2017 (7) TMI 797 - AT - Service Tax

Penalty - case of Revenue is that the credit so availed by the appellant was not available inasmuch as the imported capital goods were not being used by them in the manufacture of the final products and were being hired out - Held that - the assessee is not disputing the fact that the imported Hydraulic system was not at all used by them in their manufacturing activities and was hired out - It is also a fact that the credit of more than 10 lakhs was availed during the long period of June 2009 to June 2011 and was detected by the Prevantive Officers during the course of their visit in November 2011 only. As such it can be safely concluded that the appellants adopted the system of availing credit of duty paid on capital goods used in the manufacturing activities with an intention to avail credit not available to them and may be to take a chance. It is also a fact that as soon as the objection was raised by officers the appellants paid back the entire credit immediately along with interest. Taking into consideration that the appellants paid back the credit immediately on being pointed out by the Revenue along with payment of interest and keeping in mind the fact that the penal proceedings were initiated against them after a gap of three years I deem it fit to restrict the penalty to 25% of the total duty amount in terms of proviso to section 78 of the Finance Act 1994 - appeal allowed - decided partly in favor of appellant.

Summary

Issues:
1. Availment of Cenvat Credit on imported capital goods not used in manufacturing activities.
2. Imposition of penalty under Rule 15(2) of Cenvat Credit Rules, 2004 read with section 11AC of the Central Excise Act.
3. Challenge to penalty imposition equivalent to duty involved.
4. Dispute over payment of interest as a substitute for penalty.
5. Reduction of penalty amount under proviso to section 78 of the Finance Act, 1994.

Analysis:
1. The appellants were involved in manufacturing Hydraulic systems, availing Cenvat Credit on inputs and importing capital goods on which they also claimed credit. However, it was discovered that the imported capital goods were not utilized in manufacturing but were hired out to others, leading to an incorrect availment of credit amounting to around ?32 lakhs between June 2009 and June 2011.

2. Subsequently, upon objection by officers, the appellants debited the credit from their account and paid back the amount along with interest. This led to proceedings for confirmation of debit entries and imposition of penalty under Rule 15(2) of the Cenvat Credit Rules, 2004, along with duty and interest, through a show-cause notice dated 06.04.2014.

3. The appellants contested the penalty imposition before the Commissioner (Appeals), focusing solely on the penalty equivalent to the duty. Their argument centered on a genuine belief in entitlement to the credit, prompt reversal upon notification, and the penal nature of interest payment, seeking the penalty's dismissal.

4. The Revenue argued that the appellants, being experienced manufacturers, should have been aware of Excise laws, emphasizing the inapplicability of the credit to goods not used in manufacturing. They supported the penalty imposition, highlighting the officers' detection of the credit misuse and the lack of credit details in monthly returns.

5. The judgment acknowledged the appellants' improper credit availment and subsequent repayment upon detection, deeming the interest payment penal but insufficient as a penalty substitute. Despite a 25% penalty reduction due to immediate credit repayment and delayed penal proceedings initiation, the appeal was rejected, upholding the penalty imposition under the Finance Act, 1994's proviso to section 78.