TaxTMI 
TaxTMI 
2012 (5) TMI 299
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.... BSNL, paid the excise duty thereby claiming that they had undertaken manufacturing activity on the modems imported by them before supply of the same to BSNL. After search, seizure and investigation in the form of recording of statements, issue of show cause notice and adjudication process, it has been held that the process undertaken by the two companies on the modems cannot be said to amount to manufacture and therefore, the cenvat credit availed by these two companies was not admissible. Accordingly, the cenvat credit reversed by the appellant companies at the time of clearance of modems from their factory has been adjusted towards the duty demand and amount reversed by the appellants after the investigation was taken up has been appropriated and balance if any has been demanded. In the case of STL, total amount of cenvat credit availed was Rs.3,63,13,047/- out of which Rs.2,78,67,395/- had been paid as Central Excise duty at the time of clearances and were adjusted. STL had subsequently reversed the cenvat credit of Rs.80,17,787/- which has been appropriated and adjusted towards their duty liability. In the impugned order, an amount of Rs.4,27,870/- has been demanded along with....
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...., it cannot be said that extended period cannot be invoked. Further, it was also submitted that officers and the employees of the companies have Played a very active role in relation to maintaining the records to show that there was manufacture and also gave statements contrary to the facts. Therefore, he submitted that penalties imposed on the appellant officers and employees of the Companies should be sustained. 3. We have considered the submissions made by both the sides and have gone through the records carefully. 4. First of all, we have to consider as to whether the process undertaken by the appellant companies amounted to manufacture. If that is so, the whole case of the Revenue fails. After the bids submitted by both the companies were accepted, BSNL released the purchase orders from time to time in terms of which supplies were made. The purchase orders placed on both the companies had the same terms. SOTL was the lowest bidder and orders were placed on both the companies at the price quoted by the SOTL as LI bidder. It is noticed that there is no difference in products specified in respect of the orders placed on both the companies and even trials were conducted only in ....
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.... above contract the appellants after consultation with BSNL formulated a detailed testing and software installation module for different models of the product, which was issued by them to their personnel who were to carry out the testing of the products as well as the software installation thereon. Hereto annexed and marked as Annexure 4 is a specimen copy of document titled "Work instruction for ADSL-2 Plus software installation Type -1" along with the "ADSL Modem Software Processing Instructions". As is clear from the above document the same gives detailed procedure required to be followed for testing the product and loading the software patch onto the product. The appellants submit that the said process of loading software patches onto the was necessary and unavoidable requirement as the said product on its own was not in terms of the contract/ agreement between the appellants and BSNL. The product on its own was not capable of giving the desired output/ result without the said software patch being loaded and, therefore, was not marketable. 13. The appellants submit that they were issued purchase orders from time to time by BSNL for supply of the said product. The appellants in....
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....thout these process the same would not be accepted by BSNL thereby rendering the same non marketable. They relied upon several decisions of the Hon'ble Supreme Court in support of their claim that to pass the test of manufacture the product needs to be marketable. The purchase order issued by the BSNL had an annexure with Technical Specifications for the product in Section-VI of the Technical Specifications, it was provided that the equipment shall conform to the Electromagnetic Compatibility (EMC) requirements as per the standards given therein. According to the appellants they had used Laptops, Lan, Adaptors, Software/ Software patch. But nowhere there is an indication that the tests specified in the tender documents were conducted by the appellants. Further, the technical specifications were also requiring that the international standard - ISO 9001:2000, to which the manufacturer shall be duly accredited and the quality plan describing the quality assurance system was also required to be submitted. Summing up, technical specification given by the BSNL virtually took care to ensure that product manufactured by the manufacturer was as per specifications before the supply of equipm....
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....applicable to all the modems imported by the appellants and supplied to the BSNL. However, admittedly during validation trials, only one type of modem was found to hang. From the technical specifications and the agreement and the purchase order of the BSNL, it is seen that the tender contained all the technical Para meters which are required and the modems were to be released from the factory in ready to use condition. The training of the engineers was for trouble shooting of modem and also to train the BSNL personnel. Moreover it is to be noted that appellant company's employees were required to provide service during two years warranty and five years annual maintenance contract. Nowhere it has been indicated that the training was for further testing in the appellant's factory for loading the software in the system etc. The modems were pre installed with LINUX operating system. The need for patch in the one type of modems which were found to hang, for which the HTL found solution software patch and this is clear from the letter dated 10.7.2006 of HTL. Only Type 2 modems WA-1003A was found to hang and therefore, if any software patch was to be loaded, it was only in respect of thes....
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....claim that they had manufactured modems by conducting tests and uploading software itself is not acceptable. 8. Further, Shri C. Srinivas Kali, Commercial Manager has also stated that HTL had not objected to, any modification done on the imported Modems by STL as both STL and HTL had mutual business interests as the said software was available and accessible in the website of Huawei; that the basic software was developed by HTL only. However, technical persons from STL did further modifications as per the requirement of BSNL. But this assertion of Shri Kali was found to be wrong as HTL have clearly mentioned that this was not the case and they had not entered into any other contract with STL other than the one mentioned above. 9. Further, on scrutiny of the Staff in-out register and Inter Unit register maintained at the Security Gate of STL and submitted by Shri Jaswant Singh Gyan Singh Jasrotia, working at STL and his statement dated 23.2.2006, it was noticed that :- (i) Any person, an employee of STL or a contract worker working for STL and even all persons coming from their sister concerns at Piparia, Rakholi, Chinchpara etc., had to enter their personal details in that regis....
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....uraman. They used to come from Rakholi Unit of SOTL to STL, Dadra for handing over the requisition slips to Shri Debashish, the Store in charge for preparation of production slips and dispatch of modems. But they had never seen Mr. N R Patil in STL even once. They also claimed that Shri Shankar Ganesh Tata was never seen involved in any activity on Modems. (v) Shri Rakesh Kumar Birendar Kumar Tripathi, Loading-unloading contract worker continuously from morning till night said he had not seen any one opening the boxes containing Modems or any job being done on the Modems during his duty period and that he had seen Mr. N R Patil in their Rakholi Plant (M/s. SOTL) but never in STL and also that Shri Shankar Ganesh Tata worked in STL, but he had never seen him doing any job related to Modems. (vi) Shri Debashish Chatterjee, Commercial Assistant of STL, in his statement recorded on 23.2.2006 also confirmed that he had never seen Shri N R Patil at STL. This fact is supported by the fact that there is only one entry in the name of Shri N R Patil in the Security Gate register maintained in STL Had he been a regular visitor involved in the software loading operations - as claimed by Shri....
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.... hearing also, learned advocate was specifically asked as to how the surplus credit has arisen and he could not explain the same. He was trying to explain stating that number of modems sold was less than the total number of modems imported but fairly admitted that number was too small. Definitely if could not have been equal to 30% surplus credit remaining in the accounts of the appellant companies. As submitted by the appellant Companies in their appeal memo, both the companies in their unit are engaged in the manufacture of PIJFC and ADSL 2+ modems etc. which would show that appellants were engaged in the manufacture of something else also. Obviously, the surplus could have been used by the appellants for payment of duty in respect of other products manufactured by them, if the department had not taken up investigation and commenced proceedings. This would straight away show that the claim of Revenue neutral situation by the appellants has no basis whatsoever. These observations are made in view of the fact that no one to one co-relation between inputs in final products as per Central Excise law. Even though this itself would be sufficient to show that the appellant's claim of Re....
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.... duty paid on flywheels received for carrying out certain finishing process. Appeal in that case was against the order of Commissioner (Appeals) that the credit taken can be adjusted towards duty on the finished flywheels and in future receipt of flywheels should be regulated under Rule 173H of the Central Excise Act. This is not the case of return of goods for repair or finishing process. In any case, in that case it was held that for future the assessee should follow procedure in terms of Rule 173H, thereby holding that procedure followed was wrong. (d) In the case of Bhuwalka Pipes Pvt. Limited - 2007 (220) ELT 854 (Tri. Bang.) the process of welding, grinding, cutting and facing of steel tubes and pipes was held to be not amounting to manufacture. Thus it was the case where products were held to be dutiable earlier and later held to be non dutiable and as such cenvat credit was not required to be reversed. (e) In Punjab Tractors Limited case - 2005 (181) ELT 380 (SC), the issue was as to whether the reversal of credit taken at the time of clearances of exempted final products would attract penalty or not. In that case, while demand of duty was set-aside, it was held that pena....
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....nd paying excise duty on modems, the appellants could have availed excess amount of cenvat credit and utilized the same for payment of duty for other products. Obviously this analysis shows that rather than having a bonafide belief that process amounted to manufacture it was a well planned strategy to show this a manufacture process. The investigation conducted of the security register and comparison of the same with the statement of the employees clearly shows that there was no manufacturing activities undertaken and the Senior Management deliberately brought the goods into the factory and sent it out on payment of duty. Statements of several employees recorded have clearly brought out that there was no manufacture. 16. Further, as per the provisions of sub Section 5 of section 3 of Customs Tariff Act, 1975, the Central Government is empowered to levy additional customs duty taking into account sales tax, value added tax or any other charges leviable on like article on its sale, purchase or presentation in India. This is what is being levied as SAD by the Customs department. As per the provision of Rule 3 of Cenvat Credit Rules the manufacture of final product is allowed to take ....
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....hich any contravention has been committed, or [two thousand rupees,] whichever is greater" It is seen from the above that penalty under sub Rule 1 is imposable on the persons who take credit wrongly. Sub Rule 2 provides for penalty in terms of provisions of Section 11AC of Central Excise Act. Sub Rule 3 and 4 are not relevant since these relate to provisions of Finance Act. Penalty under sub Rule 1 provide penalty only on who takes the cenvat credit in respect of inputs or capital goods or in contravention of any of the provisions. In this case wrong credit has been taken by the appellant companies and it cannot be said that individuals have taken the credit. Similarly, under sub Rule 2 when credit is demanded on the ground of suppression or fraud, it is the manufacturer who is liable for penalty under Section 11AC. Again it is the two appellant companies who have to be treated as manufacturers and not the employees. Therefore, claim of the appellants that Rule 15 is not applicable appears to be correct. Further, it is to be noted that in the show cause notice the details of contravention by the employees and the officers has been given in detail in show cause notice issued to SO....
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....modems. The remaining amount of Rs. 80,17,782/- was reversed by the said appellant vide RG23A Part-II entry No. 58 dated 23.5.2006 and entry Nos. 171, 172 of dated 30.6.2006. Only the remaining amount of Rs. 4,27,870/- is pending reversal. 23. The question which now stands before us is as to whether availment of such credit and utilization of the same towards payment of duty on the final products by the appellants was with any malafide intention or not, so as to invoke the penal action against the appellant. My learned brother has discussed the various case laws relied by the appellant laying down that where credit so availed stands utilized by an assessee towards payment of duty on the final products, which he was not required to pay, the same amounts to Revenue neutrality. However, the said decisions do not stand followed by my learned brother on the ground that the total credit so availed was not utilized and there were excess credit remaining in the books of accounts, by the assessee. As such, these facts do not lead to Revenue neutrality. 24. It may be specified here that learned advocate appearing for the appellants have not agitated the fact of reversal of balance credit. ....
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.... arrive at the findings that the modus operandi of manufacture of modems was adopted by the appellants with an ulterior motive to save the excess credit so that the same can be utilized for payment of duty in respect of other manufactured goods. It is seen in the case of SOTL that the credit was availed during the period May 2005 to December 2005 whereas, the appellant's factory was visited on 13.7.2006. There is nothing on record to indicate or establish that the excess credit availed by the appellants was utilized for payment of duty on any other final products during this intervening period of availment of credit and visit of the officers. In any case, appellants having explained the excess remaining credit with them on the ground that number of modems supplied to BSNL were less than the number of modems imported by them, no malafide can be attributed. Otherwise also, I find that the appellants have maintained all the requisite records and nothing stands suppressed from the Revenue. There is no evidence of any mis-statement on the part of the assessee so as to attribute malafide to them. The ratio of all the decision is to the effect that as the entire exercise is Revenue neutra....
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.... of the above discussion I am of the opinion that penalty is not required to be imposed on the said appellants. As the appellants have not disputed the confirmation of demand of duty, (a part paid by way of excise duty on the cleared modems and balance reversed by them) I do not interfere in the order of confirmation. The remaining credit of Rs.4,27,870/-, in case of STL, is required to be debited (if not already reversed). 28. As I agree with the learned Member (Technical) in respect of the duty confirmation against the said appellants and setting aside the penalties on the other appellants, the said part of the order is being concurred with. DIFFERENCE OF OPINION (a) Whether balance surplus credit available with both the units i.e. M/s. SOTL and M/s. STL is on account of the price difference between the imported modems and the supplied modems to BSNL or the same is on account of the fact that all the imported modems, on which credit was availed were not cleared and supplied to M/s.BSNL. (b) Whether the surplus credit was meant for utilizing for payment of duty in respect of other products manufacture by them, had the Revenue not taken up the investigation, as held by Member ....
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....s Ltd. and M/s Sterlite Telelinks Ltd. is on account of the price difference between the imported modems and the supplied modems to BSNL or the same is on account of the fact that all the imported modems, on which credit was availed were not cleared and supplied to BSNL. b) Whether the surplus credit was meant for utilizing for payment of duty in respect of other products manufactured by them, had Tribunal he Revenue not taken up the investigation, as held by Member (Technical) or there is no such evidence on record to reflect upon the said intention of the appellants, as observed by Member (Judicial). c) Whether the payment of Excise duty to a major extent, which amounts to reversal of credit and the subsequent payment of surplus credit without using the same would amount to revenue neutral situation as held by Member (Judicial) or the fact that entire credit was not utilized as excise duty would not lead to revenue neutral situation. d) Whether the payment of excise duty on cleared modems can be considered as reversal of credit on the inputs "as such" and the balance credit reversed by the appellants, would amount to entire reversal of credit in terms of Rule 3(5), thus not wa....
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....lf is incidental and ancillary process necessary for completion of the manufactured product. It is his submission that under this bonafide belief that the process carried out by them was amounting to manufacture, they availed CENVAT Credit of CVD paid on the modems imported by them and supplied to BSNL as a manufactured product. It is his submission that violation of law, if any, by the appellant was not intentional, but on account of bonafide belief, for which purpose, he would rely upon the judgment of the Tribunal in the case of Chamundi Die Cast (P) Ltd. Vs CCE Bangalore 2007 (215) ELT 169 (SC), CCE Surat Vs Surat Textile Mills Ltd. 2004 (167) ELT 379 (SC), Centre for Development of Advanced Computing Vs CCE Pune 2002 (141) ELT 6 (SC). It is his submission that the argument that the appellant had not undertaken any manufacturing activity, which would mean that the appellant had manufactured modems as such and discharged duty liability on said modems would be reversal of CENVAT Credit, as has been held by Tribunal in the case of PSL Holdings Ltd Vs CCE Rajkot 2003 (156) ELT 602 . 4. He would also rely upon the judgment of Tribunal in the case of Vinayak Industries Vs CCE Rajkot....
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....'ble Apex Court in the case of CCE Vadodara Vs Narmada Chematur Pharmaceuticals Ltd. 2005 (179) ELT 276 (SC), Punjab Tractors Ltd Vs CCE Chandigarh 2008 (181) ELT 380 (SC). It is his submission that in the case in hand, it is undisputed that substantial amount of credit was available for the amount of the assessee which was reversed only after the investigation by the Department. It is his further submission that revenue neutrality is not a final proof of bonafide belief of the assessee, as laid down by Hon'ble Apex Court in the case of CCE Mumbai Vs Mahindra & Mahindra Ltd 2005 (179) ELT 21 (SC). It is his submission that there is no dispute between the members that the appellant is not undertaking any manufacturing operation on the modems and hence the imported modems cannot be considered as input as per provisions of CENVAT Credit Rules, 2004. It is his submission that the Larger Bench decision of the Tribunal in the case of Jay Yuhshin Ltd Vs CCE New Delhi 2000 (119) ELT 718 (Tri-LB), has clearly held that if there is a financial gain which flowed directly from action of the assessee, invocation of extended period is correct. It is his submission that in view of the facts and a....
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....duct when on test the product was found defective before supply to BSNL. In short, it was a contractual obligation on the appellant to supply the modems to BSNL after confirming that they adhere to the specifications given by BSNL. 8. Under these circumstances, to my mind that the argument as to appellant bonafidely believed that they were undertaking some kind of manufacturing activities cannot be brushed aside summararily. It is the argument of the assessee that the as per Section 2(f) of Central Excise Act, 1944, they construed the activity of testing of modems and validating the same and loading patches of software, as an activity amounting to manufacture as the same was ancillary or incidental to the manufactured product i.e. modem cannot be faulted with. On such bonafide belief, they took the Central Excise registration from the authorities and discharged the Central Excise liability on such modems after availing CENVAT Credit of the CVD paid on the modems. It is also undisputed in this case that the lower authorities had accepted the Central Excise returns filed by the assessee during the relevant period considering the said product as being manufactured product. Subsequent....