2025 (9) TMI 1636 - AT - Central Excise

Concessional 2% excise rate under N.N.1/2011 allowed; removal date under Central Excise Rules 4-5 decides duty liability

CESTAT allowed the appellant the concessional 2% excise rate under N.N. 1/2011 for garments, holding goods cleared from bonded warehouse before 1.03.2016 ... Benefit of concessional rate of 2% under N/N. 1/2011 – CE dated 1.03.2011 - job workers manufactured the final products upon fixation of brand labels owned by TCNS - liability to pay central excise duty on goods cleared before 1.03.2016 from factory or job worker to the retail outlets - payment of duty at 2% instead of 12.5% on ready-made garments under the brand names, “W”, “Wishful” and “Aurelia” having MRP Rs.1,000/- and above after 1.03.2016 - non-availing and utilisation of CENVAT credit of inputs and input services - HELD THAT:- From the records of the case, it is apparent that the goods received from the job workers were retained in the bonded warehouse from where they were cleared to the trading warehouse and then to the retail outlet. The goods which were lying in the retail outlet on 1.03.2016 were cleared from the bonded warehouse prior to the said date, when no excise duty was leviable on the said goods. The excise duty was imposed only w.e.f. 01.03.2016 and in that view, TCNS got their bonded warehouse registered with the excise department and cleared the goods from there on payment of appropriate excise duty. The goods which have been cleared prior to the said date were not chargeable to excise duty and therefore TCNS cannot be called upon to pay excise duty in respect of the goods lying in the retail outlet on the intervening night of 29th February to 1st March 2016. The Central Excise Rules, 1944, especially Rule 4 and 5, which provides for duty payable on removal and the date for determination of duty and tariff valuation. The provisions of Rule 4 and 5 make it explicitly clear that duty is payable on the goods on removal from the factory/warehouse and, therefore, rate of duty shall be the rate or value as is prevalent on the date when such goods are removed from a factory or warehouse. In the present case, the assessee has two separate businesses, one manufacturing of ready-made garments on job work basis and the other was of providing taxable output services towards ‘renting of immovable property’, ‘maintenance and repair’ and were paying service tax on it as well as ‘rent a cab service’ and legal service on reverse charge mechanism. They were, accordingly registered with the Central Excise Department as well as with Service Tax Department separately. They had availed CENVAT credit of service tax paid on the services of ‘renting of immovable property’, ‘repair and maintenance’ and ‘consultancy services’ and utilised the entire credit for discharging its service tax liability on the outward taxable services partly by utilising the credit and partly in cash which is reflected in ST-3 returns for the relevant period - The Revenue is wrong in construing the CENVAT credit availed as against the service tax on the input services, namely, ‘renting of immovable property’, ‘maintenance and repair charges’ and ‘business auxiliary services’ and utilised it for the payment of service tax liability on the corresponding output taxable services, to have been availed as against the manufacturing of the ready-made garments. The fact is that the manufacturing business is distinct from the service activity. The Tribunal in the case of Girna Organics Private Limited [2017 (7) TMI 724 - CESTAT MUMBAI] have settled this anomaly where identical issue had arisen, whether renting of immovable property will be eligible for exemption under the Notification when the factory of the appellant availed credit on input of capital goods used for manufacture of final product as the appellant was having independent activity of manufacturing of excisable goods for which they were availing CENVAT credit on input and capital goods. The reversal of the credit amounts to non-taking of the credit on the inputs, and the benefit of the notification granting exemption is available. The learned Commissioner, rightly allowed the benefit of the notification to TCNS. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether excise duty is leviable on branded ready-made garments that were cleared from bonded/trading warehouse before 01.03.2016 but were physically lying in the assessee's retail outlets on the intervening night of 29.02.2016-01.03.2016, having regard to the charging provisions and Rules 4-5 (place/date of removal) of Central Excise Rules. 2. Whether availment and utilisation of CENVAT credit of service tax on certain services (renting of immovable property, repair & maintenance, consultancy/business auxiliary services) by an assessee carrying on two distinct businesses (manufacturing and taxable services) disentitles the assessee from the benefit of concessional/exempt notifications that conditionally prohibit taking CENVAT credit. 3. Whether subsequent reversal (debiting/redeposit) of CENVAT credit (along with interest), including reversal made after issuance of show-cause notice but before final adjudication, operates as 'non-availment' of credit for purposes of eligibility under the concessional/exempt notification. 4. Ancillary: Whether the extended period of limitation and penalty were invocable in respect of the demand (as pressed by the Revenue) - insofar as the Tribunal's conclusions on issues (1)-(3) affect the quantification and sustainment of demand and penalty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability on goods lying in retail outlets as on 01.03.2016 (placement/determination of charge) Legal framework: Section 4 (valuation/charging) of the Central Excise Act read with definitions of 'place of removal' and Central Excise Rules 1944/2002, particularly Rule 4 (duty payable on removal) and Rule 5 (rate/value applicable is that in force on date when goods are removed from factory/warehouse). Precedent treatment: The Tribunal relied on the statutory scheme and on established principles distinguishing manufacture/removal (taxable event) from subsequent sale at retail; earlier authorities were cited by parties but the Tribunal's approach is founded on text of Rules 4-5 rather than a novel case law departure. Interpretation and reasoning: The Court held the incidence of excise duty is linked to removal/clearance from factory/warehouse and determined by the rate/value in force on the date of such removal. Goods cleared from bonded warehouse prior to 01.03.2016 (when the exemption was withdrawn) could not be subjected to excise merely because they were physically present in retail outlets on 01.03.2016. Ownership or subsequent sale at retail is not the criterion for charging excise; the operative event is removal from factory/warehouse. The Commissioner's attribution of duty on the basis that ownership/'parting of ownership' at retail outlets meant levy after 01.03.2016 was characterised as fallacious. Ratio vs. Obiter: Ratio - Duty is payable based on date/place of removal; goods removed from bonded warehouse before imposition of duty are not exigible to excise by subsequent physical presence in retail outlets. Obiter - Observations on nuances of stock-transfer vs sale to franchisees serve explanatory purpose but do not extend the ratio beyond the rule on removal. Conclusions: Demand of excise duty on goods cleared prior to 01.03.2016 but lying in retail outlets on 29.02-01.03.2016 is unsustainable; impugned levy in respect of such goods is set aside and amounts reversed/refunded where paid. (This conclusion disposed of the principal quantum of demand.) Issue 2 - Effect of availing/using CENVAT credit of service tax on eligibility under concessional/exempt notifications Legal framework: Notifications granting exemption/concessional rates (Notification Nos.30/2004, 1/2011 and subsequent amendments) conditionally prohibit availment of CENVAT credit of inputs/input services to qualify. CENVAT Credit Rules govern credit utilisation; distinctness of activities is relevant to applicability of the proviso. Precedent treatment: The Tribunal followed and applied prior tribunal decisions (e.g., Girna Organics; MTR Foods) which treated manufacturing and separate taxable service activities as distinct businesses such that credits availed in relation to one activity (services) do not automatically disqualify exemption for the other activity (manufacture) where the credit was not availed for the manufacturing activity. Interpretation and reasoning: The Court accepted factual distinction - assessee operated separate taxable services (renting, repair/maintenance, consultancy) and a manufacturing activity. The service tax CENVAT credits were availed and utilised against service tax liabilities of the service activity (reflected in ST-3 returns and other records) and were not availed for discharge of central excise duty on manufacture. Therefore the condition in the notifications (no credit of inputs/input services taken) was not breached with respect to the manufacturing activity. Reliance on Girna Organics and MTR Foods supported the proposition that credit taken for one distinct activity cannot be imputed to another separate activity for notification disqualification. Ratio vs. Obiter: Ratio - CENVAT credit availed/utilised for a distinct taxable service activity does not, by itself, disentitle a taxpayer from conditional exemption/concessional rates applicable to manufacturing activity, provided there is no credit availed in relation to manufacture. Obiter - Extended factual observations about record-keeping and returns supporting distinctness. Conclusions: The Tribunal upheld entitlement to concessional notification benefits insofar as service-related CENVAT credits were concerned; Revenue's construction that any CENVAT credit availed by the entity (without parsing activity) disqualifies notification benefit was rejected. Issue 3 - Effect of subsequent reversal/refund of CENVAT credit (including reversal made after show-cause notice) - treated as non-availment Legal framework: Principles developed in higher court decisions on whether reversal (debiting/repayment) of credit constitutes non-availment for purposes of conditional notification benefits; equitable and substantive consequences of reversal before final adjudication. Precedent treatment: The Tribunal relied on authoritative rulings (Chandrapur Magnets Wires and subsequent Apex Court jurisprudence, followed by tribunals/high courts in cases such as Precot Meridian, Punj Lloyd, Kitply-related decisions) holding that reversal of credit (including reversal with interest) can amount to non-availment and enable claim to conditional exemption, subject to circumstances. Interpretation and reasoning: The Court found that the assessee reversed/re-deposited the disputed service CENVAT credit of Rs.33,20,469/- along with interest of Rs.24,38,662/- under protest (dated 22.07.2021). Applying settled precedents, the Tribunal held that such reversal constitutes non-availment for the purpose of the notifications; the Revenue's reliance on timing of reversal (after issuance of SCN) did not invalidate the legal effect of reversal as 'non-availment' where reversal was made before final adjudication. The Tribunal noted supportive authority where subsequent reversal even after clearance was accepted as curing the disqualification. Ratio vs. Obiter: Ratio - Reversal of CENVAT credit (with interest), even if effected after removal or after issuance of show-cause notice but prior to final adjudication, can be treated as non-availment and thereby preserve entitlement under a notification that requires non-availment. Obiter - Discussion of factual permutations where reversal might not cure disqualification (not decided here). Conclusions: Reversal by the assessee operated to cure the alleged disqualification; the adjudicating authority's concession of the benefit (recalculating duty at 2% and allowing refund) was upheld. The assessee is entitled to refund of the reversed amount where applicable. Issue 4 - Limitation and penalty (ancillary to above conclusions) Legal framework and reasoning: The extended period of limitation and penalty were invoked in the original adjudication, but the Tribunal's dispositive findings on non-chargeability of goods removed prior to 01.03.2016 and on entitlement to notification benefits (including effect of reversal) rendered the asserted extended demand unsustainable. The Tribunal did not base its outcome on a freestanding limitation technicality but on substantive non-levy and notification compliance. Ratio vs. Obiter: Ratio - Where substantive non-liability is established (no chargeable removal or entitlement to notification), invocation of extended limitation and penalty cannot sustain a demand; specific pronouncements on limitation were incidental to substantive findings. Conclusions: The excise demand in dispute (as recalculated and as initially alleged under extended limitation) was either set aside or dropped in accordance with the holdings on Issues 1-3; penalty was not sustained where primary demand failed. The Revenue's appeal was dismissed; the assessee's appeal (seeking refund and relief) was allowed to the extent indicated.