EFFECT OF CHANGE IN MANAGEMENT IN A COMPANY IN AVAILING CENVAT CREDIT

[Mr. M. GOVINDARAJAN]

                        A company registered under the Companies Act, 1956 is a separate entity.   It is having perpetual succession.   The members may come and members may go but the company will survive till it is wound up.   The shares in respect of a company are freely transferrable subject to conditions.   The transfer of shares in some time leads to the change in management.  The change in management may be with the change of name of the company or the company may continue in its own name.   The discussion to be taken in this article the effect of management in a company in availing CENVAT credit with reference to decided case law.

                        In ‘Auora Foam Private Limited V. Commissioner of Central Excise, Chandigarh’ –  2011 -TMI - 205730 - (CESTAT, NEW DELHI) the appellants are engaged in the manufacture of PU Foam sheets/regular blocks chargeable to central excise duty.   They avail the facility of CENVAT excise duty paid on inputs and capital goods used in or in relation to the manufacture of the finished goods as per the provisions of CENVAT Credit Rules, 2002.  The appellant is a private limited company.   The shares of the appellant company were purchased by 3 persons including one a Private limited company.  By virtue of the transfer of shares the management has been changed but the name of the company remained the same.  At the time of purchase of shares  there was CENVAT credit balance of Rs.4,37,697/- which was utilized for the payment of duty as finished goods.   The Central Excise Officers visited the factory and checked the records.  They were of the view since there has been a change in the management the appellant ought to have applied to the Department for transfer of the credit lying in balance at the date of purchase.   Since they did not take necessary permission the same could not be utilized.

                        A show cause notice was issued by the Department for the record of CENVAT credit from the appellant company under Rule 12 of the CENVAT Credit Rules, 2002 read with section 11A of the Central Excise Act,1944 along with interest and imposition of penalty on the appellant under Rule 13 of the CENVAT Credit Rules read with Section 11AC of the Act and also under Rule 27 of the Central Excise Rules, 2002.  The Adjudicating Authority confirmed the demand along with interest and also imposed penalty of equal amount.  The Commissioner of Central Excise (Appeal), on appeal by the appellant, confirmed the order of the Adjudicating Authority and dismissed the appeal. 

                        Aggrieved against the order of the Commissioner (Appeals) the appellant filed the present appeal before the Appellate Tribunal.   Before the Tribunal the appellant submitted the following:

• Though the shares of the appellant had been acquired resulting in change of the management, the ownership of the factory remains with the appellant company and in view of this there is no transfer of ownership of the factory and hence Rule 8 was not applicable;
• Even if it is presumed for the sake of argument that there was change of ownership and Rule 8 of CENVAT Credit Rules, 2002 was applicable, no prior permission of the Department is required for utilizing the credit lying in balance;
• All the activities were within the knowledge of the department including the change of directors and shareholders, there was no suppression on the part of the appellant and in such circumstances, the provisions of Rule 11AC was not applicable;
• In the above view the impugned order is liable to be set aside.

The Department put forth the following:

• The agreement between the appellant company and the purchasers of the shares, it is clear that it was agreement for take over of the appellant company as per terms and conditions of the agreement;
• Since there is change of the ownership, the provisions of Rule 8(1) of CENVAT Credit Rules, 2002 would apply and before utilizing the CENVAT credit lying in the balance as on the date of change of ownership, the permission of the Department should have been obtained;
• Sine the permission was not obtained the credit has been wrongly utilized.

The Tribunal analyzed the provisions of Rule 8 of CENVAT Credit Rules, 2002.  The said Rule is applicable in the following three circumstances:

• When the manufacturer of the final products shifts his factory to another site;
• The factory is transferred from the existing owner to another person on account of change of ownership; and
• The  factory is transferred on account of merger, amalgamation, lease or transfer of the factory to a joint venture with specific provision for transfer of liabilities of such factory.

The Tribunal further held that as per the provisions of Rule 8(1), the existing manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.   As per Rule 8(2) the transfer of the CENVAT credit under sub rule (1) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory to a new site or ownership and the inputs or capital goods on which credit has been availed of are duly accounted for to the satisfaction of the Department.

                        In this the Tribunal found that the owner of the factory is the appellant company.   Only the shares were purchased by different persons and as such the owner of the factory still remains the appellant company.   It is only the shareholders and directors of the appellant company were changed.   As per the condition 9 of the agreement the appellant company shall continue to carry on the activities of manufacture/processing different goods of PU foam and other business operations.  This is, thus, a case where only the control of appellant company has changed but the appellant company continues to be the owner of the factory in question.  The Tribunal set aside the order of demanding CENVAT credit and penalty to that extent.

                        Rule 8 is attracted only when the factory shifts to another site, or its ownership is transferred on account of sale to another person or the ownership is changed on account of merger, amalgamation, lease or transfer of the factory and not for other reason.   In this case there is only change of management but the ownership is continued by the appellant company.   Therefore the Tribunal decided the case in favor of the appellant company.