2007 (12) TMI 210 - HC - Central Excise

High Court: Tax avoidance tactic triggers penal provisions, reinstates excise duty demand

The High Court held that despite no physical removal of the power unit, the transactions amounted to a de facto removal triggering penal provisions. The ... Admissibility of credit on capital goods (power unit) which have been sold but not removed from premises - transactions of sale of power unit and simultaneous lease of premises are wisely resorted to by the assessee as a device to avoid the tax liability on it - said purchaser, after purchasing the power unit from the assessee, has been enjoying the same as its absolute owner and has been supplying to the assessee the power generated from the said power unit on payment basis - this being so it is quite evident that the assessee-company lost its ownership and also control over the said power unit - Tribunal without proper appreciation of the said transactions has allowed the appeal of the assessee-company – revenue’s appeal allowed Issues:Challenge to Tribunal's order by Revenue regarding MODVAT credit availed by assessee on power unit sale.Analysis:The case involved a challenge by the Revenue against the order of the Customs, Excise and Sales Tax Appellate Tribunal, where the Tribunal had reversed the findings of the Commissioner of Central Excise related to the availing of MODVAT credit by the assessee on the sale of a power unit. The respondent-assessee, a cement manufacturing company, had availed MODVAT credit on capital goods in a power unit it installed for captive power consumption. Subsequently, the assessee sold the entire power unit to another company, along with leasing the land where the unit was installed. The excise authorities issued a show cause notice to recover excise duty on the capital goods. The Commissioner confirmed the demand, leading to an appeal by the assessee before the Tribunal, arguing no violation of MODVAT credit rules as the capital goods were not physically removed from its premises. The Tribunal agreed with the assessee, prompting the Revenue's appeal.The main question before the High Court was whether the Tribunal was justified in holding that the capital goods were not removed from the assessee's premises despite the sale of the power unit and leasing of the premises where it was installed. The Court examined the agreement between the assessee and the purchaser, Tata Electric Company, and concluded that the transaction constituted an absolute sale of the power unit for a valid consideration. The Court found that the purchaser had taken over the unit, continued its operation on the same premises, and supplied power to the assessee. Despite no physical removal of the unit, the Court determined that the transactions amounted to a de facto removal, triggering the penal provisions of the Central Excise Act and Rules.In its analysis, the Court emphasized that the transactions were a strategic maneuver by the assessee to avoid tax liability by maintaining ownership and control over the power unit while technically transferring it to the purchaser. The Court criticized the Tribunal for not properly considering the implications of the transactions in light of relevant legal provisions. Consequently, the Court ruled in favor of the Revenue, setting aside the Tribunal's order and reinstating the Commissioner's decision to recover excise duty on the capital goods. The appeal by the Revenue was allowed, and no costs were awarded in the case.