2007 (2) TMI 24 - AT - Central Excise

Appellants Can Claim Credit on Inputs for Exempted Products. Rule 6(3)(b) Payment Not Deductible.

The Tribunal held that appellants can take credit on all inputs, including those exclusively used for exempted products. The penalty imposed was set ... Classification of cess as duty of excise - exempted goods under Cenvat Credit Rules - entitlement to Cenvat credit on inputs exclusively used in manufacture of exempted goods - effect of Explanation III to Rule 6(3) of the Cenvat Credit Rules - nature of Rule 6(3)(b) payment (tax or adjustment) - deduction from sale price for statutory paymentClassification of cess as duty of excise - exempted goods under Cenvat Credit Rules - Whether automobile cess and education cess payable on tractors are duties of excise and whether tractors are 'exempted goods' within the meaning of Rule 2(d) of the Cenvat Credit Rules. - HELD THAT: - The Tribunal held that automobile cess (levied under the Industrial Development and Regulation Act, 1951) and education cess (levied under Section 93 of the Finance Act, 2004) are in substance duties of excise because they are imposed in relation to manufacture/production and statutory provisions and rules applying Central Excise law to the levy and collection support this characterisation. However, the definition of 'exempted goods' in Rule 2(d) of the Cenvat Credit Rules refers to goods 'exempt from whole of duty of excise' (singular) or charged to nil rate; the Tribunal construed this phrase as referring to the basic duty of excise specified in the Tariff (and not necessarily every ancillary cess). Applying that construction, tractors being chargeable to nil rate/basic duty under the Tariff must be treated as exempted goods for the purpose of Rule 2(d), and therefore the appellants are subject to the operative provisions of Rule 6(2)/(3). [Paras 30, 31]Automobile cess and education cess are duties of excise; tractors are to be treated as 'exempted goods' for the purpose of Rule 2(d) of the Cenvat Credit Rules.Entitlement to Cenvat credit on inputs exclusively used in manufacture of exempted goods - effect of Explanation III to Rule 6(3) of the Cenvat Credit Rules - Whether, under Rule 6(2) of the Cenvat Credit Rules, the appellant could take Cenvat credit in respect of non-common inputs (inputs exclusively used in manufacture of exempted tractors) where common inputs were also used, and the temporal effect of Explanation III added to Rule 6(3). - HELD THAT: - The Tribunal accepted the prior decisions (e.g., Hetero Labs and others) that, prior to the Explanation, credit was available even on non-common inputs exclusively used for exempted final products where common inputs were also used and separate accounts were not maintained. The Tribunal further held that Explanation III, inserted by Notification No. 27/2005 dated 16-5-2005, disallows such credit prospectively from the date the explanation came into force; because the notification itself states it comes into force on publication, the Explanation applies from 16-5-2005 and not earlier. Accordingly the appellants are entitled to claim credit on non-common inputs up to the date Explanation III took effect but not thereafter. [Paras 32]Credit on inputs exclusively used in manufacture of exempted tractors is allowable under Rule 6(2) up to 16-5-2005; Explanation III operates from its publication date and precludes such credit thereafter.Nature of Rule 6(3)(b) payment (tax or adjustment) - deduction from sale price for statutory payment - Whether the amount payable under Rule 6(3)(b) (8%/10% reversal) is a tax (so as to permit deduction from the sale price recovered from the customer) or is merely an adjustment of Cenvat credit. - HELD THAT: - The Tribunal found that the 8%/10% payment mandated by Rule 6(3)(b) is a statutory mechanism for adjustment of Cenvat credit where separate accounts are not maintained and not a duty/tax levied on the goods (the goods are exempt from basic duty); the rule's object is to regulate credit and avoid inadmissible credit rather than to raise revenue. Consequently the payment is not a tax for the purpose of allowing deduction from the sale price charged to customers. The Larger Bench decision holding recovery as duty for Section 11D purposes was distinguished on its facts and legal point; here the payment was not recovered as a duty and the invoice practice showed no deduction claimed, so abatement/deduction was not available. [Paras 33, 34]The 8%/10% reversal under Rule 6(3)(b) is not a tax for deduction from sale price; deduction is not permissible.Final Conclusion: The Tribunal held that automobile cess and education cess are duties of excise but tractors are to be treated as exempted goods for the purposes of Rule 2(d). The appellants are entitled to Cenvat credit on inputs (including non-common inputs) used exclusively in manufacture of exempted tractors up to the date Explanation III to Rule 6(3) came into force (16-5-2005); thereafter such credit is excluded. The 8%/10% reversal under Rule 6(3)(b) is an adjustment of credit and not a tax deductible from the sale price. Consequentially, three appeals allowing credit and setting aside penalties were allowed and one appeal claiming deduction of 8% was dismissed. Issues Involved:1. Eligibility of Cenvat credit on inputs used for both exempted and dutiable goods.2. Treatment of education cess and automobile cess as excise duty.3. Applicability of Rule 6(2) and Rule 6(3)(b) of the Cenvat Credit Rules.4. Deductibility of the 8/10% amount paid under Rule 6(3)(b) from the total price charged to customers.Detailed Analysis:1. Eligibility of Cenvat Credit on Inputs:The appellants, engaged in manufacturing tractors and other dutiable items, took Cenvat credit for inputs used in both exempted tractors and dutiable goods without maintaining separate accounts. As per Rule 6(2) of the Cenvat Credit Rules, 2002/2004, they were required to pay an amount equal to 8% or 10% of the total price of exempted goods. The scrutiny revealed that credit was also taken for inputs exclusively used for exempted products, which is not permissible under Rule 6(1).2. Treatment of Education Cess and Automobile Cess:The appellants argued that tractors cannot be considered exempted goods because education cess and automobile cess, which are forms of excise duty, were paid on them. The Commissioner, Central Excise, Nagpur, held that cess is not a duty of excise as it is levied under an act other than the Central Excise Act, 1944. However, the Tribunal noted that Section 9(1) of the Industrial (Development and Regulation) Act, 1951, and various Supreme Court decisions (e.g., Baranagar Jute Mills v. Inspector) confirm that cess is a duty of excise. Thus, tractors are not exempted goods as they attract education cess, which is a duty of excise.3. Applicability of Rule 6(2) and Rule 6(3)(b):The Tribunal examined whether credit could be taken on non-common inputs used exclusively for exempted products. Previous Tribunal decisions (e.g., Hetero Labs Ltd. v. CCE) allowed credit on non-common inputs. The Tribunal held that the appellants are entitled to take credit on non-common inputs used in the manufacture of exempted products up to the date when Explanation III to Rule 6(3) came into force (16-5-2005).4. Deductibility of the 8/10% Amount:The Tribunal considered whether the 8/10% amount paid under Rule 6(3)(b) should be treated as a tax and thus eligible for deduction from the total price charged to customers. It was concluded that this amount is not a tax but an adjustment for credit taken on inputs used in the manufacture of exempted products. Therefore, it is not eligible for deduction.Judgments:- Appeal No. E/2184/06 & E/3118/06 & E/471/06: The appellants are entitled to take credit on all inputs, including those exclusively used for exempted products. Penalty imposed is set aside.- Appeal No. E/2183/06: The appellants are not entitled to deduct the 8/10% amount from the total amount recovered from the customer. Appeal dismissed.- Appeal No. E/471/06: It is held that tractors are not to be considered as exempted goods, but credit will be available as per the decision in Hetero Labs & Others.Conclusion:The Tribunal's judgment clarifies the eligibility of Cenvat credit on inputs used for both exempted and dutiable goods, the treatment of education and automobile cess as excise duty, and the applicability of Rule 6(2) and Rule 6(3)(b) of the Cenvat Credit Rules. It also establishes that the 8/10% amount paid under Rule 6(3)(b) is not a tax and thus not deductible from the total price charged to customers.