2024 (10) TMI 1333 - AT - Central Excise

CENVAT Credit - capital goods - inward transport - reverse charge mechanism - scope of SCN - penalty - HELD THAT - The Adjudicating Authority has clearly traversed beyond the charges levelled in the show cause notice and confirmed the demand on the grounds which were not indicated in the show cause notice. Therefore, on this ground itself, the demand is not sustainable, even though he has rightly held the said goods as input or consumable and therefore allowed the taking of the credit of the same by the appellant which had initially taken the credit on the same as capital good. Therefore, taking of credit has not been found to be wrong by the Adjudicating Authority as such. CENVAT credit on Araldite - HELD THAT - It is found that because of their mechanical properties and resistance to chemical and suitability for prevention of formation of rust, levelling etc., they are used in fermentation tanks on the interior and exterior surfaces providing a barrier against corrosive substances. Therefore, once the Adjudicating Authority has held Epoxide Resin as capital goods, by the same logic even Araldite would also be considered as capital goods. Therefore, in view of the facts of the case and its use in the factory, Commissioner was not correct in holding that it was in the nature of inputs or consumables. On this count itself demand is not sustainable. It is further noted that Commissioner after holding it as inputs or consumables had further gone to confirm the demand on the grounds that the same has been used in the manufacture of both dutiable and exempted goods and therefore the demand has been confirmed, which has been included in the total amount of Rs. 1,33,312/- - this demand for reversal or payment of duty under Rule 6(3A) of CCR 2004 is not sustainable. Penalty - HELD THAT - It is noticed that a composite penalty has been imposed covering both the issues. However, as the demand is not sustainable on the amount of Rs. 1,33,312/- and only demand which is sustainable on account of their non-contest is Rs. 1,25,329/-. Therefore, the penalty also needs to be appropriately re-determined. In the light of the discussion, I consider an amount of Rs. 20,000/- as penalty would be adequate and therefore the order for penalty is modified to that extent. The demand of Rs. 1,33,312/- is not sustainable and set aside. The demand of Rs. 1,25,239/- is upheld - Appeal allowed in part.

Summary

Issues:
1. Eligibility of Cenvat Credit on capital goods
2. Ineligibility for taking credit on inward transport of capital goods paid on Reverse Charge Mechanism (RCM)
3. Classification of goods as capital goods or consumables
4. Imposition of penalty

Analysis:
Issue 1: Eligibility of Cenvat Credit on capital goods
The Department issued a demand on the grounds that certain capital goods were used exclusively for manufacturing exempted goods. The Adjudicating Authority examined the manufacturing processes and held that the capital goods were also used in the production of dutiable products, making the appellants eligible for Cenvat Credit. Specific items like Epoxide Resin were considered capital goods, while items like Araldite and Molecular Seives were deemed consumables. The demand was worked out under Rule 6(3A) for inputs used in exempted goods, leading to a demand of Rs. 1,33,312. The Authority also imposed a penalty for irregularly availing Cenvat Credit.

Issue 2: Ineligibility for taking credit on inward transport of capital goods paid on Reverse Charge Mechanism (RCM)
The demand for service tax credit on inward transport of capital goods paid on Reverse Charge was confirmed by the Original Adjudicating Authority. The appellants did not contest this issue, but requested a waiver of penalty. The Tribunal upheld the demand but modified the penalty amount.

Issue 3: Classification of goods as capital goods or consumables
The Adjudicating Authority classified Epoxide Resin as a capital good based on its use in preventing rust formation in machinery. However, the Authority erroneously classified Araldite as a consumable, despite its similar use and properties to Epoxide Resin. The demand on Araldite was found unsustainable, as it should have been considered a capital good.

Issue 4: Imposition of penalty
A composite penalty was imposed covering both issues, but as the demand on Araldite was deemed unsustainable, the penalty needed to be re-determined. The Tribunal modified the penalty amount to Rs. 20,000, considering the discussions and findings on the various goods in question.

In conclusion, the Tribunal partially allowed the appeal, setting aside the demand of Rs. 1,33,312 and upholding the demand of Rs. 1,25,239. The penalty amount was also modified accordingly.