2017 (8) TMI 101 - AT - Central Excise

CENVAT credit - common inputs used in exempted as well as non-exempted unit - non maintenance of separate account - demand of interest - penalty - extended period of limitation - Held that - the reversal of the credit was not done voluntarily but it was done after it was detected and pointed out by the audit - reliance was placed in the case of Hindustan Insecticiedes Ltd. Versus Commissioner Central Excise, LTU 2013 (8) TMI 225 - DELHI HIGH COURT , where it was held that in the said case notice of payment for interest was issued after four years and it was held that it was beyond a reasonable period and the department could recover the amount from the Assessing Officer, who had not taken steps for four years and not from the respondent-assessee therein. The finding of the Supreme Court on interpreting the applicable Act was that no limitation period was prescribed, therefore, proceedings for recovery could be initiated within a reasonable time - the demand of interest is clearly unsustainable. Penalty u/r 15 of CCR, 2004 read with Section 11AC - Held that - the adjudicating authority was not convinced that the elements of Section 11AC were present. However, in the operative part of the order, the adjudicating authority has imposed penalty of ₹ 1,00,000/- but the same has been done under Section 11AC of the Act read with Rule 15 of CCR, 2004. Penalty under Section 11AC cannot be imposed in the absence of allegation of suppression in the show cause notice. Besides, discretion to reduce mandatory penalty does not vest with adjudicating authority. Considering the inherent contradiction in the show cause notice and the patently perverse nature of the order passed by the adjudicating authority in relation to penalty, the same is set aside. Appeal allowed - decided in favor of appellant.

Summary

Issues:
- Incorrect availment of Cenvat Credit on furnace oil for manufacturing exempted and non-exempted goods
- Demand of interest and penalty under Rule 15 of Cenvat Credit Rules read with Section 11AC
- Allegation of suppression and extended period for demand of interest
- Application of penalty under Rule 15 of CCR, 2004 read with Section 11AC without allegations of suppression or fraud

Analysis:
1. The appellant, a manufacturer of bulk drugs and P&P Medicaments, availed Cenvat Credit on furnace oil used as an input during a specific period. It was discovered during an audit that the appellant had opted for area-based exemption but failed to intimate the stock of furnace oil and goods contained in finished products on the date of opting for exemption. The appellant did not maintain separate accounts for the furnace oil, leading to an incorrect availment of credit. This resulted in a demand of interest and penalty under Rule 15 of Cenvat Credit Rules read with Section 11AC.

2. The appellant argued that the demand of interest was time-barred as there were no allegations of suppression or elements of Section 11AC in the show cause notice. The appellant contended that the adjudicating authority's imposition of penalty implied a lenient view, suggesting the absence of mandatory penalty elements. The appellant also highlighted the maintenance of separate accounts for steam supply, indicating the possibility of calculating furnace oil consumption for each factory. The appellant referenced relevant case laws to support their arguments.

3. The Tribunal noted that the reversal of credit was not voluntary but done after being detected by the audit. The show cause notice did not explicitly invoke the extended period or allege suppression. The demand of interest was based on a CESTAT judgment, which was subsequently set aside by the Delhi High Court. The High Court's ruling emphasized that the shorter limitation period applied, barring the demand for interest.

4. Regarding the penalty, the show cause notice proposed a penalty under Rule 15 of CCR, 2004 read with Section 11AC without alleging suppression or fraud. The adjudicating authority imposed a penalty of ?1,00,000, not equivalent to the mandatory penalty. The Tribunal found discrepancies in the imposition of penalty under Section 11AC without allegations of suppression, leading to the setting aside of the penalty.

5. The Tribunal ruled in favor of the appellant, holding the demand of interest as unsustainable due to the absence of suppression elements and the penalty imposition under Section 11AC as unjustified without proper allegations. The appeal was allowed, and the decision was pronounced on 31.07.2017.