2013 (11) TMI 1384 - AT - Central Excise

Invocation of Rule 6(3) of Cenvat credit rules - Separate account and inventory not maintained for dutiable as well as exempted goods Held that - Nowhere in the show cause notices, it is mentioned as to which are the common input or input services in respect of which cenvat credit has been availed and which had been used in or in relation to the manufacture of dutiable and exempted final products - Unless the common inputs and or input services, in respect of which cenvat credit had been availed and which had been used in the manufacture of dutiable and exempted final products are clearly mentioned in the show cause notice, the show cause notice cannot invoke Rule 6(3) of Cenvat Credit Rules and demand an amount to 10% equal to the sale value of the exempted final products. The Rules 6(2) & 6(3) would not apply when some exempted final products emerge as inevitable and unavoidable waste or by-product, as in such a situation, even if the manufacturer wants, he cannot maintain separate account and inventory - Rule 6(2) and 6(3) cannot be construed to impose an obligation on a manufacturer which is imposable to observe and then go on penalise him, by the demands under Rule 6(3) and imposition of penalty Relying upon RALLIS INDIA LTD. Versus UNION OF INDIA 2008 (12) TMI 46 - HIGH COURT BOMBAY - Rule 57 CC of Central Excise Rules, 1944 (which is pari materia with Rule 6(3) of Cenvat Credit Rules, 2004) is not applicable in respect of by-products Decided against revenue.

Summary

Issues involved:
Interpretation of Rule 6(2) and 6(3) of Cenvat Credit Rules regarding the maintenance of separate accounts for dutiable and exempted final products and the consequences of non-compliance.

Analysis:
The case involved a dispute regarding the treatment of iron ore fines and coal fines arising during the manufacturing process of sponge iron as exempted final products under Rule 6(3) of the Cenvat Credit Rules. The department contended that since the fines were fully exempt from duty and common inputs were used for both dutiable and exempted final products without separate account maintenance, a demand was raised under Rule 6(3). However, the Tribunal noted that the show cause notices did not specify the common inputs or input services used for both types of products, rendering the invocation of Rule 6(3) invalid. Without clear identification of common inputs, the rule could not be enforced to demand payment equal to 10% of the sale value of exempted final products.

Moreover, the Tribunal highlighted that Rule 6(2) and 6(3) apply when a manufacturer consciously uses common inputs for dutiable and exempted final products without maintaining separate accounts. However, if exempted final products emerge as unavoidable waste or by-product, separate account maintenance may not be feasible. In such cases, imposing penalties under Rule 6(3) would be unjust as the manufacturer cannot practically segregate inputs for such by-products. This interpretation aimed to prevent unfair obligations on manufacturers and avoid penalizing them for unavoidable waste products.

Additionally, referencing a judgment by the Bombay High Court, the Tribunal emphasized that rules similar to Rule 6(3) were not applicable to unavoidable by-products. Citing the case of Rallies India Ltd., the Tribunal concluded that the provisions of Rule 6(3) should not be enforced for such unavoidable waste or by-products. Consequently, the Tribunal dismissed the Revenue's appeals, upholding the Commissioner (Appeals) orders that set aside the demands raised under Rule 6(3) for iron ore fines and coal fines arising during the sponge iron manufacturing process.