2020 (4) TMI 833 - AT - Central Excise

Process amounting to manufacture or not - repacking of goods (DVDs) and affixing MRP stickers on them - denial of credit by invoking extended period of limitation - denial of CENVAT Credit subsequently on the ground that the there was no manufacture in the first place - HELD THAT - The packing and repacking, labelling or relabelling amounts to manufacture in respect of the goods which are listed in the Third Schedule to the Central Excise Tariff Act, 1985. This is a legal fiction created by the statute and applies only to such goods which are listed in the third schedule and not to others - In the present case, the DVDs which they have imported were classified under 85234080. This tariff heading is not included in the third schedule. Evidently labelling or relabelling these DVDs will not make them classifiable under a different heading (8708) as has been done by the appellant. Demand of CENVAT Credit by invoking extended period of limitation - HELD THAT - The excise duty paid by the appellant treating this activity as manufactured is clearly not supported by law. Since the final product is not chargeable to excise duty, cenvat credit cannot be availed on the imported DVDs. However, the appellant has filed the returns which were legally required, with the department. Scrutiny of such returns and calling for any further information would have disclosed this fact that appellant was paying the central excise duty wrongly. The department could have directed them not to pay central excise duty accordingly but the department has not done so. Therefore, the erroneous payment of the appellant made as central excise duty was not detected by the department despite the appellant disclosing in their returns the details which they were mandatorily required to disclose. Under these circumstances, the demand for reversal of CENVAT credit invoking extended period of limitation does not sustain at all - The period in dispute is October 2009 to September 2012 while the SCN was issued well beyond the normal period on 21.02.2015 when this action of the appellant came to light during the audit. It was equally possible for the assessing officers to have scrutinized returns and found that excise duty was being paid wrongly after availing CENVAT credit. If the assessee has treated the activity of manufacture and paid excise duty thereon and availed cenvat credit can cenvat credit be subsequently denied by the department holding that the activity was not manufacture in the first place? - HELD THAT - The Hon ble High Court of Karnataka in the case of Vishal Precision Steel Tubes Strips Pvt. Ltd. 2017 (3) TMI 1287 - KARNATAKA HIGH COURT has held that cenvat credit cannot be denied under such circumstances. This ratio of this judgement of the Hon ble High Court of Karnataka binds us to hold that cenvat credit cannot be recovered from the appellant even on this count - As the cenvat credit cannot be denied and recovered from the appellant the demand of interest thereon as well as proposed penalties do not survive. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether repacking of DVDs and selling them as motor vehicle parts amounts to 'manufacture' for the purpose of excise duty?
2. Whether the appellant is entitled to cenvat credit on the imported DVDs?
3. Whether the demand for reversal of cenvat credit invoking extended period of limitation is valid?
4. Can cenvat credit be denied if the activity was treated as manufacture and excise duty was paid?
5. Whether interest and penalties imposed are justified?

Analysis:

1. The appellant repacked DVDs from Australia and sold them as motor vehicle parts, classifying them under a different tariff heading for excise duty. The department contended that repacking does not constitute 'manufacture' and demanded recovery of ineligible cenvat credit. The appellant argued that the repacking activity amounts to 'manufacture' as per Section 2(f)(iii) of the Central Excise Act, supported by a case law. The Tribunal analyzed the legal provisions and held that the repacking did not qualify as 'manufacture' since the DVDs were not listed in the Third Schedule, thus excise duty paid was not justified.

2. The appellant claimed cenvat credit on imported DVDs used to pay excise duty. The department argued that since the final product was exempt from excise duty, cenvat credit could not be availed. The Tribunal found that although the appellant disclosed the duty payment in their returns, the department failed to detect the error. Consequently, the demand for reversal of cenvat credit was deemed invalid due to lack of proper scrutiny by the department.

3. Regarding the extended period of limitation for demanding reversal of cenvat credit, the Tribunal ruled that since the appellant had filed required returns disclosing the duty payment, the demand beyond the normal limitation period was not sustainable. The department's failure to detect the erroneous payment earlier was highlighted, leading to the rejection of the demand based on limitation.

4. The Tribunal referred to a High Court judgment stating that cenvat credit cannot be denied if the assessee treated the activity as manufacture, paid excise duty, and availed credit. Following this precedent, the Tribunal held that cenvat credit could not be recovered from the appellant, even if the activity was later deemed not to be manufacture.

5. As cenvat credit could not be denied, the Tribunal concluded that the demand for interest and penalties did not stand. The impugned order was set aside, and the appeal was allowed, emphasizing that the appellant had complied with filing requirements, and the department's failure to detect the error in duty payment was a crucial factor in the decision.

This detailed analysis of the judgment addresses each issue comprehensively, outlining the arguments presented by both parties and the Tribunal's legal interpretation and conclusions.