2012 (5) TMI 299 - AT - Central Excise

Cenvat Credit of additional duty (SAD) - process / activity on the modems imported - loading of software/software patches on ADSL - whether manufacturing activity or not - held that - the appellant had entertained a bonafide belief that the activity carried out by them on such modems were, in fact, amounting to manufacture. - If the appellant had entertained a bonafide belief that they were carrying out manufacturing activity and discharged Central Excise duty, there cannot be any error or intentions attributable on their part for availing credit of CVD paid on modems, when they were imported. - Extended period of limitation is not invokable - Decided in favor of assessee.

Issues Involved:
1. Whether the process undertaken by the appellant companies amounted to manufacture.
2. Whether the extended period for demanding duty could be invoked.
3. Whether penalties imposed on the officers and employees of the companies were warranted.
4. Whether the situation was Revenue neutral.
5. Whether the appellant companies were liable to pay interest and penalties.
6. Whether the credit taken by the appellant companies was admissible.

Issue-wise Detailed Analysis:

1. Whether the process undertaken by the appellant companies amounted to manufacture:
The appellant companies, M/s Sterlite Optical Technologies Limited (SOTL) and M/s Sterlite Telelinks Limited (STL), argued that the process of loading software patches onto the imported modems and subsequent testing amounted to manufacture. They contended that these processes were necessary to make the modems marketable as required by their contract with BSNL. However, the Tribunal found that the modems were already marketable and ready for use when imported. The Tribunal concluded that the activities undertaken by the appellant companies did not amount to manufacture as defined under Section 2(f) of the Central Excise Act, 1944. The modems retained their identity before and after the alleged manufacturing process, and no new product emerged from the process.

2. Whether the extended period for demanding duty could be invoked:
The appellants argued that the extended period for demanding duty could not be invoked due to the Revenue neutral situation, as they had utilized the cenvat credit for payment of duty on the final products. However, the Tribunal held that the extended period was invokable as the appellant companies had deliberately devised a strategy to show the process as manufacturing to avail excess cenvat credit. The Tribunal found that there was suppression of facts and misdeclaration regarding the manufacturing process, justifying the invocation of the extended period.

3. Whether penalties imposed on the officers and employees of the companies were warranted:
Penalties were imposed on various officers and employees of the appellant companies under Rule 15 of the Cenvat Credit Rules, 2004. The Tribunal found that penalties under Rule 15 could only be imposed on the person who takes the cenvat credit wrongly. Since the wrong credit was taken by the appellant companies and not by the individual officers and employees, the Tribunal set aside the penalties imposed on the officers and employees.

4. Whether the situation was Revenue neutral:
The appellant companies claimed that the situation was Revenue neutral as the credit taken was utilized for payment of duty on the final products. However, the Tribunal found that the appellant companies were left with surplus credit in their accounts, indicating that the situation was not Revenue neutral. The Tribunal concluded that the appellants' claim of Revenue neutrality had no basis, as the surplus credit could have been used for payment of duty on other products manufactured by them.

5. Whether the appellant companies were liable to pay interest and penalties:
The Tribunal held that the appellant companies were liable to pay interest and penalties under Section 11AC of the Central Excise Act, 1944. The Tribunal extended the option to the appellant companies to pay the duty, interest, and penalty to the extent of 25% of the cenvat credit demanded within 30 days. If any of the three elements (duty, interest, and penalty) were not paid within 30 days, the penalty payable would be equal to the cenvat credit amount required to be reversed.

6. Whether the credit taken by the appellant companies was admissible:
The Tribunal concluded that the appellant companies were not eligible for the cenvat credit taken by them as the activities undertaken did not amount to manufacture. The credit taken on the imported modems was therefore not admissible.

Separate Judgment by Member (Judicial):
Member (Judicial) Archana Wadhwa recorded a separate order, disagreeing with the imposition of penalties on the appellant companies. She opined that the appellants had a bonafide belief that the activities undertaken amounted to manufacture and that the entire exercise was Revenue neutral. She concluded that no malafide intention could be attributed to the appellants, and therefore, penalties were not warranted. She also held that interest was not payable on the unutilized credit lying in the account books.

Opinion of 3rd Member on Difference of Opinion:
The 3rd Member, M V Ravindran, agreed with the Member (Judicial) that the appellants had a bonafide belief that the activities undertaken amounted to manufacture. He held that the extended period for demanding duty could not be invoked and that penalties were not warranted. Consequently, the appeals filed by all appellants were allowed.

Final Order:
In view of the majority decision, the appeals filed by all appellants were allowed.

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