2017 (12) TMI 1231 - HC - Central Excise

CENVAT/MODVAT credit - capital goods acquired on lease - Whether the Modvat Credit availed by M/s. Ispat Industries Ltd., on capital goods acquired by them on lease in terms of Rule 57(R)(3) of Central Excise Rules, 1944 can be availed prior to reimbursing the leasing company for the Excise Duty component or the same can be availed only after reimbursing the leasing company for the excise duty portion? Held that - Sub Rule (3) basically provides that the credit of the specified duty paid on the capital goods shall be allowed to a manufacturer if the capital goods are acquired by the manufacturer on lease, hire purchase or loan agreement, from a financing company subject to following the procedure provided in clauses (i) to (iv) in SubRule 3. The basic entitlement to avail credit is laid down in Sub Rule 3. Clauses (i) to (iv) lay down the procedure for availing of a credit. Subclause (b) of clause (ii) incorporates a requirement of producing a certificate from the financing company to the effect that the duty specified on such capital goods has been paid by the said manufacturer to such financing company prior to payment of first lease rental installment, or first hire purchase installment or first installment of re payment of loan, as the case may be, along with a copy of the agreement entered into with the said financing company - The difference in Sub Rule (3) of erstwhile Rule 57R and Sub Rule (3) of Rule 57AC is crystal clear from the plain reading of both the Sub Rules. The procedure which is provided under Sub Rule (3) of Rule 57R is not provided in the amended provision. From the date of conversion, the procedure which is required to be followed as per sub clause (b) of clause (ii) of Rule 57R(3) will not apply. As far as SBI is concerned, the admitted position which is recorded in paragraph 2.1 of the impugned order is that the excise duty was reimbursed under Rule 57R(3) and in particular Sub Rule (3) thereof. The finding recorded on the basis of admitted position is that there was no contravention. In paragraph 2.1, the Appellate Tribunal, after considering 57R(3) has rightly observed that the said provision does not contain any stipulation to the effect that credit on capital goods acquired on lease can be availed only after reimbursement of the excise duty component to the financing company. The clauses (i) to (iv) of Sub Rule (2) of Rule 57R provide for procedure and not a condition precedent. The finding of fact recorded is that till the date of conversion into Non Convertible Debentures, no installment was paid towards repayment to IFCI. A letter of IFCI placed on record shows that only interest was paid - As regards the impugned order subject matter of Appeal No.173 of 2008 is concerned, the same is dated 10th September 2017. By that time, the order dated 24th July 2006 was passed by the Appellate Tribunal on the Appeal preferred by Respondent assessee and on that ground, the Appeal has been dismissed. Appeal dismissed - decided against Revenue.

Summary

Issues Involved
1. Whether the Modvat Credit availed by the assessee on capital goods acquired on lease can be availed prior to reimbursing the leasing company for the Excise Duty component.
2. Whether the Tribunal is correct in holding that no action of seeking to disallow Modvat credit can be initiated due to the substitution of Rules 57A to 57V of the Central Excise Rules, 1944 from 31-3-2000 without any saving clause.
3. Whether the assessee is liable for penalty and interest under the provisions of the Central Excise Act, 1944.

Detailed Analysis

Issue 1: Availing Modvat Credit Prior to Reimbursement
The first substantial question of law in both appeals pertains to whether Modvat Credit on capital goods acquired on lease can be availed prior to reimbursing the leasing company for the Excise Duty component. The proceedings originated from a show cause notice issued by the Revenue to the respondent on February 4, 2002, alleging premature credit availed by the assessee. The Commissioner of Central Excise held that the respondent availed premature credit of ?3,14,20,082/- and imposed a penalty of ?25 Lakhs under Section 11AC of the Central Excise Act, 1944, along with interest under Section 11AA. The Tribunal, however, set aside this order, stating that Rule 57R(3) does not stipulate that credit on capital goods acquired on lease can be availed only after reimbursement of the excise duty component to the financing company. The Tribunal noted that the agreement with IFCI was converted into Non-Convertible Debentures from July 2001, and no lease rentals were paid till that date, hence no contravention of Rule 57R(3).

Issue 2: Substitution of Rules 57A to 57V
The second issue questions whether the Tribunal was correct in holding that no action to disallow Modvat credit can be initiated due to the substitution of Rules 57A to 57V from March 31, 2000, without a saving clause. The Tribunal observed that the substituted rules did not incorporate the requirement specified in Sub-Rule (3) of Rule 57R, thus indicating that the procedural requirements under the unamended rules were no longer applicable. The Tribunal also held that the change of view or interpretation by the department cannot be a cause to invoke the larger period of limitation for issuing a notice of disallowance, thereby rendering the notice barred by limitation.

Issue 3: Liability for Penalty and Interest
The Commissioner, in the Order-in-Original, confirmed only a part of the demand and imposed a penalty of ?25 Lakhs under Section 11AC, ordering the payment of interest under the Central Excise Act. The Tribunal, however, held that for premature availment of credit, the assessee could at best be liable for interest if the credit was utilized by debit entries before eligibility. The Tribunal noted that the notice did not establish how the directors/officers of the respondent dealt with the goods to render them liable for penalty under Rule 209A. The Tribunal's decision was supported by the judgment in Kapadia Enterprise Vs. Union of India, which clarified the conditions under which the extended period of limitation for recovery of excise duty could be applied.

Conclusion
The High Court found no error in the Tribunal's judgment and order dated July 24, 2006. The Tribunal's observations regarding liability for interest were noted, and since there was no challenge by the respondent to this finding, the liberty granted in terms of the observation continued to operate. Consequently, both appeals were dismissed, with no order as to costs.