2010 (5) TMI 258 - AT - Central Excise

Area based exemption Substantial expansion of installed capacity. Though substantial expansion by not less than 25% is not defined in Notification No. 50/2005-C.E. it means some expansion or addition to plant and machinery which is substantial and resulted in at least 25% increase in installed capacity. It cannot be mere improving of efficiency or making minor charges. However it is not necessary addition of machinery be comparable with setting of new unit and replacement of machinery cannot be sufficient. Area based exemption- replacement of 4MT furnace with 6MT one resulting in 50% increase in installed capacity. Held that- this was sufficient for claiming benefit of Notification No. 50/2003-C.E. Revenue plea that to claim it another furnace of 2MT was required to be installed rejected.

Issues Involved:
1. Eligibility for duty exemption under Notification No. 50/2003-CE.
2. Definition and interpretation of "substantial expansion."
3. Validity of duty demands and penalties imposed.

Issue-Wise Detailed Analysis:

1. Eligibility for Duty Exemption under Notification No. 50/2003-CE:
The appellant company, engaged in manufacturing M.S. Ingots, claimed duty exemption under Notification No. 50/2003-CE, which provides exemption to industrial units in specified hill areas of Uttranchal and Himachal Pradesh. The exemption applies to new units set up after January 7, 2003, and existing units that undertook substantial expansion by increasing installed capacity by at least 25% on or after January 7, 2003. The appellant company claimed to fall in the second category, having increased the capacity of their furnace from 4 M.T. to 6 M.T. The department contested this claim, arguing that the mere replacement of an old furnace with a new one does not constitute substantial expansion as per the definition in the exemption notification.

2. Definition and Interpretation of "Substantial Expansion":
The core issue revolved around the interpretation of "substantial expansion." The department relied on the Tribunal's judgment in M/s. Travancore Titanium Products vs. C.C., which stated that substantial expansion involves significant addition of machinery, not just an increase in production capacity. The appellant argued that the exemption notification itself defined substantial expansion as a 25% increase in installed capacity, which they met by replacing their furnace. The Tribunal noted that the notification did not explicitly define substantial expansion but implied that it involves some expansion or addition to plant and machinery resulting in at least a 25% increase in installed capacity. The Tribunal concluded that replacing an old furnace with a higher capacity one, resulting in a 50% increase in capacity, met the criteria for substantial expansion.

3. Validity of Duty Demands and Penalties Imposed:
The department issued multiple show cause notices demanding duty and interest, and imposed penalties on the appellant company and its directors. The first group of notices covered the period from October 2003 to July 2004, resulting in a confirmed duty demand of Rs. 1,03,81,578/- along with interest and penalties. The Commissioner (Appeals) upheld the duty demand and interest but reduced the penalties on the directors. The second group of notices covered the period from November 2004 to January 2006, resulting in a confirmed duty demand of Rs. 2,13,58,256/- along with interest and penalties. The Tribunal found that the appellant company had indeed undertaken substantial expansion as per the exemption notification, and thus, the duty demands and penalties were not sustainable. The Tribunal set aside the impugned orders and allowed the appeals, concluding that the replacement of the furnace constituted substantial expansion, thereby qualifying the appellant for the duty exemption.

Conclusion:
The Tribunal's judgment clarified that the replacement of an old furnace with a new one, resulting in a significant increase in installed capacity, qualifies as substantial expansion under Notification No. 50/2003-CE. The duty demands and penalties imposed by the department were deemed unsustainable, and the appeals were allowed.

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