2007 (3) TMI 86 - AT - Central Excise

Cenvat/Modvat Department contended that the entire activity carried out at KDP plant was merely a trading activity and therefore the components received from vendors and subsequently exported didn t qualify to be inputs for Cenvat credit - Held that department is not correct

Summary

Issues Involved:
1. Denial of Cenvat credit on components procured and exported from KDP Plant.
2. Imposition of penalties for irregular availment of Cenvat credit.

Detailed Analysis:

1. Denial of Cenvat Credit on Components Procured and Exported from KDP Plant
The appellants are engaged in the manufacture of cars and parts thereof, with a separate "Knock Down Pack Plant" (KDP Plant) within their factory premises. The KDP Plant received rust-proof oil-coated auto components from vendors, which, along with some components from the factory, were packed and exported to South Africa and Mexico without payment of duty. The department found that the activities at KDP Plant were merely trading activities, not qualifying the components as 'inputs' for Cenvat credit. Consequently, three show-cause notices were issued for recovering duty amounts equivalent to the Cenvat credits taken during the period 7-6-2000 to 31-10-2002. The original authority confirmed the demands and imposed penalties, which were upheld by the Commissioner (Appeals).

The appellants argued that the operations at KDP Plant, such as quality checking, sequencing, packing/palleting, and testing, constituted "manufacture" under Section 2(f) of the Central Excise Act. They contended that the components should be treated as used in the manufacture of the final product. However, the department maintained that only trading activity was undertaken at KDP Plant, and the components were exported as such. The Tribunal found that KDP Plant was set up solely for trading activities, not manufacturing, and thus, the components exported from KDP Plant did not qualify for Cenvat credit.

2. Imposition of Penalties for Irregular Availment of Cenvat Credit
The original authority imposed penalties on the appellants for irregular availment of Cenvat credit, which were sustained by the Commissioner (Appeals). The penalties imposed were:
- Rs. 10 lakhs for the period 7-6-2000 to 31-3-2001.
- Rs. 20 lakhs for the period 1-4-2001 to 31-12-2001.
- Rs. 25 lakhs for the period 1-1-2002 to 31-10-2002.

The Tribunal found that the penalty of Rs. 10 lakhs for the period 7-6-2000 to 31-3-2001 was reasonable. However, the penalty of Rs. 20 lakhs for the period 1-4-2001 to 31-12-2001 was slightly on the higher side and reduced it to Rs. 18 lakhs. The penalty of Rs. 25 lakhs for the period 1-1-2002 to 31-10-2002 was considered reasonable, given that the appellants continued to take irregular credit even after the de-registration of KDP Plant.

Conclusion
The Tribunal upheld the denial of Cenvat credit on components procured and exported from KDP Plant, as the activities there were deemed to be trading, not manufacturing. The penalties imposed by the original authority were largely sustained, with a slight reduction for the period 1-4-2001 to 31-12-2001. The appeals were dismissed with the modification of the quantum of penalty.