2023 (10) TMI 958 - AT - Central Excise

Demand for CENVAT Credit of Rs. 2.4 Crore set aside; Rs. 28,700 credit recovery confirmed with penalties.

The Tribunal modified the impugned Order by setting aside the demand for CENVAT Credit of Rs. 2,40,75,746/- along with interest and penalty, as the ... CENVAT Credit on rejected inputs - suo moto credit - process amounting to manufacture or not - goods received in their factory and subjected to various processes like blackening, buffing, final inspection, packing etc. which were subsequently exported, without payment of duty. Admissibility of CENVAT Credit of Rs. 2,40,75,746/- on the inputs/goods subjected to various processes viz. blackening, buffing, final inspection, packing etc. in the factory and the resultant the finished goods were exported - HELD THAT:- No evidence has been placed by the Revenue in support of the allegation that without subjecting the received inputs to various processes by the appellant, these goods be considered as marketable and could be exported as it is. The processes undertaken by the appellant are necessary to put the product in marketable condition as per the requirement of the customers; the appellants, on the other hand, adduced evidence in the form of rejection letters of the customers rejecting the goods supplied by the Appellant as it did not meet their requirement as per the order placed. Hence, various processes blackening, buffing, final inspection, packing etc. carried out on the inputs be considered as processes amounting to manufacture. More or less similar principle has been laid down by the Hon’ble Apex Court in the case of FLEX ENGG. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE [2012 (1) TMI 17 - SUPREME COURT] where it has been observed In the absence of the revenue having adduced any such evidence or contorted the assessee’s claim that the machines cannot be sold unless testing is done with some alternative evidence as to their marketability, the stand of the revenue cannot be accepted. Therefore, the processes carried by the appellant in their premises result into manufacture and accordingly, CENVAT Credit availed on the duty paid on inputs received is admissible to the appellant. Suo moto credit - HELD THAT:- The credit of Rs. 28,700/- is irregular in view of the judgment of Larger Bench of this Tribunal in the case of BDH INDUSTRIES LTD. VERSUS COMMISSIONER OF C. EX. (APPEALS) , MUMBAI-I [2008 (7) TMI 78 - CESTAT MUMBAI-LB]. The impugned Order is modified to the extent of setting aside demand of CENVAT credit of Rs.2,40,75,746/- with interest and penalty, however, the recovery of suo moto credit of Rs.28,700/- with interest and penalty is confirmed - Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit on inputs received in a form requiring processes (blackening, buffing, drilling, burr removal, grinding, final inspection, packing etc.) that render the goods marketable constitutes admissible credit because those processes amount to 'manufacture' within the meaning of Section 2(f) of the Central Excise Act, 1944 (and Note 6 to Section XVI of the Tariff), when the resultant goods are subsequently exported under Letter of Undertaking. 2. Whether suo moto CENVAT credit availed on inputs initially rejected and on which proportionate credit had already been debited (and invoices cancelled / goods not cleared) is admissible. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Admissibility of CENVAT credit where in-factory processes render goods marketable (whether processes constitute 'manufacture') Legal framework: Section 2(f) of the Central Excise Act, 1944 defines 'manufacture' and the concept of when an article becomes excisable; Note 6 to Section XVI of the Tariff treats conversion of an incomplete or unfinished article into a finished article as manufacture; Rule/Modvat/CENVAT credit principles treat goods used in the process of manufacture as inputs eligible for credit until manufacture is complete. Precedent Treatment: The Tribunal applied and followed the principle in the cited Supreme Court authority (Flex Engineering Ltd) that a product not in a marketable state cannot be treated as finished and excisable; burden to show marketability prior to final processes lies on the department. The Tribunal also relied on analogous decisions recognizing that processes necessary to render goods saleable may amount to manufacture. Interpretation and reasoning: The Tribunal examined facts showing the goods received by the appellant required specific finishing processes to meet contractual/customer requirements. Evidence before the Tribunal included detailed descriptions of the processes and customer rejection letters demonstrating that goods in the received state were not marketable to the customers. The revenue produced no evidence proving that the goods, as received, were marketable without the processes. Applying the legal test that manufacture is not complete until the product is marketable (and noting the department's burden to prove marketability), the Tribunal concluded the in-factory processes constituted steps of manufacture and, therefore, the inputs were correctly treated as inputs eligible for CENVAT credit under the statutory and rule framework. Ratio vs. Obiter: Ratio - where inputs are in an incomplete/unmarketable state and in-factory processes are necessary to render them marketable to contractual specifications, those processes can constitute 'manufacture' under Section 2(f) and Note 6, making CENVAT credit on inputs admissible; absence of departmental proof of marketability prior to such processing strengthens the assessee's entitlement. The Tribunal's reliance on the Supreme Court principle that the department bears the burden of proving pre-processing marketability is ratio. Conclusion: The Tribunal set aside the demand for recovery of CENVAT credit of Rs. 2,40,75,746/-, holding that the processes carried out in-factory amounted to manufacture and the credit availed on duty-paid inputs was admissible (subject to interest/penalty findings being displaced as set out). ISSUE-WISE DETAILED ANALYSIS - Issue 2: Admissibility of suo moto CENVAT credit on rejected inputs (credit of Rs. 28,700/-) Legal framework: CENVAT credit rules and relevant Tribunal larger-bench precedents govern the circumstances in which credit can be reversed or re-availed; principles distinguish legitimate reversal/adjustment from impermissible suo moto availment where invoices cancelled and proportionate credit previously debited. Precedent Treatment: The Tribunal applied binding/authoritative precedent of a Larger Bench of the Tribunal (BDH Industries Ltd) which holds that such suo moto credit re-availment is irregular in circumstances where invoices were cancelled, proportionate credit had been debited and goods were not cleared. Interpretation and reasoning: On the facts, proportionate credit had already been debited in respect of the rejected inputs, invoices were cancelled and the inputs were not cleared from factory. Applying the Larger Bench's ruling, the Tribunal found that the claimant's suo moto re-availment did not meet the legal criteria for legitimate credit and was irregular. Ratio vs. Obiter: Ratio - re-availment of CENVAT credit suo moto on inputs that were rejected, had invoices cancelled, and where proportionate credit had already been debited is irregular and not permissible under the CENVAT regime as interpreted by the Larger Bench. Conclusion: The Tribunal confirmed recovery (with interest and penalty) of the suo moto credit of Rs. 28,700/-, holding it irregular in view of the Larger Bench precedent. Cross-reference and operative result Having held that the in-factory finishing processes constituted manufacture and entitled the appellant to CENVAT credit on inputs, the Tribunal modified the impugned order by setting aside the demand relating to Rs. 2,40,75,746/-. Separately, relying on the Larger Bench precedent, the Tribunal confirmed the demand relating to the suo moto re-availment of Rs. 28,700/-.