2023 (12) TMI 901 - AT - Central Excise

Process amounting to manufacture or not - Availment of CENVAT Credit - Countervailing Duty (CVD) and additional Special Excise Duty paid on the imported Flux cored wires - availment of credit of these duties which were then utilised while paying duty on removal of finished goods - activity carried out on the imported Flux Cored Wire, did not amount to manufacture - violation of Rule 3 of CENVAT Credit Rules, 2004 - Extended period of limitation. HELD THAT - The case of the department against the Assessee was that the activity carried out by them did not amount to manufacture inasmuch as the flux cored wire remains flux cored wire only. In short, the process of drawing has not been disputed in the SCN. Issue of whether an activity or process amounts to manufacture has been discussed time and again by various courts including the Hon ble Supreme Court. It is a settled law that for any process to be considered as manufacture it must satisfy the test given under Section 2 (f) of Central Excise Act, 1944 - While 2(f)(i) provides that any activity incidental or ancillary to the completion of a manufactured product will be treated as Manufacture, sub clause (ii) of Section 2 (f) of the CEA, 1944, is a deeming fiction as per which any activity specified in relation to any goods in the Section or Chapter notes of the Fourth Schedule as amounting to manufacture will be deemed to be treated as manufacture. The activity of drawing or re-drawing a rod, wire or any other similar article into wire amounts to manufacture. In the present case as reproduced by us above, semi-finished flux cored wire in case of 400-700mm is passed through vertical killing rollers to achieve the shape and dimension of the coil having desired cast range between 800-1000mm. The said wire is thereafter layered to meet the Indian requirements post which the same are packed. Even going by the language of show cause notice, the department has not disputed that the activity of drawing/re-drawing of wire was carried out by the Appellant. Given the same we have no hesitation in holding that keeping in mind Note 10 to Section XV, the activity carried out by the Appellant amounts to manufacture. The aforesaid activity/process is undertaken by the Appellant as proper cast, helix and layering are important for weld accuracy and improper wire cast and helix reduces weld quality and adds to direct labour and factory overhead costs. The said process independently also enhances the performance of the Final product manufactured by the Appellant and therefore even if it is assumed that the allegation made by the department that the input in its imported form is a fully manufactured product is accepted to be true, even then the process undertaken by the Appellant on the imported goods being incidental to the completion of the manufactured goods and would amount to manufacture in terms of Section 2(f)(i) of the CEA, 1944. The process carried out by the Appellant enhances the performance of the product as has been clarified by Mr. Balasubramanium. The Adjudicating authority has completely misunderstood the reliance placed by the Appellant on the said opinion and has wrongly displaced the same on the ground that the same has no bearing on facts of the present case. There are merits in the submissions of the Appellant that the activity carried out by them is important to make the product marketable and the same can be treated as an activity which is incidental or ancillary to the completion of manufactured product. In view of the above, the process undertaken by the Appellant will prima facie amount to Manufacture under clause (i) of Section 2(f) of the Central Excise Act. Whether it was open for the adjudicating authority to introduce a new document after the issuance of SCN and first stage of remand? - HELD THAT - In the first round of litigation, vide order dated 02.04.2019 the case was remanded back for fresh adjudicating by this Tribunal with a specific direction that the vital argument on applicability of Note 10 to Section XV of CETA has not been considered - The Respondent in compliance with the directions of this Hon ble Tribunal listed the matter for fresh hearing. However, we note the Respondent instead of deciding the matter basis the documents placed before him, has relied solely upon Panchnama dated 05.06.2020 wherein statement of Mr Shinde was recorded who stated that no process as mentioned by the Appellant of drawing was carried out in their factory premises. The said Action on the part of the Respondent is clearly beyond the scope of remand order and cannot be upheld. It appears to us, that on finding that the SCN is issued contrary to Note 10 to Section XV, the Respondent decided to change the narrative of the allegations by introducing a new document in the form of Panchnama much after the close of Investigation and even after the first round of Litigation had concluded. In the said Panchnama the department has made out a totally new case i.e. no process was carried out in the factory of the Appellant and to prove the same statement of Mr. Shinde has been relied upon who admittedly started working as Plant Head with the Appellant organisation much after the period of dispute viz. 20.05.2018. The said action of introducing a new document and changing the case post issuance of the SCN cannot be permitted on more than one count - The impugned order on the other hand relies upon the Panchnama which was drawn after the first round of litigation. The said document to start with could not have been relied upon. If the department is permitted to improve upon or change its case after issuance of a show cause notice, the same will lead to every matter getting into an endless litigation loop. The same can never be the intention of the legislature. There are merits in the submission of the Appellant that the department has tried to circumvent the provisions of Section 11A which permits issuance of show cause notice for a maximum period of 5 years from the date of issuance of Notice in case of fraud suppression or wilful mis-statement. Show cause notice dated 08.05.2017 was issued demanding cenvat credit for the period 2012-2017 by invoking extended period of limitation of 5 years. The Respondent by placing reliance on the Panchnama dated 05.06.2020 has totally introduced a new case and if the said document is admitted as evidence the period for which demand was sought to be confirmed will go much beyond the statutory period of 5 years - the Respondent had no jurisdiction to change the case made out in original show cause notice by introducing a new document post issuance of the same. Extended period of limitation - HELD THAT - There was no dispute raised on availment of credit on imported inputs as the main activity did not amount to manufacture. The same shows that all facts were well within the knowledge of the revenue and therefore question of invoking extended period of limitation in the present case does not arise. Even the other two audit reports are dated 29.04.2013 and 10.04.2014 and the period for which audit was conducted overlaps with the period of dispute in the present case. Accordingly, the department cannot allege fraud and suppression in the present case as all facts were within their knowledge. Hon ble Supreme Court in following cases have held that extended period cannot be invoked if facts were within the knowledge of the department. The issue in the present case relates to Manufacture and the bonafides of the Appellant can be seen from their act of paying duty on the Final product - the demand of cenvat credit is not sustainable both on merits and limitations - Appeal allowed.

Summary

Issues Involved:
1. Whether the activity of converting unlayered semi-finished flux cored wire amounts to manufacture.
2. Whether Cenvat credit can be denied once the duty has been paid and collected on the final product.
3. Whether the department can argue that the activity did not amount to manufacture after collecting the duty on the final product.
4. Whether the Respondent passed the Impugned Order beyond the scope of the show cause notice and statement of demand.
5. Whether the Respondent followed the direction given by the Tribunal in the Remand order or went beyond it.
6. Whether the department can introduce new evidence or investigate the matter post issuance of show cause notice/after the first round of litigation.
7. Whether the extended period of limitation is invokable in the present case.

Summary:

1. Whether the activity of converting unlayered semi-finished flux cored wire amounts to manufacture:
The Tribunal concluded that the activity of converting unlayered semi-finished flux cored wire into fully layered flux cored wire amounts to manufacture. This conclusion was based on Note 10 of Section XV of the Central Excise Tariff Act, which states that the process of drawing or re-drawing a rod, wire, or any other similar article into wire amounts to manufacture. The Tribunal also relied on a Chartered Engineer's certificate and various technical documents that detailed the manufacturing process and its significance.

2. Whether Cenvat credit can be denied once the duty has been paid and collected on the final product:
The Tribunal held that Cenvat credit cannot be denied once the duty has been paid and collected on the final product. The department's acceptance of the duty paid on the final product implied that the activity carried out by the Appellant amounted to manufacture.

3. Whether the department can argue that the activity did not amount to manufacture after collecting the duty on the final product:
The Tribunal ruled that the department cannot argue that the activity did not amount to manufacture after collecting the duty on the final product. This position was supported by the fact that the department had already accepted the duty paid on the final product without any objections.

4. Whether the Respondent passed the Impugned Order beyond the scope of the show cause notice and statement of demand:
The Tribunal found that the Respondent had passed the Impugned Order beyond the scope of the show cause notice and statement of demand. The original show cause notice and statement of demand only alleged that the activity did not amount to manufacture. However, the Impugned Order introduced new evidence and arguments that were not part of the original allegations.

5. Whether the Respondent followed the direction given by the Tribunal in the Remand order or went beyond it:
The Tribunal concluded that the Respondent did not follow the direction given by the Tribunal in the Remand order. Instead of deciding the matter based on the documents and arguments presented, the Respondent conducted a new investigation and introduced new evidence, which was beyond the scope of the remand order.

6. Whether the department can introduce new evidence or investigate the matter post issuance of show cause notice/after the first round of litigation:
The Tribunal held that the department cannot introduce new evidence or investigate the matter post issuance of show cause notice/after the first round of litigation. The introduction of new evidence, such as the Panchnama and the statement of Mr. Shinde, was found to be beyond the scope of the original show cause notice and the first round of litigation.

7. Whether the extended period of limitation is invokable in the present case:
The Tribunal ruled that the extended period of limitation was not invokable in the present case. The Appellant had been regularly audited by the department, and all relevant facts were within the knowledge of the department. Therefore, the invocation of the extended period of limitation was not justified.

Conclusion:
The Tribunal allowed the appeal filed by the Appellant, quashing and setting aside the Impugned Order. The Tribunal held that the activity carried out by the Appellant amounted to manufacture, and therefore, the denial of Cenvat credit was not sustainable. The Tribunal also ruled that the department's actions were beyond the scope of the show cause notice and remand order and that the extended period of limitation was not applicable. The appeal was allowed with consequential reliefs.