2008 (5) TMI 180 - AT - Central Excise

It is alleged that the bought out spares brought into their factory are neither utilized in the manufacture of the transformer nor brought into factory for utilization in the manufacture of the final product. Hence, the Cenvat credit is not admissible on them - Held that duty paid on spares by way of the debit in the Modvat account should be treated as the reversal of the inadmissible credit taken and, therefore, no demand would lie.

Summary

Issues:
Admissibility of Cenvat credit on bought out spares used in the manufacture of transformers.

Analysis:
The appeal was filed against the disallowance of Cenvat credit amounting to Rs. 6,81,14,176/- for the period from December 2000 to June 2001. The Commissioner of Central Excise imposed an equivalent penalty and demanded interest on the disallowed credit. The appellants paid excise duty on the actual cost of transformers, spare parts manufactured in their factory, and bought out spares treated as manufactured in their factory. The dispute arose when the bought out spares were cleared as spares over and above those used in manufacturing transformers. The Department contended that these spares were not utilized in manufacturing and hence, Cenvat credit was inadmissible.

The appellants argued that the bought out spares were essential inputs in the manufacture of transformers, crucial for immediate replacement in case of breakdowns to ensure uninterrupted electricity supply. They contended that the duty collected on the spares sold should be considered as reversal of any alleged ineligible credit. The Tribunal noted that the duty paid on the spares should be treated as reversal of Cenvat credit availed on them, especially when the spares were sold at a higher price than their value at the time of receipt in the factory.

Citing legal precedents, the Tribunal emphasized that if the final product was exempt from duty, the duty paid on inputs should be considered as reversal of inadmissible credit. Various cases were referenced to support this principle, highlighting that when a process is not considered manufacturing, duty paid on the final product should reverse any ineligible credit on inputs. Based on the settled legal position, the Tribunal ruled in favor of the appellants, setting aside the demand for Rs. 6,81,14,176/- along with interest and equivalent penalty for the specified period.

In conclusion, the appeal was allowed, and the demand for Cenvat credit on bought out spares used in transformer manufacturing was deemed not maintainable, following established legal principles and precedents.