Case Law Details
Kanade Anand Udyog Pvt Ltd Vs CCE Thane – I (CESTAT Mumbai)
Introduction: The case of Kanade Anand Udyog Pvt Ltd vs. CCE Thane-I (CESTAT Mumbai) revolves around the denial of CENVAT credit for duty discharged on the procurement/import of ‘capital goods’ between 2005-06 and 2007-08. The denial was based on the lack of evidence that these goods had been received at the appellant’s designated factory. This article provides an in-depth analysis of the case and the final verdict.
Background of the Case: Kanade Anand Udyog Pvt Ltd had their CENVAT credit challenged due to a lack of evidence regarding the receipt of ‘capital goods’ at their designated factory. The denial pertained to the period between 2005-06 and 2007-08.
Denial and Appeal: The initial demand was for ₹21,31,950. Still, after the appellant’s explanation that ‘welding machines’ had been disposed of after payment of duty, the demand was reduced by ₹37,061 by the first appellate authority. The appellant provided various justifications, such as the transfer of machinery to sister units and the use of spares and consumables. However, these explanations were rejected by the authorities.
Factory Ceased to Function: The appellant’s pleas were made in the context of their factory ceasing to function by the time of an audit visit in 2008. They explained the absence of goods by mentioning transfers to sister units and the deployment of spares and consumables. The authorities challenged the allegations of non-inclusion in income tax returns.
Key Issues: The case revolved around the denial of CENVAT credit due to a lack of evidence that the capital goods were received at the factory. The recovery was initiated after an audit visit, non-inclusion in income tax returns, and explanations provided only after adjudication had commenced.
Failure of Verification: The physical verification of imported machinery was conducted after the factory’s closure. There was no reference to the audit including a physical verification. The existence of these goods at sister units could have been ascertained, and the failure to do so was a lapse on the part of the adjudicating authority.
No Onus on Manufacturer: The authorities did not cite any rule that placed the onus on a manufacturer to produce ‘capital goods’ for verification. Under the CENVAT Credit Rules, 2004, taking credit is permitted on the receipt of goods in the factory, subject to variations, and should not be denied if availed against proper documentation.
Lack of Clear Evidence: Any claim of non-receipt of ‘capital goods’ at the factory must be based on clear evidence of diversion, which was lacking in this case. The authorities relied on presumptions, which is inconsistent with the principles of adjudicatory proceedings.
Appeal Allowed: The impugned order was set aside, and the appeal was allowed.
Conclusion: The Kanade Anand Udyog Pvt Ltd vs. CCE Thane-I case highlights the importance of clear evidence in CENVAT credit disputes. In this case, the denial of credit was based on presumptions rather than concrete evidence of diversion. The ruling emphasizes the need for authorities to rely on clear evidence when challenging CENVAT credit claims, as presumptions have no place in adjudicatory proceedings. The appeal’s success underscores the importance of adhering to the principles of the CENVAT Credit Rules, 2004, and the rule of law in taxation matters.
FULL TEXT OF THE CESTAT MUMBAI ORDER
This appeal of M/s Kanade Anand Udyog Pvt Ltd is concerned with denial of CENVAT credit of duty discharged on procurement/import of ‘capital goods’ between 2005-06 and 2007-08 on the ground of lack of evidence of having been received at the designated factory of the appellant at 42, Morivili, MIDC, Ambernath to the extent ₹20,94,889 remaining in dispute after disposal of appeal by order1 of Commissioner of Central Excise (Appeals), Mumbai-I.
2. The adjudicating authority had confirmed demand of ₹21,31,950 but, on consideration of plea of the appellant that ‘welding machines’ had been disposed off on payment of duty, the first appellate authority reduced the demand by ₹37,061. Several other explanations and justification had been offered before the adjudicating authority which was discarded then and the first appellate authority was not inclined to accept those factual submissions which were rejected as afterthought, on unreliability of certificate of chartered engineer who had been contracted by the appellant and that physical verification did not evince the presence of the impugned capital goods.
3. The pleas of the appellant, in proceedings initiated by notice of January 2011, were made in the specific context of the factory having ceased to function by the time of the audit visit in August/September 2008 and absence explained away as owing to transfer of the machinery to sister units, as well as deployment of spares and consumables, and challenge to the allegation of not having been incorporated in the returns filed with the Commissioner of Income Tax.
4. We have heard Learned Counsel and Learned Authorized Representative at length. It is common ground, from non-disputation on the part of the lower authorities, that, in addition to machinery and equipment imported against bills of entry of 2005-06 to 2007-08, the enumerated ‘capital goods’ were such as find fitment within plant and machinery or are consumed in usage. Furthermore, the claim of the factory having been closed at the time of issue of notice or that the audit visit was followed by ‘note’ of January 2009 and after which, it took another two years for notice to be issued have also not been disputed in the order of the lower authorities.
5. The recovery was initiated owing to lack of ascertainment at the time of audit visit, non-inclusion in return filed with income-tax, and production of certificate as well as furnishing of explanations only after commencement of adjudication during which verification had been conducted on behalf of the original authority. We find that the first appellate authority had allowed the claim in relation to ‘welding machines’ on the basis of documents produced before, though overlooked by, the adjudicating authority. Yet, the impugned order was not prepared to subject even statutory compliances to the test of ascertainment. We refer to the submissions on inclusion in returns filed by the appellant before income tax authorities.
6. The physical verification of imported machinery was undertaken after closure of the factory. There is no reference in the orders of the lower authorities to audit having included physical verification of these; in any case, their existence at the sister units could well have been ascertained and failure to do so is dereliction on the part of the adjudicating authority as central excise authority having jurisdiction over the factory of the appellant. Choosing to style alleged ‘non-intimation of transfer’ as sufficing to deny credit also demonstrates failure to cite the authority under which the appellant was required to intimate such transfer.
7. That the other ‘capital goods’ were spares, that may have been incorporated in the machinery for which those were intended, or used consumables has not been controverted by the lower authorities. Nor has any authority, under CENVAT Credit Rules, 2004, been cited as placing onus on a manufacturer to produce ‘capita good ’ for verification and, in absence thereto, liable to be proceeded against under rule 14 of CENVAT Credit Rules, 2004.
8. Under the scheme of CENVAT Credit Rules, 2004, taking of credit is permitted on receipt of goods in factory, subject to such variations as permitted therein, and not to be denied if availed against proper documentations. Any allegation of non-receipt of such ‘capital goods’ at factory, in contradistinction with non-availability that may be justified with explanations subject to ascertainment, would, therefore, have to be based on, and also sustained on, clear evidence of diversion.
9. We also fail to find any compelling motive for diversion of imported and locally procured goods save that two establishments set to take credit – one on document and the other on availability of ‘capital goods’ – which, in the absence of supporting evidences, defies logic as having occurred. It would appear that the entire exercise was half-hearted and relying entirely on presumptions which is a characteristic that is anathema to adjudicatory proceedings.
10. For the above reasons, the impugned order is set aside and appeal allowed.
(Order pronounced in the open court on 06/10/2023)
