2018 (3) TMI 167 - AT - Central Excise

CENVAT credit - engines/pump/frames - denial on the premises that the process undertaken by them does not amount to manufacture - Held that - As there are contrary views and difference of opinion between the Members, therefore, the matter be placed before the Hon ble President to refer the matter to the third member to resolve the following issues - Whether the activity of inspection and testing in respect of the parts for proper alignments of pump set on engines, pump and base frames and packing thereof in master box amounts to manufacture as held by the Member (Judicial)? Matter referred to Third Member.

Summary

Issues Involved:
1. Whether the process undertaken by the appellant amounts to manufacture.
2. Entitlement to avail Cenvat credit on engines, pumps, and base frames.
3. Imposition of penalty under Rule 15(1) of the Cenvat Credit Rules, 2004.

Issue-wise Detailed Analysis:

1. Whether the process undertaken by the appellant amounts to manufacture:
- The appellant contended that the process of alignment, testing, and inspection of the parts of the pump set amounts to manufacture, making the product marketable, as per Note 6 to Section XVI of the Central Excise Tariff Act, 1985. They argued that the process undertaken by them is essential to make the pump set a complete and marketable product.
- The Tribunal referred to previous decisions, such as Western Refrigeration Pvt. Ltd., Indo Asian Fuse Gear Ltd., and Exide Industries Ltd., which supported the appellant's contention that similar processes amounted to manufacture.
- The Tribunal noted that the appellant procured engines, pumps, and base frames, inspected them for proper alignment, and sold them together as pump sets. Therefore, a new product came into existence after the inspection and alignment, amounting to manufacture.

2. Entitlement to avail Cenvat credit on engines, pumps, and base frames:
- The Revenue argued that since no new product came into existence and the appellant sold the parts after repacking, they were not entitled to avail Cenvat credit.
- The Tribunal, however, held that since the process undertaken by the appellant amounted to manufacture, they were entitled to avail Cenvat credit on the inputs.
- The Tribunal cited Note 6 to Section XVI of the Central Excise Tariff Act, which states that converting an incomplete or unfinished article into a complete or finished article amounts to manufacture. This supported the appellant's claim that their process made the product marketable and thus amounted to manufacture.

3. Imposition of penalty under Rule 15(1) of the Cenvat Credit Rules, 2004:
- The appellant argued that there was no proposal in the show cause notice to impose a penalty under Rule 15(1), and hence the adjudicating authority went beyond the scope of the notice.
- The Revenue contended that the show cause notice did propose a penalty under Rule 15(1), and the adjudicating authority rightly imposed it.
- The Tribunal found that the show cause notice did indeed propose a penalty under Rule 15(1) and upheld the imposition of the penalty, as the appellant had wrongly taken Cenvat credit.

Separate Judgments:
- Member (Judicial): Held that the activity of inspection and alignment amounts to manufacture, thus entitling the appellant to avail Cenvat credit.
- Member (Technical): Held that the activity of putting three components in one master carton after random checking/inspection does not amount to manufacture, and the appellant is not entitled to avail Cenvat credit.

Conclusion:
- Due to the contrary views and difference of opinion between the Members, the matter was referred to the Hon'ble President to resolve the following issues:
- Whether the activity of inspection and testing amounts to manufacture.
- Whether the activity of putting three components in one master carton after random checking/inspection does not amount to manufacture.