2024 (2) TMI 1079 - AT - Central Excise

CENVAT credit allowed even when process doesn't constitute manufacture if duty paid on final products

CESTAT Chandigarh allowed the appeal regarding recovery of CENVAT credit with interest and penalty. The appellant had availed credit on inputs from ... Recovery of CENVAT Credit alongwith interest and penalty - credit availed by the appellant on inputs during 12.02.2004 onwards - process amounting to manufacture or not - HELD THAT:- The issue involved in the present case is no more res integra and has been consistently held by various decisions of the Tribunal, upheld by the Hon’ble Supreme Court and High Court wherein it has been held that when process undertaken by the assessee does not amount to manufacture, even then the CENVAT credit is admissible if such inputs are cleared on payment of duty which would amount to reversal of credit availed. Reliance can be placed in the case of COMMISSIONER OF CENTRAL EX. & CUS., SURAT-III VERSUS CREATIVE ENTERPRISES [2008 (7) TMI 311 - GUJARAT HIGH COURT] which was upheld by the Hon’ble Apex Court in COMMISSIONER VERSUS CREATIVE ENTERPRISES [2009 (7) TMI 1206 - SC ORDER] wherein it was held that once duty on final products has been accepted by the Department in the case, CENVAT credit cannot be denied even if the activity does not amount to manufacture. The impugned order is not sustainable in law and therefore is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit availed on inputs is liable to be disallowed where the process undertaken (laminating/metallising/printing of duty-paid film) does not amount to 'manufacture' under law. 2. Whether CENVAT credit can be retained where the inputs on which credit was availed are subsequently cleared on payment of duty equal to or exceeding the credit availed (i.e., whether such clearance on payment amounts to reversal of credit under the CENVAT Credit Rules). 3. Whether interest under Section 11AB and penalty under Rule 15 of the CENVAT Credit Rules are properly leviable where CENVAT credit is disallowed for the reason that the process does not amount to manufacture. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of CENVAT credit where the process does not amount to manufacture Legal framework: The CENVAT Credit Rules permit availing of credit on inputs and capital goods used in the manufacture of dutiable goods. The Central Excise law distinguishes between processes that constitute 'manufacture' (attracting excise duty) and processes that do not; if an activity does not amount to manufacture, the legal character of inputs/outputs for credit purposes is in question. Precedent treatment: The Tribunal and higher courts have addressed situations where lamination/metallisation/printing on duty-paid film was held not to create a new and distinct product and thus did not constitute manufacture. However, subsequent authority and administrative circulars have been considered with respect to whether credit can be retained subject to reversal on clearance. Interpretation and reasoning: The Court examined the nature of the activity - printing/laminating/metallising of an existing film - and the settled principle that if a film remains essentially a film after processing (no new and distinct article emerges), the activity does not amount to manufacture. The impugned departmental conclusion that such activity is not manufacture was not disputed as a factual/legal finding but was the pivot of the revenue's contention to disallow credit. Ratio vs. Obiter: Ratio - where the processing does not amount to manufacture, such processing per se does not automatically disentitle the assessee to CENVAT credit if statutory mechanisms for reversal on clearance are available and complied with. Obiter - ancillary observations on historical payment of duty prior to judicial developments and tariff amendments. Conclusions: The Tribunal treats the proposition that laminating/metallising of film does not amount to manufacture as established for purposes of the appeal; the legal consequence is addressed under Issue 2 rather than resulting automatically in disallowance of credit. Issue 2 - Effect of clearing inputs/processed inputs on payment of duty equal to or higher than credit availed (reversal mechanism) Legal framework: The CENVAT Credit Rules provide for reversal of credit where inputs are cleared as such or when conditions for retention of credit are not met; reversal may be achieved by payment of an amount equivalent to the credit taken upon clearance. Precedent treatment: The Tribunal and High Courts have consistently held that when inputs or processed inputs (which do not amount to manufacture) are cleared on payment of duty equal to or exceeding the credit already availed, such payment operates as reversal of credit and precludes a separate demand for recovery of credit. This line of decisions has been followed and affirmed in higher courts in reported rulings relied upon by the appellant. Interpretation and reasoning: The Tribunal reasoned that the statutory scheme contemplates an assesseewho undertakes a non-manufacturing process may either be found to have not made dutiable goods or, alternatively, may discharge liability on clearance of the processed goods; where the latter occurs and the duty paid on clearance equals or exceeds the CENVAT credit taken, that payment is functionally equivalent to reversal under the Rules. The Tribunal emphasized consistency of this approach across multiple decisions and the absence of a valid basis for imposing an additional recovery when reversal has already been effected by payment on clearance. Ratio vs. Obiter: Ratio - CENVAT credit is admissible/maintainable (i.e., cannot be recovered back) where the inputs or processed inputs have been cleared on payment of duty equal to or exceeding the credit availed, because such payment amounts to reversal of credit under the Rules. Obiter - references to administrative circulars and tariff amendments that post-date the transaction periods are not determinative of the reversal question. Conclusions: The Tribunal held that the departmental demand disallowing the CENVAT credit was unsustainable where the appellant had paid duty on clearance that equalled or exceeded the credit availed; in such circumstances no further reversal or recovery of credit is justified and the impugned recovery order must be set aside. Issue 3 - Liability for interest under Section 11AB and penalty under Rule 15 where credit is disallowed on the ground that processing is not manufacture Legal framework: Section 11AB prescribes interest on delayed payment of duty; Rule 15 provides for imposition of penalty in certain cases of misuse or improper availing of credit. Precedent treatment: Authorities have held that interest and penalty implications depend on whether a demand for duty or reversal of credit is legally sustainable; where reversal is effectively effected by payment on clearance and no further shortfall is shown, ancillary interest and penalty claims cannot be sustained. Interpretation and reasoning: Because the Tribunal concluded that the credit was adequately reversed by payment on clearance (see Issue 2), there is no lawful shortfall of duty for the period in question that would attract interest under Section 11AB or penalty under Rule 15. The impugned order's directions for recovery of interest and levy of penalty were therefore predicated on a disallowance that the Tribunal found unsustainable. Ratio vs. Obiter: Ratio - interest and penalty cannot be imposed where there is no legally sustainable duty demand or unreversed credit; Obiter - discussion of the precise conditions for invoking Rule 15 in different factual matrices. Conclusions: The directions for recovery of interest under Section 11AB and imposition of penalty under Rule 15, being consequent upon a disallowance that the Tribunal set aside, were also set aside; consequential relief follows as per law. Overall Disposition The Tribunal, having regard to the legal framework and consistent judicial precedents, holds that where the process does not amount to manufacture, CENVAT credit availed need not be disallowed if the inputs/processed inputs are cleared on payment of duty equal to or higher than the credit availed; such payment constitutes reversal of credit under the CENVAT Credit Rules. Consequently, the impugned order disallowing credit and directing recovery of interest and imposition of penalty was set aside and the appeal allowed with consequential relief as per law.