Bharti Infratel Limited Vs Additional Director General (CESTAT Delhi)
Facts- The appellant removed certain capital goods, which were waste/ scrap, after their usage. At the time of removal, neither credit was reversed nor any amount was paid as the appellant believed that there was no requirement of payment/ reversal by an output service provider under rule 3(5A) of the Cenvat Credit Rules.
The proceedings were initiated by the department with respect to the capital goods which were removed as scrap without payment / reversal of amount. It was alleged that the capital goods removed by the appellant were not scrap.
Conclusion- The goods declared as scrap have been sold by the appellant to companies engaged in scrap management which have a certificate issued to them by the Principal Environment Commissioner, Rajasthan State Pollution Control Board, for procurement and recycling of scrap under the Hazardous Waste Management Rules. Further, the invoices through which these goods were sold to these companies also describe the good as scrap only.
The capital goods cleared as scrap by the appellant undergo an extensive procedure, after which based on the evaluation of a third-party vendor, the goods are declared scrap and sold to scrap management companies who have taken certificates for recycling the said scrap under the Hazardous E-waste Management Rules.
The inevitable conclusion that follows is that the capital goods cleared as scrap by the appellant are scrap and, therefore, the appellant, being an output service provider, was not required to pay any amount in terms of rule 3(5A) of the Credit Rules.
FULL TEXT OF THE CESTAT DELHI ORDER
The order dated 31.08.2016 passed by the Additional Director General (Adjudication) in the Directorate General of Central Excise, Intelligence1 has been assailed in this appeal. The said order seeks to confirm the demand of Rs. 19,65,03,88/- for the period from 27.09.2013 to 31.03.2015 with interest and penalty. The order also appropriates an amount of Rs. 3 crores earlier paid by the appellant.
2. The appellant is engaged in the provision of telecom infrastructural support services to various telecom companies and discharges service tax on the same under the category of ‘support service of business or commerce2.
3. For providing the output service of BSS, the appellant purchased various capital goods namely lead acid batteries, air conditioners, transmission racks, fire alarms, smoke detectors etc. and availed CENVAT credit thereon. The credit availed on capital goods was utilized by the appellant in discharging its output service tax liability.
4. The appellant, thereafter, removed certain capital goods after their usage which were waste/scrap. At the time of removal, neither credit was reversed, nor any amount was paid as the appellant believed that there was no requirement of payment/reversal by an output service provider under rule 3(5A) of the CENVAT Credit Rules 20043 during the relevant period. However, with respect to capital goods which were removed as used capital goods, the appellant paid the amount in terms of rule 3(5A) of Credit Rules.
5. The appellant claims that it had internally devised a ‘Inventory Management Process’ for the purpose of identification of scrap. The said process has been explained by the appellant in the following manner:
a) When capital goods become unworkable after continuous usage, they are inspected by outside vendors within the warehouse of the appellant and a health certificate is issued by such vendors;
b) Basis the health report and after undertaking cost/benefit analysis in terms of repair or purchase of new capital goods, a decision is taken by the appellant to either undertake repair of such capital goods or to purchase new capital goods;
c) If the appellant decides to get the capital goods repaired, the same are repaired either within the warehouse of the appellant or in a workshop of the vendor‟s;
d) However, if the said capital good cannot be repaired and the appellant has no alternate use of the same, the said goods are classified as obsolete and the procedure for clearance of such goods as scrap is triggered;
e) Thereafter, a scrap inventory report is generated requiring approvals at various levels, including Circle Manager, Circle Operation Management Head, Circle Finance Head;
f) If after approvals from the Circle, it is unanimously recommended to scrap off the capital good, a final approval is sought from the Head Office of the appellant;
g) If such an approval is granted, the scrap disposal note is generated. Thereafter, the scrap is put for sale via e-auctions. The auction documents clearly mention the description of goods as ‘scrap’; and
h) Upon successful competition of the auction, goods are sold and invoices are raised describing the good as scrap.
6. The appellant has further stated that the purchasers of the goods are all scrap management companies and, in this respect, e-certificates have been issued to the purchasers by the Principal Environment Commissioner, Rajasthan State Pollution Control Board, for procurement and recycling of scrap under the Hazardous Waste Management Rules.
7. However, proceedings were initiated by the Department with respect to the capital goods which were removed as scrap without payment or reversal of amount. Investigation was initiated by way of issuance of summons, examination of documents submitted by the appellant and recording of statements of DGM (Taxation) of the appellant. Thereafter, a show cause notice dated 29.12.2015 proposing recovery of amount in terms of rule 3(5A) of Credit Rules along with interest and penalty was issued to the appellant. The show cause notice mentions:
(i) Even after the amendment to rule 3(5A) of Credit Rules, the appellant, being a service provider, was required to pay an amount equivalent to credit availed on such capital goods after factoring in depreciation;
(ii) The capital goods cleared by the appellant as scrap were not actually in the nature of scrap and hence, the appellant contravened the provisions of rule 3(5A) of Credit Rules by not paying the amount equivalent to the CENVAT credit availed after factoring in depreciation;
(iii) The appellant has deliberately changed the description of goods in their invoices by describing the same as scrap so as to evade the payment of amount under rule 3(5A) of Credit Rules;
(iv) From the product brochure of telecom batteries manufactured by M/s. HBL Power System Ltd., the active life of a telecom battery is 20 years, but the appellant has cleared the batteries after 3-4 years of use as ‘scrap battery cell’ whereas in fact such battery cells were actually ‘used battery cells’; and
(v) The appellant has cleared these batteries even before the useful life of these batteries, as per the industry standards.
8. The appellant submitted a reply dated 28.06.2016 to the show cause notice and filed additional submissions to assert that it was not required to pay any amount in terms of rule 3(5A) of Credit Rules on clearance of capital goods as scraps, and therefore, the show cause notice was liable to be dropped.
9. However, the Additional Director passed the order dated 31.08.2016 confirming the proposed demand of Rs. 19,65,03,338/-, with interest and penalty.
10. Shri B.L. Narasimhan learned counsel for the appellant assisted by Ms. Poorvi Asati, made the following submissions:
(i) Rule 3(5A) of the Credit Rules, will have no application in the present case. It is evident that in terms of payment of amount under rule 3(5A) of Credit Rules, during the relevant period, only ‘manufacturer’ was required to pay the amount in case of clearance of capital goods as scrap and not output service provider. The appellant, being an output service provider, was, therefore, not required to pay any amount in terms of rule 3(5A) of the Credit Rules during the relevant period from 27.09.2013 to 31.03.2015;
(ii) The capital goods removed by the appellant are not used capital goods but scrap. There is a difference between used capital goods and scrap in rule 3(5A) of Credit Rules and in this connection reliance has been placed on the judgment of the Supreme Court in Valji Khimji and Company vs. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited and Others4;
(iii) The Additional Director committed an error in holding that something cannot be treated as „scrap‟ just because it is no longer of any use to the seller and what has to be seen is that the said goods should be of no use for the market as a whole;
(iv) The Additional Director committed an error in holding that in the absence of any evidence that the goods in question were used as waste or scrap, the goods cannot be said to be scrap. The goods have been sold by the appellant to the companies which are engaged in scrap management and have certificates issued to them by the Principal Environment Commissioner, Rajasthan State Pollution Control Board, for procurement and recycling of scrap under the Hazardous Waste Management Rules. Further, the invoices through which these goods were sold to these companies also describe the goods as scrap only;
(v) The Additional Director committed an error in holding that there was no evidence that the goods cannot be used, even after due repairs and renovations, for any similar purpose. Hence, the goods cannot be considered as waste/scrap;
(vi) The definition of „scrap’ given under Explanation (b) to section 206C of the Income Tax Act, 1961, cannot be relied upon as it is settled law that in case a term has not been defined in the given Statute, reference to the definition of the said term in another Statute cannot be made. Instead, reference should be made to the dictionary meaning of the said term. In this connection, reliance has been placed on the judgment of the Supreme Court in MSCO Pvt. Ltd. Union of India and Others5;
(vii) The extended period of limitation could not have been invoked and so the demand for the period 27.09.2013 to 30.09.2013 is time barred; and
(viii) Interest was not recoverable and penalties were not imposable.
11. Dr. Neha Garg, learned authorised representative appearing for the Department, however, supported the impugned order and made the following submissions:
(i) Old and used capital goods were removed on invoices mentioning the description as „scrap of batteries‟, „scrap of AC‟ etc. Thus the capital goods so removed were identifiable as purchased and had been cleared without breaking them into pieces;
(ii) The health check up reports submitted by the appellant do not mention any reason as to why the said goods were declared as scrap or whether the goods were scrap only from the purpose of the appellant or they could be used further for any other purpose;
(iii) It is apparent that the capital goods were cleared with their original form intact and there is no evidence they cannot be used even after repairs and renovation;
(iv) Prior to the period in question i.e. before 27.09.13, when the amount was payable in both cases – where the goods were cleared as used capital goods or as waste and crap- the appellant was clearing them as „used goods’ and paying the said amount. However after the change in the rule, there was a change in this description. The appellant has not provided any reason or evidence thereof for this change;
(v) If a plea relates to certain factual aspects, the same must be substantiated by producing evidence;
(vi) There is an unusually large gap between the shelf life of some of the items suggested by the manufacturer’s brochure and the actual shelf life before being declared as scrap; and
(vii) The extended period of limitation was rightly invoked and so was the levy of interest and penalty.
12. The submissions advanced by the learned counsel for the appellant and the learned authorized representative appearing for the Department have been considered.
13. The issue that arises for consideration in this appeal is regarding the demand made on the amount required to be paid in terms of rule 3(5A) of the Credit Rules for capital goods cleared as scrap.
14. It would, therefore, be necessary to examine whether rule 3(5A) of the Credit Rules could have been invoked in the present case and for this purpose the scope of this rule as it stood prior to 27.09.2013 and post 27.09.2013 is required to be considered. The relevant portions of rule 3(5) and rule 3(5A) of the Credit Rules are contained in the following tabular form:
