Case Law Details
C.C.E. & S.T.-Bhavnagar Vs Navyug Ship Breaking Company (CESTAT Ahmedabad)
CESTAT Ahmedabad held that ship imported for breaking purpose contains fuel and oil and accordingly they are by-product that are inevitably required to be removed from the ship. Hence, CENVAT Credit of the same duly available.
Facts- Respondent during the period 2013-14 to 2014-15 was engaged in breaking of ships imported for breaking purpose at their plot at the ship breaking yard, Alang where goods and material is obtained by way of breaking the ship.
The Show Cause Notice issued to the Respondent alleged that Respondent has wrongly availed cenvat credit of the CVD paid on Bunkers viz. Fuel Oil, Marine Gas Oil, Lube Oil etc. in violation of provisions of Rule 3 read with Rule 2 (k) and Explanation III to sub-rule (3) of Rule 6 of the Cenvat Credit Rules, 2004 as the same were not their “input” used in or in relation to manufacture of their final products.
The said Show cause notice was adjudicated by the adjudicating authority who interalia held that Fuel oil, Marine Gas Oil and Lubricating Oil were not used, directly or indirectly in or in relation to the process of obtaining goods and material by breaking up the ship and hence the same cannot be considered as ‘input’ in terms of the provisions of Cenvat Credit Rules and consequently Cenvat Credit of Additional Duty of Customs (CVD) paid on Fuel Oil, Marine Gas Oil and Lubricating Oil is not admissible to the Respondent. The adjudicating authority confirmed the demand of Cenvat Credit of Rs. 50,49,578/- under Rule 14 of the Rules read with Section 11A(4) of the Act and imposed penalty of Rs. 50,49,578/- under Rule 15(2) of the Rules read with Section 11AC of the Act upon Respondent and also imposed penalty of Rs. 5000/- upon Partner of the Respondent.
Conclusion- It is clear that Fuel and Oils are by-product that are inevitably required to be removed from the ship in the course of commencing the activity of breaking the ship and if that be so, there is no reason for denial of cenvat credit of CVD paid on any part of the Ship including its stores viz. fuel and oil on the ground that they do not form part and parcel of the ship or that they are removed at a stage before commencing the activity of breaking ship or that their classification is under different heading. It is settled law that in the course of manufacturing activity any by-product emerges; cenvat credit on that part which pertains to by-product cannot be denied on the ground that such by-products are non-excisable goods or that they are not used in or in relation to manufacturing activity of manufacturer of excisable goods.
Ordinarily, ship when imported for breaking purpose would contain fuel and oil whether in the engine, machinery or in the bunker/tanks. There is no reason to treat the same not part of the ship imported for breaking purpose. It has been rightly held by Learned Commissioner (Appeals) that removal of fuel and oil is the initiation of ship breaking activity and cannot be said as separate activity.
FULL TEXT OF THE CESTAT AHMEDABAD ORDER
The present appeal is preferred by department against Order-In-Appeal No. BHV-EXCUS-000-APP-296 to 297-2018-19 dated 09.10.2018 passed by the Commissioner (Appeals) Central GST & Excise, Rajkot by which learned Commissioner (Appeals) set aside Order No. BHV-EXCUS-000-JC-47-2017-18 dated 25.01.2018 passed by Learned Joint Commissioner, Central GST, Bhavnagar and allowed the appeal of Respondent herein namely M/s. Navyug Ship Breaking Company.
02. Briefly the facts of the case are that Respondent during the period 2013-14 to 2014-15 was engaged in breaking of ships imported for breaking purpose at their plot at the ship breaking yard, Alang where goods and material is obtained by way of breaking the ship. Ship imported for breaking purpose contain items viz. Fuel Oil, Marine Gas Oil, Lubricating Oil etc which are used as fuel for the ship or for generation of electricity. As per the prevailing practice at Alang, an importer files a bill of entry in respect of ship imported for breaking purpose with the jurisdictional customs authority wherein customs duty is separately assessed in respect of (i) Fuel Oil, Marine Gas Oil & Lubricating Oil; (ii) Other consumables articles like food, beverages, toiletries etc and (iii) The “Ship for breaking purpose”. The items of (i) above, in respect of which cenvat credit of additional duty of customs (CVD), totally amounting to Rs. 50,49,578/- in respect of ships M.V. Shanti and M.V. „Xing Peng Da‟, imported vide Bills of Entry No. SBY/283/2013-14 dated 19.03.2014 and SBY/112/2014-15 dated 21.7.2014, was availed by the Respondent during the period January – February 2015 and the eligibility of the said items for availment of cenvat credit is the subject matter of the present appeal.
2.1 Show cause notice no. V/15-200/Dem/AE/HQ/2015-16 dated 31.3.2016 was issued to Respondent calling upon to show cause as to why wrongly availed cenvat credit totally amounting to Rs. 50,49,578/- should not be demanded and recovered from them under Rule 14(1)(i) of the Rules read with sub-section (4) of Section 11A of the Act. It also proposed to impose penalty under Rule 15(1) of the Rules read with Section 11AC(1)(a) of the Act upon Respondent and Penalty under Rule 15A of the Rules upon Partner of the Respondent.
2.2 The said Show Cause Notice alleged that Respondent has wrongly availed cenvat credit of the CVD paid on Bunkers viz. Fuel Oil, Marine Gas Oil, Lube Oil etc. in violation of provisions of Rule 3 read with Rule 2 (k) and Explanation III to sub-rule (3) of Rule 6 of the Cenvat Credit Rules, 2004 as the same were not their “input” used in or in relation to manufacture of their final products. The said Show cause notice was adjudicated by the adjudicating authority who interalia held that Fuel oil, Marine Gas Oil and Lubricating Oil were not used, directly or indirectly in or in relation to the process of obtaining goods and material by breaking up the ship and hence the same cannot be considered as „input‟ in terms of the provisions of Cenvat Credit Rules and consequently Cenvat Credit of Additional Duty of Customs (CVD) paid on Fuel Oil, Marine Gas Oil and Lubricating Oil is not admissible to the Respondent. The adjudicating authority confirmed the demand of Cenvat Credit of Rs. 50,49,578/- under Rule 14 of the Rules read with Section 11A(4) of the Act and imposed penalty of Rs. 50,49,578/- under Rule 15(2) of the Rules read with Section 11AC of the Act upon Respondent and also imposed penalty of Rs. 5000/- upon Partner of the Respondent.
2.3 The Respondent preferred appeal before Commissioner (Appeals) Rajkot interalia on the ground that removal of oils from the Ship has direct nexus with the manufacturing activity of obtaining goods and material by way of breaking the ship as process of breaking ship is initiated by first removing such fuel and oils for safe and efficient operation of such process of breaking ship.
2.4 Learned Commissioner (Appeals) after hearing the parties and considering various arguments advanced, set aside the Order of the Adjudicating authority and allowed the appeal of the Respondents interalia on the ground that when the ship is imported for breaking up, the fuels & oils available on ship even as stores form part of the ship and entire ship including items on board are therefore “input” for the process of obtaining goods and material by breaking up of ship. He further held that it is common practice that fuel and oil on board of ship are necessarily required to be removed first for the purpose of hazardless and efficient operation of breaking of the ship, therefore removal of fuels and oils is nothing but initial part of manufacturing process and all the goods including fuel and oils are “input” for manufacturing process of ship breaking for a ship breaking unit. Accordingly, learned Commissioner (appeals) held that CVD paid on removal of items available on ship including fuel and oils at the time of importation of ships is part and parcel of duty element which is available to the ship breaking unit as cenvat credit and can be utilized for discharging central excise duty on the items removed from breaking of ship. He further relied upon Circular No. 1014/2/2016-CX dated 1st February 2016 in which it has been clarified that once the importer has paid CVD on import of ship, cenvat credit of that CVD cannot be denied for payment of central excise duty on breaking of that ship.
03. Shri G. Kirupanandan, learned Assistant Commissioner (AR) on behalf of Department while reiterating the grounds of appeal, submitted that impugned Order holding that when the ship imported for breaking up, the fuel and oils available on ship even as stores form part of the ship and is an “input” within the meaning of Cenvat Credit Rules, 2004 is incorrect. He submitted that such oils are considered as “store” only and by no stretch of imagination, a part of ship, because, once activity of breaking up of ship is commenced; such fuel & oil are no longer required. He further submitted that impugned order allowed the cenvat credit holding that process of breaking up of ship starts with removing of fuel and oils from ship as well as other removable articles is also untenable as it is not in dispute that fuels and oils imported in a ship are removed without making any process and change in their form or characteristics and that such fuel and oil do not emerge out of breaking up of ship; that fuel and oil do not play any role so far as activity of breaking up of ship amounting to manufacture is concerned. He further submitted that when such fuel and oil has been classified under CETSH No. 27.10 as “remaining fuel & Oil, question of eligibility of cenvat credit of CVD paid thereon considering it as “input” for ship breaking classifiable under Tariff Head 89.08 “Ship for Breaking” does not arise in this case.
04. Shri J C Patel along with Shri Rahul Gajera, learned Advocates for the Respondent submitted that Learned Commissioner (Appeals) has rightly held that entire ship is the “input” for the importer. He further submitted that fuel and oil so obtained and sold by the importer is a by-product of the ship breaking activity which amounts to manufacture and that it is settled position of law that in the course of manufacturing activity any by-product emerges cenvat credit on that part of input cannot be denied. As regards the issue of classification he submits that classification of inputs is immaterial for admissibility of cenvat credit and that this position is also specifically admitted in the appeal memo in para 3.2.4.
05. We have carefully considered the rival submissions and perused the records. It can be seen that obtaining of goods and material by process of breaking ship is deemed as manufacturing activity liable to central excise duty as per section note 9 of section XV of Central Excise Tariff Act, 1985 which reads as under:
“in relation to the products of this section, the process of obtaining goods and material by breaking up of ships, boats and floating structure shall amount to „manufacture‟.
Section XV covers all goods and materials falling under section 72 to 83 of the Schedule 1 appended to the Central Excise Tariff Act, 1985. Thus, all such goods and materials obtained by such process are considered as „excisable goods being subject to levy of duties of excise as per section 2 (d) of the Central Excise Act, 1944. As a corollary the goods and materials, except those covered under section XV (Chapter 72 to 83) are considered as non-excisable irrespective of the fact that they are obtained by breaking up of ships. Thus, Fuels and Oils are non-excisable. It is in this context the cenvat credit of CVD paid on fuel and oils was denied to the Respondent by the adjudicating authority. The case of the department mainly is that fuel and oils are removed as such from the ship before commencing the breaking activity and are not specified products of section XV amounting to manufacture and hence the same cannot be “input‟ for the Respondent for the process of obtaining goods and materials by breaking ship. However, as can be observed from the appeal memo itself fuel and oils for the use of ship, found as store in the ship when brought for breaking purposes are inevitably required to be removed for efficient and safe operation of breaking of ship. This position is also specifically admitted in the appeal memo in para 3.4.4. In this background, it is clear that Fuel and Oils are by-product that are inevitably required to be removed from the ship in the course of commencing the activity of breaking the ship and if that be so, there is no reason for denial of cenvat credit of CVD paid on any part of the Ship including its stores viz. fuel and oil on the ground that they do not form part and parcel of the ship or that they are removed at a stage before commencing the activity of breaking ship or that their classification is under different heading. It is settled law that in the course of manufacturing activity any by-product emerges; cenvat credit on that part which pertains to by-product cannot be denied on the ground that such by-products are non-excisable goods or that they are not used in or in relation to manufacturing activity of manufacturer of excisable goods. This was made clear by para 3.7 of CBEC Manual for supplementary instructions that states as follows:
“CENVAT credit is also admissible in respect of the amount of inputs contained in any of the waste, refuse or by-product. Similarly, CENVAT is not be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that CENVAT credit is admissible so long as the inputs are used in or in relation to the manufacture of final products, and whether directly or indirectly.”
5.1 There can be no doubt that for the purpose of carrying out the manufacturing activity as envisaged under note 9 to section xv viz. obtaining goods and material by breaking of ship, the entire ship as imported is the “input” for a ship breaker. Ordinarily, ship when imported for breaking purpose would contain fuel and oil whether in the engine, machinery or in the bunker/tanks. There is no reason to treat the same not part of the ship imported for breaking purpose. It has been rightly held by Learned Commissioner (Appeals) that removal of fuel and oil is the initiation of ship breaking activity and cannot be said as separate activity. Further, Learned Commissioner (Appeals) has rightly held that in view of para 6 of the circular no. 1014/2/2016-CX., dated 1-2-2016, that cenvat credit of CVD paid on fuel & oils cannot be denied to the Respondent.
06. In view of foregoing discussion, impugned order is required to be upheld and appeal of department is liable to be dismissed. Accordingly, we uphold the impugned order and dismiss the revenue‟s appeal. CO also stand disposed of.
(Pronounced in the open court on 14.03.2023 )
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