CONDITIONS TO BE SATISFIED FOR AVAILING CREDIT

[Mr. M. GOVINDARAJAN]

The most important aspect for grant of credit is to see that cascading effect of the duty imposed on the final product cleared at the time of sale is removed. If some duty is levied on the inputs, raw materials etc., and the final product is also dutiable, then the duty levied on inputs, i.e., raw materials is to be reduced from the duty ascertained on the final product. For taking and utilizing credit the Rule provides for conditions.   Besides the conditions stipulated in the Rules the Supreme Court in ‘KCP Limited V. Commissioner of Central Excise, Chennai’ – 2013 (9) TMI 98 - SUPREME COURT held that there are two conditions for getting the credit benefit which are as follows:

• On the raw materials, i.e., on the inputs, the manufacturer must have paid duty and such raw material must have been used in the process of manufacturing the final product in his factory or premises;
• Excise duty must have been levied on the final product.   If there is no duty levied on the final product, there would not be any question of grant of any relief because in that case there would not be any cascading effect on the duty imposed.

The fact of the above said case runs as follows:

The assessee is a manufacturer of machinery for sugar and cement plants and parts thereof falling under Chapter 84 of the Central Excise Act, 1944.   The assessee not only sets up sugar and cement manufacturing plant as per the specifications of the clients in India but also sets up such plants in foreign countries. The assessee entered into a contract with M/s Vina Sugars, Vietnam for supply and installation of a sugar plant at Vietnam with a capacity of 1250 tons crushed per day.   The assessee had manufactured certain machines in his own factory which were to form part of the sugar plant and certain machinery, including electric cables etc., which were necessary for the plant were purchased from others, along with the appellant’s manufactured items, had been put in a container and the containers were transported to Vietnam so that the different parts of the machinery can be assembled and the plant can be set up at Vietnam.

The assessee availed the credit on certain goods under the provisions of Rule 57Q of the Central Excise Rules, 1944 declaring them as capital goods which had been purchased by the assessee from other manufacturers dealers in the country and had set to Vietnam along with other parts of machinery manufactured by the appellant.

The Department was of the view that the credit availed by the assessee on goods was not justified because the same had been wrongly described such as parts-equipments-cables etc., as capital goods though the said goods were not covered under the definition of capital goods.   None of such purchased items had been used in its factory premises in relation to manufacture of the final product manufactured by the assessee.   Show cause notices were issued to the assessee.   The same have been dropped on considering the reply of the appellant. On review of the said orders the CBEC directed the Commissioner to file an appeal before the Tribunal.

Before the Tribunal the Department submitted the following:

• The credit availed by the assessee was not capital goods;
• Such goods were not used in the factory premises of the assessee;
• The said goods had been exported along with parts of machinery manufactured by the assessee in a container and the said parts had been exported in the same condition, i.e., even without opening the packages or testing them;
• The role of the assessee was merely a trader who had purchased certain goods including parts of machinery, cables etc., from dealers in our country and thereafter exported the same in the exact condition in special containers along with the machinery manufactured by it;
• The parts purchased by the assessee could not have been even treated as inputs as the said parts had not been used by the appellant in the process of manufacturing the machinery.

The Tribunal allowed the appeal by remanding the cases to the original authority for computing and confirming the amount of credit irregularly availed by the assessee and also for imposition of appropriate penalty after affording effective opportunity of hearing to the appellant in accordance with law.

Against the order of Tribunal the assessee filed appeal before Supreme Court. The appellant submitted the following before the Supreme Court:

• The impugned orders passed by the Tribunal are bad in law as the Tribunal did not appreciate the facts and law correctly;
• The credit availed by the appellant was just and proper and therefore there was no question of re-calculating or recovering the amount of the credit availed by the appellant;
• The parts of machinery purchased were to form part of the entire plant which was set up by the appellant at Vietnam and therefore, it was to be treated as inputs or part of capital goods and therefore, the appellant had rightly claimed and availed the credit;
• The entire sugar machinery plant was to be sent to Vietnam in Completely Knocked Down condition.   After receipt of the complete machinery in Vietnam, the plant was to be set up and therefore, even the machinery which had been purchased by the appellant from other manufacturers or dealers and which had been transported to Vietnam by sea was part of the inputs;

The Supreme Court is of the view that the Tribunal had rightly come to the conclusion that the appellant was not entitled to the credit as prayed for. In this case it is not disputed that the appellant had purchased some machinery from others and such machinery had not even been unpacked by it and in the exact condition it had been transported along with the machinery manufactured by it to Vietnam.   Thus the appellant did not use the purchased machinery in the premises or in its factory and therefore, necessary condition for availing credit had not been complied with. To avail the credit, the input on which excise duty is paid must be used in the manufacture of the final product in the factory. The machinery purchased by the appellant had not even beentested or was not even unwrapped in the factory of the appellant.   In case of such an admitted fact that it cannot be said that machinery so purchased from others was used by the appellant in the manufacture of sugar plant. In this case the appellant acted only as a trader or as an exported in relation to the machinery purchased by it, which had been exported and used for setting up a sugar plant in a foreign country. In any case, it cannot be said to have manufactured that plant in its factory. It is also clear that the appellant did not pay any excise duty on the sugar plant set up by it in Vietnam and therefore, cannot be any question of availing any credit.