2010 (8) TMI 287 - HC - Central Excise

Cenvat credit - input purchased are removed as such from the factory - respondent is not doing anything with input after purchase - respondent is engaged in repacking of input after purchase and the same does not involve any manufacture or processing - no dispute that the tubes and flaps are accessories to tyres for the end user that is the purchaser - Tribunal has held that since tubes and flaps have been cleared along with tyres as accessories the tubes and flaps are not cleared as such - packing of tube within the tyre along with the flap and partly inflating the tube does not make the transaction anything other than a transfer or sale in the same form - Rule 3(4) (Rule 3 (5) later) of the CENVAT Credit Rules squarely applies to the transaction - Tribunal s finding to the contrary is not sustainable cenvat credit not available

Summary

Issues:
1. Applicability of Rule 3(4) (later Rule 3(5) of the CENVAT Credit Rules to the purchase and resale of tubes and flaps.
2. Limitation period for the case.

Analysis:

Issue 1: Applicability of Rule 3(4) (later Rule 3(5) of the CENVAT Credit Rules to the purchase and resale of tubes and flaps:

The case revolves around the respondent, a tyre manufacturer, purchasing tubes and flaps for sale along with tyres. The respondent claimed CENVAT credit for tubes and flaps sold to Original Equipment Manufacturers (OEMs) but not for those sold in the replacement market. The Department found a discrepancy in the duty paid and the CENVAT credit claimed, invoking Rule 3(4) (later Rule 3(5) of the CENVAT Credit Rules). The Tribunal previously ruled in favor of the respondent, stating that the tubes and flaps were not cleared "as such." However, the High Court disagreed, emphasizing that the respondent merely engaged in trading activities by selling tubes and flaps along with tyres, without using them as inputs. The Court held that the Rule applied as the respondent did not justify the input tax credit for tubes and flaps. The judgment highlighted that the packing of tubes and flaps within tyres did not alter the nature of the transaction as trading. The Court rejected the Tribunal's finding, stating that the respondent acted as a trader in both scenarios, thus upholding the Department's demands.

Issue 2: Limitation period for the case:

The Department challenged the Tribunal's finding on the limitation period, arguing that the respondent had suppressed information leading to a short-levy of duty. The Tribunal had ruled in favor of the respondent, stating that the letter provided by the respondent was written in a different context. However, the High Court disagreed, noting that the respondent's misrepresentation in the letter regarding the sale price of tubes and flaps led to a short-levy of duty. Consequently, the Court held that the extended period of limitation under Section 11A(1)(a) applied, allowing the Department to demand the differential duty with interest. The Court reversed the Tribunal's orders on this issue, restoring the adjudication orders, but canceled the penalty due to the respondent's misunderstanding of the law, which was accepted by the Tribunal.

In conclusion, the High Court ruled in favor of the Department, upholding the applicability of Rule 3(4) (later Rule 3(5) of the CENVAT Credit Rules) to the purchase and resale of tubes and flaps by the respondent, and allowed the demands for differential duty with interest based on the extended limitation period.