2015 (7) TMI 267 - HC - Central Excise

High Court affirms Tribunal's ruling on capital goods credit eligibility; penalty not applicable

The High Court upheld the Tribunal's decision, ruling that leasing the power plant did not constitute removal of capital goods as per Rule 3 (5) of the ... Rule 3(5) of the Cenvat Credit Rules, 2004 - removal of inputs or capital goods as such - invoice under Rule 9 of the Cenvat Credit Rules, 2004 - physical removal - deeming provision - input services and admissibility of Cenvat credit - penalty under Section 11AC of the Central Excise Act - extended period of limitation and suppressionRule 3(5) of the Cenvat Credit Rules, 2004 - removal of inputs or capital goods as such - invoice under Rule 9 of the Cenvat Credit Rules, 2004 - physical removal - deeming provision - Whether leasing the captive power plant to a third party amounted to removal of inputs or capital goods 'as such' under Rule 3(5), attracting repayment of Cenvat credit. - HELD THAT: - The Court agreed with the Tribunal that Rule 3(5) applies only where inputs or capital goods 'are removed as such from the factory' and such removal must be effected under the cover of an invoice as envisaged by Rule 9. There was no invoice for removal from the assessee's factory, and the capital goods remained installed within the same premises; the rule contains no separate deeming fiction treating a lease as a deemed removal. Reliance on precedents distinguishing cases of physical removal and on the principle that a specific deeming provision is required to attribute removal on other transactions supports the conclusion that the statutory trigger in Rule 3(5) was not attracted on the facts of this case. [Paras 16, 17, 18]Leasing of the power plant did not amount to removal of inputs or capital goods 'as such' under Rule 3(5); the rule was not attracted in the absence of removal under invoice.Input services and admissibility of Cenvat credit - Rule 3(5) of the Cenvat Credit Rules, 2004 - scope of reversal - Whether credit taken on input services used in setting up the power plant was required to be reversed under Rule 3(5). - HELD THAT: - The Court noted that Rule 3(5) speaks in terms of 'inputs or capital goods' and contains no provision deeming removal of input services or mandating reversal of credit for input services in the circumstances covered by the rule. The Tribunal's conclusion that Rule 3(5) does not operate to deny or require reversal of credit on input services on the factual matrix of this lease was accepted. [Paras 16, 17]Cenvat credit on input services was not liable to be reversed under Rule 3(5) on the facts of this case.Penalty under Section 11AC of the Central Excise Act - extended period of limitation and suppression - bona fide belief - Whether the extended period of limitation could be invoked and penalty under Section 11AC imposed for alleged suppression in leasing the power plant. - HELD THAT: - The Tribunal found, and this Court upheld, that there was no suppression with intent to evade payment under Rule 3(5). The assessee had disclosed proposals to set up a captive power plant and had submitted revised plans; the factual matrix did not demonstrate conscious suppression or fraudulent intent warranting invocation of extended limitation or imposition of penalty. The Court endorsed the Tribunal's factual conclusion and reasoning on these aspects. [Paras 14, 18, 19]Extended period of limitation and penalty under Section 11AC were not sustainable on the facts; no suppression was established.Final Conclusion: Appeals dismissed; the Tribunal's finding that Rule 3(5) was not attracted (no removal under invoice), that input-service credit need not be reversed under that rule, and that penalty/extended limitation for suppression were not sustainable, is upheld. Issues Involved:1. Whether the inputs and capital goods used in a power plant and on which Cenvat credit of duty had been taken could be deemed as removed as such in terms of Rule 3 (5) of the Cenvat Credit Rules, 2004, when leased by the assessee.2. Whether on leasing the power plant, the assessee must pay an amount equal to the credit availed in respect of such inputs or capital goods under Rule 3 (5) of the Cenvat Credit Rules, 2004.3. Whether the power plant and the inputs, capital goods, and input services used in the power plant could be considered an integral part of the factory of the assessee to be eligible inputs, capital goods, and input services under Rule 2 (a), Rule 2 (k), and Rule 2 (l) of the Cenvat Credit Rules, 2004, even after the lease.4. Whether the assessee is liable to pay an equal amount of penalty under Section 11AC of the Central Excise Act, 1944 for consciously suppressing the fact of removal of the power plant by way of lease.Issue-Wise Detailed Analysis:1. Deeming Removal of Inputs and Capital Goods on Leasing:The Tribunal concluded that the leasing of the power plant by the assessee to another company did not constitute 'removal of capital goods as such' from the factory. The Tribunal relied on the decision in BLIT Industrial Packaging Company Ltd. v. CCE, Salem, which held that there was no physical removal of capital goods from the factory, and thus, Rule 3 (5) of the Cenvat Credit Rules, 2004, was not applicable. The Tribunal emphasized that no invoice was issued for the removal of capital goods, as required under Rule 11 (1) of the CCR, 2002.2. Payment of Amount Equal to Credit Availed on Leasing:The Tribunal held that since there was no physical removal of capital goods from the factory premises, the provisions of Rule 3 (5) of the CCR, 2004, which mandate payment of an amount equal to the credit availed, were not applicable. The Tribunal's decision was supported by the Supreme Court's ruling in Shyam Oil Cake Ltd. v. CCE, Jaipur, which stated that deeming provisions must be explicitly stated in the language of the provision, and no such deeming provision existed in Rule 3 (5).3. Eligibility of Inputs, Capital Goods, and Input Services Post-Lease:The Tribunal found that the power plant remained an integral part of the assessee's factory even after the lease, as it continued to supply electricity to the cement manufacturing plant of the assessee. The Tribunal noted that all raw materials required for electricity generation were supplied by the assessee, and the entire electricity generated was used by the assessee. Therefore, the inputs, capital goods, and input services used in the power plant remained eligible under Rule 2 (a), Rule 2 (k), and Rule 2 (l) of the CCR, 2004.4. Liability for Penalty under Section 11AC of the Central Excise Act, 1944:The Tribunal did not find sufficient grounds to impose a penalty under Section 11AC of the Central Excise Act, 1944. The Tribunal concluded that there was no suppression of facts by the assessee, as the department was informed about the setting up of the captive power plant and the revised ground plan. The Tribunal also noted that the assessee had a bona fide belief that they were entitled to avail the credit, irrespective of the lease agreement with KPPL.Conclusion:The High Court upheld the Tribunal's decision, agreeing that there was no removal of goods as such from the factory premises and that Rule 3 (5) of the CCR, 2004, was not applicable. The Court also concurred with the Tribunal's interpretation that the power plant remained an integral part of the assessee's factory, and thus, the inputs, capital goods, and input services used were eligible for Cenvat credit. The Court dismissed the appeals, finding no merit in the Revenue's arguments and no reason to interfere with the Tribunal's well-considered findings.