Cenvat credit on traded export goods denied where the plant was not a factory and no manufacture was shown.

Activities limited to random quality checks, sequencing, packing and palletising of bought-out components for export were not treated as manufacture, because the KDP Plant was set up for trading activity and was not shown to be a factory or a premises where manufacture, or any process connected with manufacture, was carried on. The legal fiction of removal of inputs as such did not apply since the goods were not removed from a factory within the statutory sense, and the plea of deemed manufacture was rejected. Cenvat credit on the components exported as such was therefore inadmissible. Penalties for irregular availment of credit were broadly sustained, with one penalty reduced and the others upheld.

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Issues: (i) Whether the activities carried on in the KDP Plant amounted to manufacture and whether the plant could be treated as part of the factory for availing Cenvat credit on bought-out components exported as such; (ii) Whether the penalties imposed for irregular availment of Cenvat credit required interference.

Issue (i): Whether the activities carried on in the KDP Plant amounted to manufacture and whether the plant could be treated as part of the factory for availing Cenvat credit on bought-out components exported as such?

Analysis: The components were received directly from vendors for export, were subjected only to random quality check, sequencing, packing and palleting, and were exported from the KDP Plant. The plant was found to have been set up for trading activity alone and was not shown to be a premises where manufacture of excisable goods, or any process connected with or incidental or ancillary to manufacture of the factory product, was carried on. The legal fiction relating to removal of inputs as such could not apply because the goods were not removed from a factory within the meaning of the Act. The Board circulars and the plea of deemed manufacture therefore did not assist the appellants.

Conclusion: The activities in the KDP Plant did not amount to manufacture, the plant was not a factory for Cenvat purposes, and Cenvat credit on the bought-out components exported as such was inadmissible.

Issue (ii): Whether the penalties imposed for irregular availment of Cenvat credit required interference?

Analysis: The irregular availment of credit on components traded through the KDP Plant attracted penal provisions. While the penalty for one period was found reasonable, the penalty for the second period was considered somewhat high and was reduced. The penalty for the third period was upheld as reasonable in view of continued irregular availment even after de-registration of the KDP Plant.

Conclusion: The penalties were sustained in substance, with only one penalty reduced from Rs. 20 lakhs to Rs. 18 lakhs.

Final Conclusion: The substantive denial of Cenvat credit was upheld and the appeals failed, with only a limited modification in the quantum of one penalty.

Ratio Decidendi: Cenvat credit is not available on goods purchased solely for export as traded goods outside a factory, and the fiction of deemed manufacture applies only where removal as such is from a factory carrying on manufacture or a connected manufacturing process.

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