Pune I vs Sandvik Asia Ltd

[Arising out of Order-in- Appeal No: PI/258/06 dated 12th July 2006 passed by the Commissioner of Central Excise (Appeals), Pune  I.]

For approval and signature:

Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical)

1. Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? : No 2. Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? : No 3. Whether Their Lordships wish to see the fair copy of the Order? : Seen 4. Whether Order is to be circulated to the Departmental authorities? : Yes

Commissioner of Central Excise

Pune  I

Appellant versus

Sandvik Asia Ltd.

Respondent

Appearance:

Shri Ajay Kumar, Jt. Commissioner (AR) for the appellant

Shri Gajendra Jain, Advocate for the respondent

CORAM:

Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical)

Date of hearing: 06/10/2015 Date of decision: 06/10/2015

ORDER NO: ____________________________

Per: C J Mathew:

This appeal has been filed by Revenue against order-in-appeal no. PI/258/06 dated 12th July 2006 of Commissioner of Central Excise (Appeals), Pune  I setting aside the order of the lower authority by which duty of ` 33,30,162/- was confirmed, with interest thereon, besides imposing penalty of ` 8,32,500/-.

2. Proceedings were initiated against M/ Sandvik Asia Ltd on 30th September 2005 in connection with CENVAT Credit availed by them prior to 1st September 2004 on raw materials received at their factory in Dapodi for manufacture of tools. A part of the said plant was, in accordance with procedure prescribed in the Foreign Trade Policy, converted as a 100% Export Oriented Unit and the available stock of raw materials and work-in-progress was placed at its disposal for use in production. Prior to conversion on 1st September 2004, the assessee had utilised the entire credit available in the CENVAT Credit account for discharge of excise duty liability.

3. The case of Revenue was that, though CENVAT Credit was taken on the entire raw material procured by it, usage of a part of it by the 100% Export Oriented Unit after 1st September 2004 was tantamount to removal and non-utilisation for manufacture of excisable goods; such removal should have been preceded by reversal of the credit taken on such goods. Hence, the assessee was held liable to duty equivalent to the CENVAT Credit that had been wrongly availed in contravention of Rule 2(g) of CENVAT Credit Rules, 2002. It is that finding of the original authority that was set aside in the impugned order which is the subject of this appeal.

4. Revenue contends that the raw materials had not been used in manufacture of excisable goods by the manufacturing unit that procured them and availed CENVAT Credit thereon, that reliance placed by the first appellate authority on Jamna Auto Industries Limited v Commissioner of Central Excise, Indore [2001(130) ELT 181 (Tri-Del)], which dealt with availment of MODVAT Credit, is erroneous, that CENVAT Credit was not available to Export Oriented Units till 6th September 2004 and that the appellate authority had failed to take into consideration the finding of the lower authority that clearance of goods by Export Oriented Units are at par with imported goods.

5. Learned Counsel for respondent took us through the CENVAT Credit Rules, 2002 and the erstwhile MODVAT Rules. He placed particular emphasis on the decision of the Tribunal in Sandoz Pvt Ltd v Commissioner of Central Excise, Belapur [2011-TIOL-673-CESTAT-MUM] affirmed by the Honble High Court of Bombay in Commissioner of Central Excise, Belapur v Sandoz Pvt Ltd [2013 (291) ELT 325 (Bom)].

6. We observe that this dispute has arisen from the morphing of the manufacturing operation as an Export Oriented Unit. An infrequent occurrence, it is even more rare for such an occurrence to be accompanied by transfer of raw materials in this manner. That, probably, is one of the reasons for the absence of any reference to such a contingency in the CENVAT Credit Rules, 2002. It is more likely that it was not perceived as having an impact at all on revenue. The transformation does not alter the works undertaken in the unit. Nor is the statutory jurisdiction altered. Eligibility for CENVAT Credit remains unchanged except that, as an Export Oriented Unit, duty-free procurement is an alternative.

7. Excise duty is fastened on goods and not on the status of the manufacturer; payment of duty and availment of credit of duty so paid is in relation to goods. As long as the goods on which CENVAT Credit has been taken are used in production, revenue is not jeopardized. Instead of procuring goods without payment of duty, the respondent has used already duty neutralized goods for manufacture of export goods. Had the CENVAT Credit been reversed by the erstwhile unit before the conversion, the newly minted Export Oriented Unit would be entitled to avail CENVAT Credit of like amount. These circumstances of revenue neutrality are a clear pointer to the rationale for redundancy of a specific provision for such an event in the CENVAT Credit Rules.

8. We also find that not only is there no revenue impact but that there is no transfer at all. The role of M/s Sandvik Asia Ltd in the manufacturing premises remains unchanged. There is no transfer to speak of, much less removal of raw materials. Hence, the provision of CENVAT Credit Rules cited by the original authority to confirm the demand is clearly inapplicable.

9. The Tribunal in re Sandoz Pvt Ltd, taking note of identical submissions canvassed on behalf of Revenue in near-identical circumstances and placing reliance on Sun Pharmaceutical Industries v Commissioner of Central Excise, Pondicherry [2010 (251) ELT 312 (Tri-Chennai)], set aside the demand for duty equivalent to CENVAT Credit availed by the assessee before the undertaking was converted as a Export Oriented Unit observing that:

3. However, the learned DR submitted that the decision cited by the learned counsel are not applicable to the facts of this case. He submitted that, during the relevant time, the appellant was not allowed to utilise the CENVAT credit for payment of duty in respect of their clearance to DTA unit. When CENVAT credit cannot be utilised for the purpose of paying duty in respect of DTA clearance, such credit available in the books of account would be utilised by the 100% EOU. Further, the very fact that when utilization is not permitted it means availment is also not permitted. He submitted that the Commissioner has relied upon the Board's Circular no. 77/99-Cus dated 18.11.1999, according to which a 100% EOU will not avail CENVAT credit. Further, he submitted that the Commissioner has also cited the provisions of Foreign Trade Policy and according to them also, credit cannot be availed.

4. We have considered the submissions made by both sides. The issue before us is similar to the facts in the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. (supra). The Tribunal after considering the issue in detail, came to the conclusion that the department cannot insist upon reversal of the CENVAT credit available in the books of accounts or recovery of the same if the same has been utilised. Since we are in full agreement with the reasoning adopted by the Tribunal in Sun Pharmaceuticals Industries Ltd. (supra), it would be appropriate to reproduce the relevant paragraphs of the said decision:

6. We have carefully considered the case records and the submissions by both sides. We find that Sun had not violated the provisions of Rule 3 (1) and 3(4) of CCR and Rule 11 of CER as proposed in the show cause notice, as it had availed cenvat credit of excise duty paid on inputs in accordance with law. Rule 3(4) requires that the manufacturer shall pay an amount equal to the credit availed when inputs or capital goods are removed as such from, the factory. Rule 11 of CER requires removal of goods under invoice. We find that the credit availed inputs were not removed in the instant case from the premises of Sun when Sun got converted into an EOU. Therefore, the contravention of provisions of Rule 3 (1) and 3(4) of CCR and Rule 11 of CER alleged in the show cause notice has not occurred. Therefore, the consequential demand of cenvat credit relating to the inputs at the time of conversion of Sun into an EOU and the liability to penalties proposed did not exist. Therefore, the orders of the lower authorities are not sustainable.

7. In CCR'02, or CCR'04, there exist no provisions barring an EOU from availing cenvat credit of excise duty paid on inputs it received. Rule 110H of CER'44 made various rules including Rule 57A to Rule 57U of CER'44 inapplicable to an EOU. CER'44 have been rescinded. There is also no corresponding rule/provision in CCR'01 or CCR'02. CER'01 and CER'02 contain transitional provisions to the effect that any circulars, instructions, orders, trading notices or other orders issued under the CER'44 superseded by CER'01, or such orders etc issued under CER'01 superseded by CER'02, by the Board, and in force on the date the erstwhile rules were rescinded shall, to the extent they are relevant and consistent with the new set of rules shall be deemed to be valid. CBEC Circular No. 77/99-Cus dated 18.11.99 is reproduced below:-

Paragraph 9.28 of the EXIM Policy, 1997-2002 provides that existing DTA units may also apply for conversion into an EOU/EHTP/STP, but no concession in duties and taxes would be available under the scheme for plant, machinery and equipment already installed. In this connection, instances have come to the notice of the Board that such units on their conversion into EOUs have been asked to reverse the Modvat credit already availed of, on plant and machinery procured by them prior to their conversion into EOUs.

2. The matter has been examined. It is clarified that if the DTA unit has availed of the modvat credit on plant, machinery and equipment and also utilized such credit for payment of duty on goods manufactured and cleared before its conversion into EOU/EHTP/STP, the same is not required to be demanded on its conversion into EOU/EHTP/STP. However, if the Modvat credit so availed of is lying in balance as unutilized on the date of conversion into EOU/EHTP/STP, it would lapse on conversion of DTA unit into EOU/EHTP/STP unit and cannot be utilized after such conversion.

This circular was issued during the currency of CER, 1944, which contained Rule 100H which disentitled an EOU to the Cenvat scheme. The CER, 1944 have been rescinded. Therefore, Circular No.77/99 DATED 18.11.99 has to be held to be no longer in force, in view of the transitional provisions contained in Rule 32 of CE, 2001.

8. We find that at the material time the CER or CCR did not contain any provision barring the 100% EOUs from availing cenvat credit or utilizing the same for payment of duty on excisable goods removed to the DTA or for payment of duty on goods exported under claim for rebate. Also there exists no bar for a DTA unit carrying over inputs and the cenvat credit balance in its accounts when it got converted into an EOU. We also observe that this Tribunal in Waterbase Ltd. Vs. CCE, Guntur reported in 2005 (187) ELT 346 (Tri.-Bang.) = (2005-TIOL-947-CESTAT-BANG) had made the following observations.

"6. We have gone through the rival contentions. The appellants have informed their intention of taking Cenvat credit. The Department acknowledged the intimation sent by the appellants. In these circumstances, the appellants started taking credit. Therefore, there is no contumacious conduct on the part of the appellants warranting imposition of any penalty. Therefore the penalties imposed on the appellants and on Shri P. Ravi, General Manager are set aside. As regards the merits of the case, we find that there is no rule corresponding to the erstwhile Rule 100H of the Central Excise Rules, 1944. The interpretation that there is no prohibition for 100% E.O.U. to take Cenvat credit appears to be correct. However, in view of Rule 17 of the Central Excise Rules, the duty should be paid by a 100% E.O.U. only through account current. Account current refers to PLA. In view of this position, the appellant cannot pay duty through Cenvat credit. In that case, the appellant will not be in a position to utilize the Cenvat credit at all and it does not make any sense to allow him to take credit. The inconsistency between Cenvat Rules and Central Excise Rules can be removed only by the legislature. As such in view of the Rule 17 of the Central Excise Rules, the appellant cannot avail the credit taken by him for payment of duty in respect of clearance to DTA. Therefore, the demand of duty only is confirmed. As already stated, the penalties are set aside. However the demand of interest under Section 11AB is upheld."

The CBEC has since made good the deficiency in the rules noted by the Tribunal by providing for the EOUs to utilize the cenvat credit. In CCE Rajkot Vs. Ashok Iron and Steel Fabricators reported in 2002 (140) ELT 277 (Tri.-LB) = (2002-TIOL-274-CESTAT-DEL-LB cited by the Ld. Counsel for the appellants, this Tribunal held as follows:-

"a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. Here, the credit that has been validly taken and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product."

5. In view of the above position, all the points raised by the learned DR have been considered by the Tribunal in Sun Pharmaceuticals Industries Ltd. case and we do not find any merit in the submissions. Accordingly, the appeal is allowed with consequential relief to the appellants.

10. The Honble High Court of Bombay placed its seal of approval on this decision as can be seen in re Sandoz Pvt Ltd [2013 (291) ELT 325 (Bom)] 2.?The Tribunal has held that the assessee is entitled to avail the credit in balance as on the date of conversion by relying upon the decisions by the Tribunal in Sun Pharmaceuticals Industries Ltd. v. Commissioner of Central Excise, Pondicherry - 2010 (251) 312 (Tri.-Chennai); GTN Exports Ltd. v. Commissioner of Central Excise, Coimbatore - 2009 (240) E.L.T. 53 (Tri.-Chennai) and Commissioner of Central Excise, Rajkot v. Ashok Iron & Steel Fabricators - 2002 (140) E.L.T. 277 (Tri.-LB). It is not in dispute that the decision of the Tribunal in the case of Sun Pharmaceuticals Industries (supra) and GTN Exports Ltd. (supra) have been accepted by the Revenue. It is also not in dispute that appeal filed by the Revenue against the decision of the CESTAT in the case of Ashok Iron & Steel Fabricators (supra) has been dismissed by the Apex Court. In this view of the matter, in our opinion, no fault can be found with the decision of the CESTAT. Hence, the appeal is dismissed with no order as to costs.

11. In the light of the above analysis and decisions, we are in agreement with impugned order and reject the appeal of Revenue.

(Pronounced in Court)

(M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical)

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