2025 (11) TMI 1540 - AT - Central Excise

CENVAT credit on common input services upheld; no double reversal needed under Rules 6(3)(i) and 3(5) CCR, 2004

CESTAT Mumbai allowed the appellant's appeal, holding that CENVAT credit on common input services used for manufacturing batteries and for PPCP cleared as ... Denial of CENVAT credit on input services - common input services for manufacture of batteries as well as trading of PPCP which is liable to be paid in terms of Rule 6(3)(i) of CENVAT Credit Rules, 2004 - HELD THAT:- The undisputed facts of the case are that the appellants are engaged in the manufacture of excisable final products i.e., Electric Storage Batteries and parts thereof and have availed CENVAT credit in terms of Rule 3 of CCR of 2004. Further, the department did not dispute the taking of CENVAT credit by the appellants and the demand of CENVAT credit is not on the ground that Polypropylene Co-Polymer (PPCP) is an ineligible input. It is also a fact that the appellants while clearing PPCP to molding manufacturers/molders, have undertaken reversal of CENVAT credit under Rule 3(5) of CCR of 2004. It is not the case with the department that PPCP were not used in the manufacture of the final products. In the above factual matrix of the case, it is not found that there is a requirement under CCR of 2004, for reversal of credit taken on input services used in relation to those inputs, which are subsequently removed as such by treating the same as ‘trading’ activity in terms of Rule 6(3)(i) of CCR of 2004. The Co-ordinate Bench of the Tribunal in the case of self-same appellants i.e., Exide Industries Vs. Commissioner of Central Excise [2018 (4) TMI 655 - CESTAT MUMBAI] have held that the proposal of department for confirmation of the adjudged demands under Rule 6(3)(i) of CCR of 2004 is not sustainable. The impugned order dated 30.06.2016 passed by the Commissioner of Central Excise & Customs, Belapur does not stand the legal scrutiny. Therefore, the adjudged demands along with interest and imposition of penalty on the appellants, in the impugned order is not legally sustainable and thus is liable to be set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether clearance of Polypropylene Co-Polymer (PPCP) 'as such' to moulders, with reversal of credit under Rule 3(5) of the CENVAT Credit Rules, 2004, constitutes 'trading' of goods / an exempted service attracting Rule 6(3) of the CENVAT Credit Rules, 2004. 1.2 Whether, in the facts of PPCP being treated as input and credit reversed on its removal as such, the department is entitled to demand an amount under Rule 6(3)(i) of the CENVAT Credit Rules, 2004, along with interest and penalty. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of PPCP clearances to moulders - 'trading' versus removal of inputs as such (a) Legal framework (as discussed) 2.1 The Court proceeded on the basis of the CENVAT Credit Rules, 2004, specifically referring to: 2.1.1 Rule 2(k) defining 'input'. 2.1.2 Rule 3 permitting availment of CENVAT credit on inputs and input services. 2.1.3 Rule 3(5) governing removal of inputs 'as such' from the factory on reversal/payment of credit. 2.1.4 Rule 6(3)(i) concerning payment of an amount where common input services are used for dutiable goods and exempted services, including 'trading'. (b) Interpretation and reasoning 2.2 It was undisputed that: 2.2.1 The appellant manufactured dutiable final products (electric storage batteries and parts) and availed CENVAT credit under Rule 3. 2.2.2 PPCP was treated by the department as an eligible 'input'; there was no allegation that PPCP was not used in the manufacture of final products. 2.2.3 Whenever PPCP was cleared to moulders, the appellant reversed the CENVAT credit under Rule 3(5) of the CENVAT Credit Rules, 2004, and this was duly reflected in ER-1 returns. 2.3 The Court noted that the department's case did not challenge the eligibility of PPCP as an input, but re-characterised the clearances of PPCP to moulders as 'trading' activity, claimed to be an exempted service, in order to trigger Rule 6(3)(i) liability on common input services. 2.4 Relying upon the Coordinate Bench decision in the appellant's own case, the Court recorded that once PPCP is accepted as an input and is removed from the factory with reversal of credit in terms of Rule 3(5), such removal cannot be treated as trading to invoke Rule 6(3). The earlier order had held that: 2.4.1 Proceedings to deny PPCP the status of 'input' had already been dropped, accepted by the Revenue, and had attained finality. 2.4.2 If an input is cleared on reversal of CENVAT credit, invocation of Rule 6(3A)/Rule 6(3) is impermissible. 2.5 The Court further relied on another Coordinate Bench decision in respect of the appellant's Chennai unit, where on identical facts it was held that: 2.5.1 PPCP cleared to moulders is used exclusively for manufacture of battery parts (containers, lids, etc.) which are sold back to the appellant and then used in manufacture of dutiable batteries. 2.5.2 The adjudicating authority itself had accepted PPCP as 'input' under Rule 2(k) and the clearance to moulders as removal of inputs 'as such' with proper reversal under Rule 3(5), yet paradoxically treated the same transaction as trading. 2.5.3 There was no evidence that the appellant was in the business of trading PPCP, derived any profit therefrom, or sold PPCP in the market independent of its manufacturing operations. 2.5.4 The entire sequence of transactions revealed a single integrated manufacturing arrangement, not a trading activity, and the department could not approbate and reprobate on the same transaction. 2.6 Applying the above reasoning to the present case, the Court held that, in the factual matrix: 2.6.1 PPCP remained an 'input' within the meaning of Rule 2(k); 2.6.2 Its clearance to moulders, with reversal of credit under Rule 3(5), constituted removal of inputs as such in the course of the appellant's manufacturing activity; 2.6.3 There was no independent or standalone 'trading' of PPCP that could be treated as an exempted service for the purpose of Rule 6(3)(i). (c) Conclusions 2.7 The Court concluded that: 2.7.1 Clearances of PPCP to moulders, after reversal of credit under Rule 3(5), cannot be categorised as 'trading' or as exempted service. 2.7.2 Rule 6(3)(i) of the CENVAT Credit Rules, 2004 is not attracted to such clearances. Issue 2: Validity of demand under Rule 6(3)(i), interest and penalty (a) Interpretation and reasoning 2.8 Since PPCP clearances were held not to be trading activity or exempted service, the foundational premise for invoking Rule 6(3)(i) failed. 2.9 The Court emphasised that: 2.9.1 There is no requirement under the CENVAT Credit Rules, 2004 to reverse credit on common input services merely because inputs, on which credit is taken, are subsequently removed as such with reversal of credit under Rule 3(5). 2.9.2 On identical facts in the appellant's own cases decided by Coordinate Benches, demands under Rule 6(3) had already been set aside, and a contrary view would be impermissible. (b) Conclusions 2.10 The Court held that: 2.10.1 The demand of an amount under Rule 6(3)(i) of the CENVAT Credit Rules, 2004, along with interest, was not legally sustainable. 2.10.2 The imposition of penalty on the same basis was equally unsustainable. 2.10.3 The impugned order confirming the demands, interest and penalties was set aside, and the appeal was allowed.