2022 (8) TMI 639 - AT - Central Excise

Reversal of CENVAT Credit - manufacture of dutiable as well as exempt goods - appellants have a 100% EOU unit as well as a DTA unit located adjacent to each other - manufacture dutiable goods viz. PVC vinyl floorings PVC film/sheets PVC leather cloth etc. classified under Chapter 39 and coated cotton fabrics classified under Chapter 59 of the First Scheduled to the Central Excise Tariff Act 1985 as well as manufacture and clearance of coated cotton fabrics (deluxe) falling under Chapter 5903 without payment of Central Excise duty by availing benefit of Notification No. 30/2004 dated 9.7.2004 - non-maintenance of separate records - applicability of Rule 6(3) (i) of the Cenvat Credit Rules 2004 - CENVAT credit on services like Transport Charges Testing Charges Import Charges Freight Charges availed - procedure laid down under clause 3A of Rule 6 for determination and payment of amount equivalent to Cenvat credit attributable to inputs and input services used in or in relation to the manufacture of exempted goods not followed. HELD THAT - In the light of judicial pronouncements it is clear that (i). Rule 6 lays down the obligations of the manufacturer of dutiable and exempted goods and provider of taxable and exempted services; Rule 6 (1) and (2) Provide for different situations; (ii). Rule (3) starts with a non estante clause; it begins with the words notwithstanding and refers to Sub-Rules (1) and (2) of Rule 6 of CCR 2004; once the conditions stipulated in Sub-Rule (3) are complied with the provisions of Sub-Rule (1) and (2) will not be applicable; sub-Rule (3) clearly provides that if the provider of output service does not opt to maintain separate accounts he should comply with the provision of Rule 6(3)(c) of the said Rules; (iii). Reversal amounts to non availment of credit; (iv). It is not open for the revenue to thrust upon the assessee the choices available under Sub-Rule (3); (v). It is not the intention of the legislature to demand huge amounts of credit disproportionate to the credit availed on exempted goods. Validity of reliability on judgment of Mumbai High Court in the case of COMMISSIONER OF C. EX. THANE-I VERSUS NICHOLAS PIRAMAL (INDIA) LTD. 2009 (8) TMI 224 - BOMBAY HIGH COURT by Revenue - HELD THAT - It was held in the case of Nicholas Piramal that if separate inventory is not maintained then the manufacturer would have no option but to pay amounts specified in Rule 6(3)(i) of the Cenvat Credit Rules 2004; mere reversal of the availed Cenvat credit would not be sufficient; procedure needs to be followed. The decision of Principal Bench in the case of M/S AGRAWAL METAL WORKS PVT. LTD. VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX ALWAR 2022 (7) TMI 924 - CESTAT NEW DELHI relied upon being the latest one where it was held that The demand has been made under Rule 6 (3) of CCR 2004. It has been held by the Hon ble High Court of Andhra Pradesh and Telangana in the case of M/S TIARA ADVERTISING VERSUS UNION OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE 2019 (10) TMI 27 - TELANGANA AND ANDHRA PRADESH HIGH COURT that the various options under Rule 6 are options given to the assessee and the Revenue cannot choose one of the options and force it upon the assessee. Even if the assessee is rendering exempted services or manufacturing exempted goods and using common input services no demand can be sustained under Rule 6 (3) as this is only one of its options available to assessee to fulfill its objection. The appellants have submitted to the Audit party as well as the adjudicating authority that process involved in the manufacture of goods respectively i.e. coated cotton fabrics (deluxe) by M/s Responsive Industries and Hawser Fishing Net by M/s Axiom Cordages Ltd did not involve the raw material which is disputed to have been a common input by the Department - It is found that the appellants have given a detailed submission on the process of manufacture of the impugned goods. The learned adjudicating authority has not gone into the submissions and has simply brushed aside the arguments of the appellant saying that understandably the raw material used is common - Department has not taken any steps to negate the claims of the respective appellants. No Panchnama indicating the process of manufacture has been drawn in the least leave alone obtaining any technical opinion to support or to contradict the submissions of the appellants. The only averment of the learned adjudicating authority appears to be that the input services are understandably used in the manufacture of dutiable as well as exempted goods - it is not open to the Department to brush aside the submissions of the appellants without a proper enquiry and reason. In the absence of a systematic study and negation of the appellant s submissions the findings of the learned adjudicating authority are not legally tenable. Validity of acceptance of Chartered Accountant s certificates without giving any reasons thereof - HELD THAT - It is not a case of the Department that the said Chartered Accountant has been examined. Learned Commissioner was within his rights to call the said Chartered Accountants and examine him to find out and establish the veracity or otherwise of the certificates issued by them. Interestingly one more argument taken by the learned adjudicating authority is that the certificates given by the Manpower Recruitment Agency in respect of Axiom Cordages Ltd are verbatim to the end and do not disclose any details - in the absence of any enquiry verification or examination of the persons concerned the conclusion drawn by the learned adjudicating authority do not sustain the scrutiny of law. The impugned orders are not sustainable. The learned adjudicating authority mainly relies on the averments that the appellants did not disprove the allegation made in the show-cause notice. It is a matter of record that the appellants have given elaborate submissions in response to Audit reports and also during the adjudication proceedings it is apparent that the learned adjudicating authority has not gone into the submissions in detail and has not negated the assertions made by the appellant in a reasoned manner. It is to be noted that it is the Department who are alleging certain non-observance of procedures by the appellants and availment of CENVAT Credit in a proper manner on the part of the appellants. Therefore it was incumbent upon the Department to prove the same with cogent evidence reasoned argument and on a legal basis. Having not discharged their onus the Department cannot simply brush aside the submissions of the appellants. The appellants have reversed the credit attributable to the inputs or inputs services alleged to have been used in the manufacture of exempted goods - the reversal of CENVAT Credit amounts to non-availment of CENVAT Credit and therefore demands would not sustain. The appeal is partly allowed by way of remand to the adjudicating authority for a limited purpose of verifying the conclusion of reversal. In case the amount reversed by the appellant falls short of the requisite amount the appellants shall pay the difference along with interest.

Summary

Issues Involved:
1. Availment of CENVAT credit on common inputs and input services used in the manufacture of both dutiable and exempted goods.
2. Maintenance of separate accounts for dutiable and exempted goods.
3. Applicability of Rule 6 of the Cenvat Credit Rules, 2004.
4. Proportionality of the demand raised in relation to the availed credit.
5. Invocation of the extended period of limitation.
6. Imposition of penalties.

Issue-wise Detailed Analysis:

1. Availment of CENVAT Credit on Common Inputs and Input Services:
The appellants, M/s Responsive Industries Ltd and M/s Axiom Cordages Ltd, were alleged to have availed CENVAT credit on common inputs and input services used in the manufacture of both dutiable and exempted goods. Specifically, M/s Responsive Industries Ltd availed credit on inputs such as Furnace Oil, Lubricating Oil, and Kraft paper, and on services like Tours & Travels, Exhibition, and Advertising. Similarly, M/s Axiom Cordages Ltd availed credit on services like GTA, CHA, and Insurance Services. Both appellants argued that they maintained separate accounts and that the credit availed was only for dutiable goods. They also claimed to have reversed the credit availed on common inputs and services.

2. Maintenance of Separate Accounts:
The appellants contended that they maintained separate accounts for the manufacture of dutiable and exempted goods. M/s Responsive Industries Ltd submitted that the exempted goods were manufactured at separate places in the factory, and separate records were kept. M/s Axiom Cordages Ltd argued that they maintained separate inventories for input services used in the manufacture of dutiable and exempted goods. However, the adjudicating authority found that the appellants failed to provide sufficient evidence to support their claims of maintaining separate accounts.

3. Applicability of Rule 6 of the Cenvat Credit Rules, 2004:
The core issue revolved around the applicability of Rule 6 of the Cenvat Credit Rules, 2004. Rule 6(1) and (2) mandate the maintenance of separate accounts for inputs and input services used in the manufacture of dutiable and exempted goods. Rule 6(3) provides options for manufacturers who do not maintain separate accounts, including paying an amount equal to 5%/6% of the value of exempted goods or reversing the credit attributable to exempted goods. The appellants argued that they had complied with Rule 6 by reversing the credit, which should be considered as non-availment of credit, thus making Rule 6(3) inapplicable.

4. Proportionality of the Demand:
The appellants contended that the demand raised by the department was disproportionate to the credit availed on common inputs and services. They argued that the reversal of credit should suffice, and the demand of 5%/6% of the value of exempted goods was excessive. The tribunal, referring to various judicial pronouncements, held that the intention of the legislature was not to demand disproportionate amounts and that reversal of credit amounts to non-availment of credit.

5. Invocation of the Extended Period of Limitation:
The department invoked the extended period of limitation, alleging suppression of facts by the appellants. The appellants argued that they had maintained separate records and had informed the department about the reversal of credit. The tribunal found that the department failed to provide sufficient evidence of suppression and that mere filing of ER-1 returns would not provide immunity from non-adherence to the law. The tribunal held that the extended period of limitation could not be invoked in the absence of clear evidence of suppression.

6. Imposition of Penalties:
The appellants argued that the imposition of penalties was unwarranted as there was no intention to evade duty, and they had reversed the credit availed on common inputs and services. The tribunal held that once the demands were found to be unsustainable, the penalties imposed would also not be sustainable.

Conclusion:
The tribunal allowed the appeals filed by M/s Responsive Industries Ltd, setting aside the demands and penalties. In the case of M/s Axiom Cordages Ltd, the tribunal remanded the matter to the adjudicating authority for verifying the correctness of the reversal of credit. The tribunal emphasized that reversal of credit amounts to non-availment of credit and that the demands raised were disproportionate. The tribunal also held that the extended period of limitation could not be invoked without clear evidence of suppression.