2022 (2) TMI 9 - AT - Service Tax

CENVAT Credit - capital goods cleared as scrap - amount required to be paid in terms of rule 3(5A) of the Credit Rules - whether rule 3(5A) of the Credit Rules could have been invoked in the present case and for this purpose the scope of this rule as it stood prior to 27.09.2013 and post 27.09.2013? - HELD THAT - The period of dispute in the present case is from 27.09.2013 to 31.03.2015. It is evident from the tabular chart given that in terms of payment of the amount under rule 3(5A) of the Credit Rules during the said relevant period, only a 'manufacturer' was required to pay the amount in case of clearance of capital goods as scrap and not an output service provider. The appellant, being an output service provider, was not required to pay any amount in terms of rule 3(5A) of the Credit Rules during the period involved in the present appeal for clearance of capital goods as scrap. Whether the capital goods involved in the present case which were cleared by the appellant without payment of any amount under rule 3(5A) of the Credit Rules can be considered as used capital goods or waste and scrap? - HELD THAT - The capital goods cleared as scrap by the appellant undergo an extensive procedure, after which based on the evaluation of a third-party vendor, the goods are declared scrap and sold to scrap management companies who have taken certificates for recycling the said scrap under the Hazardous E-waste Management Rules - The items which were declared as scrap were sold to companies specializing in scrap management and these companies have also been granted a certificate for procurement and recycling of scrap under the Hazardous Waste Management Rues. The appellant, therefore, could not have undertaken the process of breaking the items and it cannot be urged that these items would not be scrap merely because they have not been broken before disposal. The capital goods cleared as scrap by the appellant are scrap and, therefore, the appellant, being an output service provider, was not required to pay any amount in terms of rule 3(5A) of the Credit Rules. It is not necessary to examine the contention advanced by learned counsel for the appellant that the extended period of limitation could not have been invoked in the facts and circumstances of the present case. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:

1. Applicability of Rule 3(5A) of the CENVAT Credit Rules, 2004 to an output service provider.
2. Classification of capital goods as 'used' or 'scrap'.
3. Invocation of the extended period of limitation.
4. Imposition of interest and penalties.

Issue-wise Detailed Analysis:

1. Applicability of Rule 3(5A) of the CENVAT Credit Rules, 2004 to an output service provider:

The primary issue was whether Rule 3(5A) of the CENVAT Credit Rules, 2004, which mandates payment of an amount equivalent to the CENVAT credit availed on capital goods cleared as scrap, applies to output service providers. The tribunal noted that during the relevant period (27.09.2013 to 31.03.2015), Rule 3(5A) required only manufacturers, not service providers, to pay such an amount. The tribunal confirmed that the appellant, being an output service provider, was not required to pay any amount under this rule for the clearance of capital goods as scrap.

2. Classification of capital goods as 'used' or 'scrap':

The tribunal examined whether the capital goods cleared by the appellant were 'used' or 'scrap.' The appellant argued that the goods were scrap, following a detailed 'Inventory Management Process' for identifying and classifying scrap. The tribunal referred to dictionary definitions and the Supreme Court's interpretation in Valji Khimji, which clarified that 'scrap' means something that can no longer be used for its original purpose. The tribunal found that the appellant followed a rigorous process to classify goods as scrap, including third-party health checks and approvals at various organizational levels. The tribunal concluded that the goods were indeed scrap and not used capital goods.

3. Invocation of the extended period of limitation:

The tribunal did not find it necessary to address the issue of the extended period of limitation due to its findings on the primary issues.

4. Imposition of interest and penalties:

Since the tribunal concluded that the appellant was not required to pay any amount under Rule 3(5A) for the clearance of capital goods as scrap, the imposition of interest and penalties was also deemed unwarranted.

Conclusion:

The tribunal set aside the impugned order dated 31.08.2016, which had confirmed the demand of ?19,65,03,338/- along with interest and penalties. The appeal was allowed, and the amount earlier paid by the appellant, which had been appropriated, was ordered to be refunded with applicable interest.