2007 (6) TMI 47 - AT - Central Excise

Tribunal rules in favor of appellants, finding no duty on capital goods transfer under Cenvat Credit Rules

The Tribunal allowed the appeal, holding that the demand for duty on the appellants regarding the capital goods was unwarranted under the Cenvat credit ... Cenvat credit recovery on removal of capital goods as such - Interpretation of 'as such' in Rule 3(4) of the Cenvat Credit Rules, 2002 - Physical removal and invoice requirement under Rule 7 of CCR read with Rule 11 of CER - Distinction between removal as such and removal as waste/scrap (erstwhile Rule 57S(2)) - Transfer of unutilised Cenvat credit on change of ownership under Rule 8 of CCR, 2002Cenvat credit recovery on removal of capital goods as such - Interpretation of 'as such' in Rule 3(4) of the Cenvat Credit Rules, 2002 - Physical removal and invoice requirement under Rule 7 of CCR read with Rule 11 of CER - Transfer of unutilised Cenvat credit on change of ownership under Rule 8 of CCR, 2002 - Whether Rule 3(4) of the Cenvat Credit Rules, 2002 applies to require recovery of credit when a factory (with capital goods installed) is transferred in toto to another entity - HELD THAT: - The Tribunal held that subrule (4) of Rule 3 of the CCR, 2002 requires two conditions to be satisfied before the Revenue can recover credit: (a) physical removal of the capital goods from the factory, and (b) such removal must be under an invoice as contemplated by Rule 7 of the CCR read with Rule 11 of the CER which requires the invoice to be signed by the owner of the factory or his authorised agent. The expression 'as such' in Rule 3(4) is to be understood in light of the erstwhile Rule 57S(2), which distinguishes removal 'as such' (whether unused or used) from removal as waste or scrap; but the statutory scheme for levy of duty on removal is linked to physical removal under invoice. In the present case there was no physical removal of capital goods; the factory (with capital goods) was transferred by sale and the appellants ceased to be owners and could not issue the invoice contemplated by Rule 11. Further, Rule 8 of the CCR, 2002 expressly provides for transfer of unutilised Cenvat credit on change of ownership if stocks or capital goods are transferred, indicating that the legislative scheme contemplates transfer of unutilised credit rather than recovery of utilised credit upon change of ownership. In that light, recovering credit already taken and lawfully utilised by treating the sale of the factory as 'removal' under Rule 3(4) is not warranted under the Cenvat scheme. [Paras 6, 8, 9]Rule 3(4) of the CCR, 2002 is not attracted where a factory with capital goods installed is transferred in toto without physical removal and without invoicing by the transferor; the demand under Rule 3(4) therefore cannot be sustained.Final Conclusion: The impugned demand and penalty were set aside and the appeal was allowed. Issues Involved:1. Applicability of Rule 3(4) of the Cenvat Credit Rules, 20022. Interpretation of 'removal as such' of capital goods3. Transfer of ownership and its impact on Cenvat credit4. Provisions for transfer of unutilized Cenvat creditIssue-wise Detailed Analysis:1. Applicability of Rule 3(4) of the Cenvat Credit Rules, 2002:The primary issue in this appeal is the applicability of sub-rule (4) of Rule 3 of the Cenvat Credit Rules, 2002 (CCR). The department contended that the transfer of the factory, including capital goods, to M/s. ITC Ltd. constituted a 'removal' of capital goods, necessitating the payment of an amount equivalent to the capital goods credit availed. The appellants argued that the transfer of the factory did not equate to the removal of capital goods from the factory, as the goods remained installed within the factory premises.2. Interpretation of 'removal as such' of capital goods:The appellants contended that 'removal as such' meant the removal of unused capital goods, whereas the department argued that it included both used and unused goods. The Tribunal noted that the expression 'as such' was not used in the erstwhile Rule 57-S, which dealt with the utilization of capital goods and the credit of duty paid thereon. The Tribunal concluded that the expression 'as such' in Rule 3(4) should be understood to mean the removal of capital goods, whether used or unused, from the factory.3. Transfer of ownership and its impact on Cenvat credit:The Tribunal emphasized that for Rule 3(4) to apply, there must be a physical removal of capital goods from the factory under an invoice as per Rule 7 of the CCR, 2002, read with Rule 11 of the Central Excise Rules, 2002 (CER). In this case, the factory, along with the capital goods, was transferred to M/s. ITC Ltd. without any physical removal of the goods from the factory. Therefore, the provisions of Rule 3(4) were deemed inapplicable.4. Provisions for transfer of unutilized Cenvat credit:The Tribunal also considered Rule 8 of the CCR, 2002, which allows for the transfer of unutilized Cenvat credit in the event of a change in ownership, provided the stock of inputs and capital goods is also transferred along with the factory. The Tribunal noted that the legislative intent was not to recover utilized Cenvat credit in such cases, as no specific provision was made for such recovery.Conclusion:The Tribunal set aside the impugned order and allowed the appeal, concluding that the demand for duty on the appellants in respect of the capital goods was unwarranted under the Cenvat credit scheme. The Tribunal held that the transfer of the factory did not constitute a removal of capital goods as envisaged under Rule 3(4) of the CCR, 2002, and there was no provision for recovering utilized Cenvat credit in the event of a change in ownership of the factory.Operative Portion:The operative portion of the order was pronounced in open Court on 19-6-2007.