellants plea regarding commercial production having commenced on 30.03.2010 is also supported by the fact that power consumption on 30.03.2010 was 6000 units and the power consumption on 31.03.2010 was about 30,000 units and that in view of the above, the impugned order holding that the appellant had not commenced commercial production on or before 31.03.2010 and hence, are not eligible for the exemption notification no.50/2003-CE and confirmation of duty demand on this basis against the appellant company for the period from March, 2010 to September, 2011 along with interest under Section 11AB and imposition of penalty of equal amount on them under Section 11 AC is not sustainable.

4. Shri Ranjan Khanna, ld. Departmental Representative vehemently defended the impugned order by reiterating the findings of the Commissioner in it and pleaded that even as per the appellants own claim that 600 units to 1500 units are required for manufacture of one MT. of M.S. Ingots, as per the appellants record of power consumption of 334 units on 29.03.2010, production of 11 M.T. of M.S. Ingots on that day was impossible and subsequently, even the appellants themselves accepted that on 29.03.2010 there was no production and claimed that this production had been wrongly recorded. He pleaded that the power consumption for 30.03.2010 was 6052 units and on the basis of the appellants own norm of power consumption, production of 11.67 MTs. recorded for this date was impossible, that --

similarly, production of 17.52 MTs recorded for 31.03.2010 is impossible looking to the period for which the furnace was operated;

that initial heating of the furnace takes 14 hours and hence the production of 11.675 MTs. shown on 30.03.2010 and production of 17.52 Mts. was of 31.03.2010 is impossible, that

even as per the opinion of M/s. Rajeev Jain and Associates, Chartered Engineer, on the basis of the power consumption on 29.03.2010, no production was possible and on the basis of the power consumption on 30.03.2010, (about 6000 units) production of only 4.152 MTs was possible while the appellant have shown the production of 11.00 M.T. on 30.03.2010, that when the false production figures have been entered for 29.03.2010 and 30.03.2010, the production figure for 31.03.2010 would also be false and that even on the basis of the analysis of the electricity load survey report from 29.03.2010 to 31.03.2010, no production was possible on any of these three dates and the function of the furnace has to be treated as trial run and not commencing of commercial production. With regard to the appellants claim regarding production of M.S. Ingots on 30.03.2010 and 31.03.2010, he reiterated the Commissioners findings in para-23 to 38 of the impugned order and emphasized that operation of the plant was only trial run, which cannot be called commencing of commercial production. He, therefore, pleaded that Commissioners finding that the appellant have not commenced commercial production on or before 31.03.2010 and that the production shown on 29.03.2010 to 31.03.2010 is only bogus entry and hence, the appellant are not eligible for the duty exemption under notification no.50/03-CE, are correct and as such, 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 are a manufacturer of M.S. Ingots, the raw materials for which are the raw M.S. Scrap and Sponge Iron. Notification no.50/03-CE dated 10.06.2003 exempts the goods other than those mentioned in Annexure-I to this notification and manufactured and cleared from the industrial areas, etc. mentioned in an Annexure-II and III to the notification from the whole of the central excise duty leviable under Section III of the Central Excise Tariff Act, 1944 and also from additional excise duty leviable under the Additional Duty of Excise (goods of Special Importance) Act, 1957 [AED(GSI)] and Additional Duties of Excise (Textile & Textiles Articles) Act, 1978, [AED(T&TA)]. The exemption is subject to the condition that the assessee who intends to avail this exemption files a declaration in this regard in the prescribed format to the jurisdictional Asstt. Commissioner, Central Excise, with a copy to the Superintendent of Central Excise and the exemption shall be effective from the date of exercise of option. There is no dispute that the goods being manufactured are not mentioned in the negative list of the items specified in Annexure-I of the notification and the Khasra No. of the Plots on which the unit is located are specified in Annexure-II of the notification. There is also no dispute that the appellant under their letter dated 26.3.2010 had filed the necessary declaration to the jurisdictional Central Excise Authorities informing that they will commence commercial production on or before 31.03.2010. The dispute is only in respect of the eligibility of the appellant unit for exemption in terms of conditions as prescribed in para-2 of the exemption notification. In this regard para-2 of the exemption notification is reproduced below:-

2. The exemption contained in this notification shall apply only to the following kinds of units, namely:-

(a) New industrial units set up in areas mentioned in Annexure-II and Annexure-III, which have commenced commercial production on or after the 7th Day of January, 2003, but not later than the 31st day of March, 2010;

(b) Industrial units existing before the 7th day of January, 2003 in areas mentioned in Annexure-II, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty-five per cent on or after the 7th day of January, 2003, but have commenced commercial production from such expanded capacity, not later than the 31st day of March, 2010.

The appellant claim to be covered by Clause-(a) of para-2 i.e. a new industrial unit set up in the areas mentioned in Annexure-II which had commenced commercial production not later than the 31st day of March, 2010. In other words, it is the claim of the appellant that they have commenced commercial production on or before 31.03.2010. The department, however, disputes this claim.

7. From a perusal of para-2 (a) of the exemption notification, it is clear that in terms of this clause, a manufacturing unit for being eligible for exemption must be 

(I) A new industrial unit set up in areas mentioned in Annexure-II or Annexure-III, and

(II) which has commenced commercial production on or after the 7th Day of January, 2003, but not later than the 31st day of March, 2010;

The term, new in the context of this notification must be construed as not existing before. Thus, a new unit which had been set up either prior to 7.1.2003 or on or after 7.1.2003, but which had commenced commercial production on or after 7.1.2003 would be eligible for the exemption. However, for commencing commercial production, the cut off date is 31.03.2010 and in the present case, the dispute is as to whether the commercial production had commenced on or before the cut off date of 31st March, 2010. Though the term commercial production is not defined in this notification, in our view, this term must be construed in contradistinction with the term trial production. Trial production precedes the commercial production. The first stage of setting up of a manufacturing plant is erection work in course of which foundation of the machinery, on which machinery is to be installed is prepared, supporting structures which support the machinery to be installed are erected and the sheds which house the machinery are constructed. After completion of the erection work, the next stage is the installation of the machinery.

However, before the machinery can be used for full-fledged commercial production, it has to be tested for which it is run on trial basis. During this phase run on trial basis if the production is not of the desired quantity and /or of the desired quality, the necessary adjustments are made and defective parts or components, if any found, are replaced. The commercial production starts only when the commissioning i.e. trial run is complete and the plant is in a position to start the manufacture of the goods of the desired quality and according to its installed capacity. In our view, the date of commencing of the commercial manufacture is the date of commissioning of plant when the newly commissioned plant had been run and some goods of the desired quality had been produced. However, once the plant is commissioned, it is not necessary that from the day one it must start manufacture at its full installed capacity, as the quantum of the goods produced would depend upon the supply orders which the manufacturer may have at that time or the quantity of the goods which the manufacturer expects to be sold at that time.

Thus, in the present case the point which is to be decided as to whether the commissioning of the plant was complete i.e. whether the plant of the appellant was in position to start production of the desired quality of M.S. Ingots according to its installed capacity and whether some production had been made on or before 31.03.2010.

8. According to the appellant, during month of March, 2010, i.e. on 30.03.2010 and 31.03.2010, they had produced about 30 MTs. of M.S. Ingots which had been declared by them in the quarterly return for Jan. 2010 to March, 2010 filed by them and which had been cleared on payment of duty. The appellant in this regard also rely upon the certificate given by the furnace supplier,IIPL and also the statement of Shri Tarun Sangal, Senior Manager of IIPL. Besides this, the appellant also rely upon the purchase of raw materials of 100 MTs. of M.S. Scrap and 236.50 MTs. of sponge iron during the last week of March, 2010 and also the fact that as per the load survey report of power consumption, their power consumption on 30.03.2010 and 31.03.2010 was about 6000 units and 30,420 units respectively. The appellant also rely upon the certificate given by furnace supplier, IIPL, that the plant had been commissioned on 30.03.2010 and thus, was ready for commercial production on that date. The Department, however, on the basis of the analysis of the load survey report for 30.03.2010 and 31.03.2010 alleges that looking to the pattern of the power consumption on these dates, the production of about 29 MTs claimed during these two dates is impossible.

The Department also alleges that initially the appellant had shown production of about 11 MTs. for 29.03.2010 against the power consumption of about 340 units but subsequently, they themselves accepted that the production of 11.68 Mts. of M.S. Ingots with power consumption of 340 units of electricity was not possible and have pleaded that this entry was made by mistake. The Department cites this incident in support of its allegation that during 29.03.2010 to 30.03.2010, there was only trial run of the plant and the bogus entries of production were made to wrongly claim the exemption. However, we find that while on one hand, the Department alleges that there was no production of M.S. Ingots during the last week of March, 2010, on the other hand, the show cause notice issued to the appellant has also demanded duty of Rs.90,805/- on 30.4 MTs. of M.S. Ingots cleared during March, 2010 and this duty demand is included in the duty demand of Rs.5,27,66,984/- confirmed by the appellant in the impugned order. Thus, the Departments allegation that there was no production by the appellant unit during March, 2010 and that the appellant have made only bogus entries regarding production during March, 2010, in their records is not compatible with the Commissioners order confirming duty demand of Rs.90,805/- in respect of the clearance of 30.40 Mts. of M.S.

Ingots during March, 2010.

9. Moreover, the appellant had filed the declaration regarding availment of this exemption on 26.03.2010 and it was possible for the jurisdictional central excise officers to immediately visit the unit to verify as to whether at that point of time they were in position to start the commercial production or not. But the unit was visited only in Jan. 2011. In our view, merely on the basis of the load survey report for 30.03.2010 & 31.03.2010, it would not be correct to conclude that there was no production of M.S. Ingots on these dates. While the Engineer of IIPL which had supplied the induction furnace has given a certificate that the equipment supplied by them was commissioned in two installments - one inverter and three crucibles were commissioned on 30.03.2010 and second inverter was commissioned on 29.03.2010 and that on 30.03.2010, the plant was in position to start commercial production. Further, Departments side except for its analysis of the load survey report no evidence to the contrary has been produced.

9.1 An induction furnace consists of a non-conducting crucible holding the charge of metal to be melted, surrounded by a coil of conductor (copper wire). When an alternating current flows through the surrounding conductor coil, the fluctuating magnetic field produced induces eddy currents inside the metal in the crucible and the eddy currents flowing in the metal generate heat on account of its resistance which melts the metal. In ferro magnetic material like iron scrap, the heat is also generated by the phenomenon of magnetic hystersis. The function of inverter is to provide alternating current of different frequencies. Since one inverter along with the three crucibles had been commissioned on 30.03.2010, there is no reason to disbelieve the furnace suppliers certificate that the induction furnace had been commissioned on 30.03.2010 and was in a position to start commercial production on that date, even though, the second inverter had been installed in May, 2010. Moreover power consumption of 30000 units on 31.03.2010, which is, not disputed by the Department, by adopting the norm of 1200 units per M.T. could result in production of about 25 MT of MS Ingots. In this regard, there is absolutely no basis for the DRs contention that heating of the furnace takes about 14 hours as induction furnace units can have more than one heat during a day.

10. When the Department has not disputed the procurement of raw materials during March, 2010 and its consumption and there is no evidence to prove that the sale of about 30 MTs. of M.S. Ingots during the last week of March, 2010 was false and when the Commissioner has confirmed the duty demand on 30.4 MTs. of M.S. Ingots cleared during the month of March, 2010, and thereby accepting the appellants claim of having commenced production during March, 2010, the Department, merely on the basis of its own interpretation of Electronic Load Survey Report for 30.03.2010 and 31.03.2010 cannot allege that the appellant unit had not commenced commercial production on or before 31.03.2010. As discussed above, for determining as to whether the Appellant had commenced commercial production on or before 31.03.2010, the quantum of production during March, 2010 is not relevant and what is relevant is as to whether the plant had been commissioned on or before 31.03.2010 i.e. whether on or before 31.03.2010, a plant was in a position to manufacture the finished product of the desired quality and according to its installed capacity and some production had been made and as discussed above, on this point, there is no evidence produced by the Department to refute the Appellants plea based on certificate of the furnace suppliers, IIPL and Chartered Engineers certificate, that the furnace had been commissioned on 30.03.2010.

Moreover when the Department does not dispute that on 30.03.2010 and 31.03.2010 there was power consumption of about 36000 units and there was raw material consumption sufficient to produce the quantity of M.S. Ingots claimed to have been produced and there was clearance of about 30 M.T. of M.S. Ingots on 30th & 31st March, 2010 on which the duty has been demanded, the Department can not allege that there was no production of M.S. Ingots on or before 31.03.2010. Even though, there is minor discrepancy, between the production recorded on 30.03.2010 & 31.03.2010 of about 29 MT and the goods sold upto 31.03.2010 - 30.40 M.T., the fact remains that on 30.03.2010, the furnace had been commissioned and looking to the power consumption, there was some production on these dates. In this regard, just because the production entry for 29.03.2010 was false, it cannot be presumed that the production entries for 30.03.2010 and 31.03.2010 were also false. Therefore, it has to be concluded that the manufacturing unit of the Appellant company had commenced commercial production on or before 31.03.2010 and is eligible for the exemption under notification no.50/03-CE.

11. In view of the above discussion, we hold that the impugned order is not sustainable. The same is set aside. The appeal is allowed.

[Order pronounced on 12.05.2015]

(Rakesh Kumar)

Member (Technical)

( S.K. Mohanty)

Member (Judicial)

Ckp

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