2018 (9) TMI 981 - AT - Central Excise

CENVAT Credit - inputs removed as such - whether such removal amounts to trading activity or not? - reversal of proportionate credit - Rule 6(3A) of CENVAT Credit Rules, 2004 - Held that - The department does not have a case that these spares and consumables are not integrally connected to the machines. They have also not denied that these are inputs for the appellants and also that the credit availed on such spares and consumables are not eligible. It is to be specifically stated that there is no allegation show cause notice that such goods are not inputs to the appellant. Thus when inputs are removed as such Rule 3(5) would come into application. There is clear distinction from Rule 3(5) from trading activity for the reason that the credit is not eligible on traded goods whereas credit under Rule is eligible on inputs used for the clearance of final products. Credit remains allowed - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Eligibility of CENVAT credit on inputs used for trading activity and manufacturing of final products.

Analysis:
The case involved the appellants, manufacturers of CNC machines, availing CENVAT credit on inputs, capital goods, and service tax credit on inputs service. The department alleged that when the appellants removed inputs as such, it constituted trading activity, making them ineligible for the entire common credit of input services used for trading and manufacturing. A show cause notice was issued proposing a demand under Rule 6(3A) of CENVAT Credit Rules, 2004. The original authority and Commissioner (Appeals) upheld the demand, interest, and penalties.

The appellant argued that they cleared spare parts and consumables along with final products, not engaging in trading activity. They maintained that removal of inputs as such falls under Rule 3(5) of CENVAT Credit Rules, 2004, not trading activity. Relying on precedents like Lakshmi ring travellers (CBE) Ltd., the appellant contended that they were entitled to the credit on common input services. The department, represented by the ld. AR, asserted that the appellant's activity of clearing spare parts and consumables constituted trading, thus necessitating payment under Rule 6(3A).

Upon examination, the Tribunal noted that the department did not dispute the integrality of the spares and consumables to the machines, acknowledging them as inputs. The Tribunal differentiated Rule 3(5) from trading activity, emphasizing that credit under Rule 3(5) is eligible on inputs used for final products, unlike trading goods. Citing the case of Lakshmi ring Travellers (CBE) Ltd., the Tribunal concluded that removal of inputs as such did not equate to trading, warranting the reversal of CENVAT credit. Consistent with the decisions in UP Telelinks and Mahaveer Cylinders Ltd., the Tribunal ruled in favor of the appellant, setting aside the demand and allowing the appeal.

In summary, the Tribunal held that the appellants were eligible for the CENVAT credit on inputs used for manufacturing final products, rejecting the department's contention that the activity constituted trading. The judgment emphasized the distinction between Rule 3(5) and trading activity, providing relief to the appellants based on established legal principles and precedents.