CENVAT Credit of materials used in manufacture of capital goods is duly available

Dhampur Sugar Mills Ltd Vs Commissioner, Central Excise (CESTAT Allahabad)

CESTAT Allahabad held that CENVAT Credit of materials used for fabrication work of machines which are capital goods is duly available in terms of rule 3 of the CENVAT Credit Rules, 2004.

Facts- The appellant manufactures V.P. sugar & molasses falling under Chapter Headings 1701 11 90 and 1703 10 00 of the First Schedule to the Central Excise Tariff Act, 1985. The appellant availed CENVAT credit of duty paid on inputs and capital goods used in the manufacture of the final products under rule 3 of the CENVAT Credit Rules, 2004.

A show cause notice dated 19.10.2007 was issued to the appellant and Gautam Goel, Managing Director of the appellant mentioning therein that on scrutiny of the ER-1 returns and the records of the appellant submitted for the period October 2006 to March 2007, it appeared that the appellant had availed CENVAT credit of Rs. 1,44,37,976/- on items namely Plate (7208), M.S. Angles (7216), Shape & Section (7216), G.P. Sheet/Coils (7210), C.R. Coil/Sheet (7209), C.R. Strip (7211), M.S. Bar/Rod (7214), Paints/Primer (3208), Thinner (3814) and Polyester Resin (3907) by treating these items as ‘capital goods’. The appellant was, therefore, called upon to show cause as to why the CENVAT credit wrongly utilized should not be disallowed and recovered from the appellant with interest and penalty for the reason that the items were not capital goods.

Conclusion- It is, therefore, clear that the materials on which CENVAT credit had been taken had all been used for fabrication work of machines which are capital goods. In any view of the matter the show cause notices do not allege that the raw materials on which CENVAT credit had been taken had not been utilized for fabrication of ‘capital goods’.

FULL TEXT OF THE CESTAT ALLAHABAD

Excise Appeal No. 314 of 2010 has been filed by M/s Dhampur Sugar Mills Ltd.¹ for quashing the order dated 14.10.2009 passed by the Commissioner, Customs and Central Excise Meerut-II² adjudicating the show cause notice dated 19.10.2007 for the period October 2006 to March 2007 and the show cause notice dated 29.04.2008 for the period April 2007 to September 2007. The order denies CENVAT credit and further directs for its recovery with interest and penalty. The order also imposes a penalty of Rs. 10 lakhs upon Gautam Goel, Managing Director of the appellant.

2. Excise Appeal No. 315 of 2010 has been filed by Gautam Goel to assail that part of the aforesaid order dated 14.10.2009 that imposes a penalty of Rs. 10 lakhs upon him.

3. Excise Appeal No. 323 of 2010 has been filed by the appellant to assail the order dated 23.10.2009 by which the show cause notice dated 31.12.2008 for the period November 2007 to March 2008 has been adjudicated upon by denying CENVAT credit and ordering it to be recovered with interest and penalty. The order also imposes a penalty of Rs. 10 lakhs upon Gautam Goel, Managing Director of the appellant.

4. Excise Appeal No. 324 of 2010 has been filed by the Gautam Goel to assail that part of the aforesaid order dated 23.10.2009 that imposes a penalty of Rs. 10 lakhs on him.

5. The appellant manufactures V.P. sugar & molasses falling under Chapter Headings 1701 11 90 and 1703 10 00 of the First Schedule to the Central Excise Tariff Act, 1985. The appellant availed CENVAT credit of duty paid on inputs and capital goods used in the manufacture of the final products under rule 3 of the CENVAT Credit Rules, 2004³.

6. A show cause notice dated 19.10.2007 was issued to the appellant and Gautam Goel, Managing Director of the appellant mentioning therein that on scrutiny of the ER-1 returns and the records of the appellant submitted for the period October 2006 to March 2007, it appeared that the appellant had availed CENVAT credit of Rs. 1,44,37,976/- on items namely Plate (7208), M.S. Angles (7216), Shape & Section (7216), G.P. Sheet/Coils (7210), C.R. Coil/Sheet (7209), C.R. Strip (7211), M.S. Bar/Rod (7214), Paints/Primer (3208), Thinner (3814) and Polyester Resin (3907) by treating these items as ^„capital goods^‟. After reproducing rule 2(a)(A) of the CENVAT Rules, the show cause notice mentions:-

“4. Whereas, in the instant case, it appears that the items mentioned in ANNEXURE-I to this notice neither fall under one of the specified chapter or heading mentioned in Rules 2 (a)(A) (i) of CENVAT Credit Rules, 2004, nor do they fall under any of the other clause of the said Rule. It therefore, appears that the said items do not conform to the definition of Capital Goods, therefore, no CENVAT Credit appears to be admissible to the party on the said items. Thus, the party have violated the provisions of Rule 2 and 3 of CENVAT Credit Rules, 2004 by wrongly taken and utilized the inadmissible Cenvat credit of Rs. 1,44,37,976/- (Cenvat duty Rs. 1,41,55,563/- + Education Cess Rs.2,82,413/-) on these items during the period from October’06 to March’07 in as much as they have availed the inadmissible Cenvat credit under Rule 3 of CENVAT Credit Rules, 2004 on the items which do not covered in purview of the definition of the Capital Goods as defined under Rule 2 (a) (A) of the CENVAT Credit Rules, 2004.

5. *****

6. Further, Shri Gautam Goel, Managing Director of M/s Dhampur Sugar Mills Ltd., Dhampur, Distt.- Bijnor is looking after the works relating to Finance and Central Excise. His active involvement in the incorrect availment of Cenvat credit is established. Therefore, it appears that he is also liable for penal action under Rule 26 of the Central Excise Rules, 2002.”

(emphasis supplied)

7. The appellant was, therefore, called upon to show cause as to why the CENVAT credit wrongly utilized should not be disallowed and recovered from the appellant with interest and penalty for the reason that the items were not capital goods. The show cause notice also calls upon Gautam Goel to show cause as to why penalty should not be imposed upon him.

8. The show cause notice dated 29.04.2008 mentions that on scrutiny of ER-1 Returns filed by the appellant and the records submitted by the appellant for the period April 2007 to September 2007, it appeared that the appellant had availed CENVAT credit on items namely G.P. Coils (721049), G.P. Sheets (721049), HR Coils (720837), C.R. Sheet (720920), M.S. Angle (721621), M.S. Plates (720811), M.S. Channel (721631), Shape and Section (721650), Alloyed/Unalloyed cold Rolled Coil & Throughed Corrugated C R Sheet (Ch-76) and Primer & Pains (320890) by treating these items as ^„capital goods^‟. The show cause notice also mentions that the said items appeared not to confirm to the definition of ^„capital goods^‟and, therefore, CENVAT credit was not admissible to the appellant. It, therefore, called upon the appellant to show cause as to why CENVAT credit wrongly utilized should not be disallowed and recovered from the appellant. The show cause notice also calls upon Gautam Goel to show cause as to why penalty of Rs. 10 lakhs may not be imposed upon him.

9. The appellant filed a reply to both the show cause notices primarily contending that the appellant was eligible to avail CENVAT credit of duty on inputs (raw material) used by the appellant in the manufacture and fabrication of ^„capital goods^‟mentioned in rule 2(a)(A)(i) in terms of Explanation 2 to rule 2 of the CENVAT Rules. The appellant also gave details of the specific uses of input raw materials to the capital goods falling under Chapter 84 of the Central Excise Act, 1985 duly verified by the Chief Engineer of the appellant factory. In view of the Circular dated 03.0 1.1996, the appellant also pointed out that sugar mill machinery falling under Chapter 84 were covered by the definition of ^„capital goods^‟ and so under rule 2 (a)(A)(iii) of the CENVAT Rules all the parts, components and accessories, irrespective of their classification, would be covered by the definition of ^„capital goods^‟. The appellant also placed reliance on the decisions of the Tribunal in its own matter that held that the appellant would be entitled to avail CENVAT credit on these items.

10. The Commissioner, however, by order dated 14.10.2009, did not accept the contentions advanced by the appellant and observed as follows:-

“I do not find any reason to place the goods on which the party has taken Cenvat credit, anywhere in the category (i) to (vii) mentioned as above. Therefore these goods do not qualify to as capital goods, in view of the above said definition, and hence the Cenvat Credit on these goods is not admissible as capital goods. The Honorable Supreme Court of India, in case of CCE Coimbatore Vs. Jawahar Mills Ltd (2001(132) E.L.T.3 (S.C.)] held that an item falls within the definition of capital goods would depend upon the use it is put to. Therefore, it is very vital to ascertain the use of the goods on which Cenvat credit taken i.e. whether the goods used in fabrication of capital goods or in repair & maintenance of capital goods. I have gone through the case laws referred by them and found that in all the case laws, Cenvat credit was allowed on the goods used for repair & maintenance of the capital goods. However, I do not find any such use of the above said goods submitted by the party with supportive evidence thereof, and therefore do not accept the claim of the party to allow Cenvat credit on these goods, used as such, as capital goods or used in repair & maintenance. I find that they are eligible to avail Cenvat credit of central excise duty paid on inputs (raw material) used in the manufacture or fabrication of capital goods mentioned in Rule 2 of Cenvat Credit Rules 2004 in view of explanation 2 of rule 2 of Cenvat Credit rules 2004. I also agree with Circular No.276/110/96-TRU, dated 02.12.96; vide which it was clarified that the tariff classification of parts & components (inputs) were immaterial, if the same were used in capital goods. To analyse the claim of the party that the Cenvat Credit on the above said goods is admissible as inputs used in the fabrication of Capital Goods as per explanation 2 to rule 2 of Cenvat Credit Rules, 2002, I have gone through the said explanation, which says that “Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacture.” I agree with their submission in view of explanation to of Rule 2 of Cenvat Credit Rules 2002, but the party did not produce any record / evidence about the capital goods so fabricated from the above said goods on which Cenvat credit taken and where the said fabricated capital goods were placed/entered and issued for captive consumption and without such records/ evidence it is difficult to establish that the said goods were used in the manufacture/fabrication of capital goods, as inputs. I find from the use of these goods submitted by the party duly verified by the Chief Engineer of their factory, but the same was not supported by any documentary evidence about the use of the said goods, therefore it is nothing but after thought and not acceptable until and unless supported by evidences. Therefore, I do not find any evidence to treat the said goods as inputs on which the party availed the Cenvat credit used in the manufacture/fabrication: of capital goods and hence no Cenvat Credit admissible to them.

The party failed to produce any record maintained for proper accounting of the goods used for fabrication of capital goods, and the record where so fabricated capital goods were entered and further issued for captive use or how much goods were used in the repair & maintenance of capital goods and how much for fabrication of capital goods. Therefore, without any such correlation, the Cenvat credit can not be allowed to the party who merely took Cenvat credit on all the goods purchased by them and did not maintain any documentary evidence about specific use of the said goods, made them liable for penal action. The case laws referred by them are not squarely applicable in the facts & circumstances of the case. I do not accept the plea of the party on demand of interest as the rule 14 of Cenvat credit rules 2004, read with Section 11 AB of Central Excise Act, 1944, had clear provisions in this regard, whether wrongly taken Cenvat credit utilized or not. The case laws referred by them are not applicable.

I find that Sh. Gautam Goel who looks after the excise work also did not make necessary arrangement to up keep the records regarding the said goods on which the party took Cenvat credit. I do not find any proper reason in his explanation and hence he is liable for penal action.”

(emphasis supplied)

11. Shri Aalok Arora, learned counsel for the appellant submitted that the order dated 14.10.2009 passed by the Commissioner has travelled beyond the show cause notice as even though there was no allegation in the two show cause notices, the Commissioner has held that the appellant has not maintained records and given evidence of use of the items. The contention of the learned counsel for the appellant is that even otherwise the appellant had maintained all the records of receipts and issue of items. The issue slips which had been produced before the Commissioner show the names of the items, quality and place of use and even the Chief Engineer and the Chartered Engineer certified the use of each item in question. According to the learned counsel for the appellant, since the items in issue were used by the appellant in the expansion of the factory, CENVAT credit would be admissible on the items. Elaborating this submission, learned counsel for the appellant pointed out that the items in question have been used in fabrication of machine, machinery, accessory and support structure which are necessary to keep the heavy machinery/equipments like boiler, turbine, cane carrier, bagasse carrier, EOT crane at a calculated height to run the manufacturing process for manufacture of the final product. Thus, CENVAT credit, according to the learned counsel for the appellant, would be available on such items used in fabrication of support structure. In support of this submission learned counsel placed reliance upon certain decisions, to which reference shall be made at the appropriate stage. Learned counsel also pointed out that there was no evidence on the record to show that Gautam Goel, Managing Director of the appellant, was involved in the day to day affairs of the appellant and availment of CENVAT credit and, therefore, no penalty could have been imposed upon Gautam Goel.

12. Shri Santosh Kumar, learned authorized representative appearing for the department, however, supported the impugned Learned authorized representative submitted that the appellant did not produce any documentary evidence to establish that the goods on which CENVAT credit had been availed were used in the fabrication of capital goods and so the Commissioner was justified in denying CENVAT credit. Learned authorized representative also submitted that the goods in question do not qualify as ^„capital goods^‟as they were not used in the factory for the manufacture of the final product.

13. The submissions advanced by the learned counsel for the appellant and the learned authorized representative appearing for the department have been considered.

14. To appreciate the contentions, it would be appropriate to first reproduce rule 2(a)(A) of the CENVAT Rules, as it existed at the relevant time.

15. Rule 2(a) defines ^„capital goods^‟as under”-

2(a) “Capital Goods” means-

(A) The following goods, namely

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Central Excise Tariff Act,

(ii)) pollution control equipment;

(iii) components, spares and accessories of the goods specified at (i) and (ii);

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof; and

(vii) storage tank,

used-

(i) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or

(ii) for providing output services;

16. Rule 2 (g) defines ^„input^‟to mean-

(g) “input” means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils and coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production.

Explanation 1. – The high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.

Explanation 2. – inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.”

17. According to the appellant, it had used all the items mentioned in the two show cause notices for fabrication of ^„capital goods^‟in the expansion of the factory. Learned counsel pointed out that the factory had installed Co-generation plant for which the items were fabricated and installed. The appellant claims that it maintained all the records of receipt and issue and inputs for fabrication of capital goods in the factory and had shown the availment of CENVAT credit in the relevant ER-I returns.

18. In this connection, learned counsel for the appellant placed reliance upon the letter dated 04.04.2008 sent by the appellant to the Superintendent in response to the letter dated 07.02.2008 regarding the use of each item in question duly certified by the Chief Engineer. The Range Superintendent along with inspector also visited the factory and the offices of the factory and were shown the various machinery where the items were used. They were also provided copies of the invoices, store issue slips of materials duly signed which fact is evident from the panchnama dated 06.10.2009. Learned counsel, therefore, submitted that apart from the fact that it was not even the allegation in the show cause notice, the finding recorded by the Commissioner that the appellant had not maintained records and provided evidence of use of the items is factually incorrect. In this connection learned counsel referred to the various issue slips which show the names of the items, quantity and place of use.

19.Explanation 2 to rule 2 (g) of the CENVAT Rules provides that ‘input’ includes goods used in the manufacture of the ‘capital goods’ which are further used in the factory of the manufacturer. Thus, if the items in question were used in the expansion of factory, CENVAT credit would be admissible on such items. The items were used in the fabrication of machine, machinery, accessory and support structure necessary to keep the heavy machinery/equipments like boiler, turbine, cane carrier, bagasse etc., to manufacture the final product.

20. In this connection, it would be useful to reproduce the letter dated 03.11.2009 submitted by the appellant to the Commissioner in response to the show cause notice, wherein a certificate from the Chartered Engineer regarding use of the items involved in the ‘capital goods’ used in the manufacture of finished goods was produced. The said letter is reproduced below:-

“We had already submitted through our additional submission that the amount had not been taken or utilized by us for the payment of duty on finished goods.

It is submitted that neither penalty nor interest can be demanded from us because more than amount involved in this Show Cause Notice is shown in RG-23 was admissible to us.

On merit we had already submitted the certificate from the Factory personnel as per Trade Notice before your goodself. In addition to above we are submitting the additional proof of uses by way of Certificate from the Chartered Engineer about the uses of these items involved in the said capital goods which in turn were used in the manufacture of finished goods. The Chartered Engineer is independent authority for the purposes of our claim on merit.”

21. The inspection report which was submitted with the aforesaid letter is reproduced below:-

“INSPECTION REPORT

“In accordance with the request of Shri J.S. Sharma, Executive President (Commercial), Dhampur Sugar Mills Ltd., Dhampur, the undersigned visited the premises of the client at Dhampur to inspect the machinery! plant! equipments installed in the factory on 23.10.09.

The various records of purchase of material for the use in the capital goods closely examined as to its quantity and use. Upon completion of assignment, I have to report as hereunder –

04. Upon having visited the factory site of M!s Dhampur Sugar Mills Ltd., Dhampur, I have physically verified the uses of the items on which Cenvat Credit under Central Excise Act is claimed by the said unit. I found that the items have been used in the machinery ! equipment ! plant installed in the factory premises of Dhampur Sugar Mills Ltd., Dhampur. The use of the items purchased are also reflected in their records. The statements given by the Chief Engineer of the said unit are enclosed herewith and which have been found in order. In token of verification ! correctness of uses, I have also countersigned this statement of uses. The items were used in machinery, equipment and plant of the sugar mill as mentioned in the statement enclosed.”

22. With the inspection report, details of each item of machinery and use of items and the amount of CENVAT availed was mentioned. These have been found to be in order by the Chartered Engineer.

23. It would also be pertinent to reproduce the letter dated 04.04.2008 sent by the appellant to the Superintendent of the Central Excise, Range Dhampur in connection with the letter dated 07.02.2008 and the same is reproduced below:

“The Superintendent, Central Excise,

Range- Dha m pu r

Dhampur

Subject: CENVAT Credit taken on Capital goods during the period April 07 to September 07.

Dear Sir,

This is with reference to your letter C.No. 20-CE/Misc./DSM Sugar/DPR/04/99 dated 07.02.2008.

The aforesaid items were used as Input to Capital Goods in the machinery namely Electrostatic Precipitator of 170 Ton Boiler, Body of 170 Ton Boiler, Pipe Lines of Cooling Tower of 170 Ton Boiler, E.O.T. Crane of 30 M.W. Turbine, I.D. Fan of 170 Ton Boiler, base Frame of Cooling Tower of 170 Ton Boiler and 30 M.W. Turbine, Oil System Section of 30 M.W. Turbine, Control Panel of 30 M.W. Turbine, D.N. Piant Tank, HCL Tank of R.O. Plant, F.D. Fan of 170 Ton Boiler, Body of CIGAR of Boiling House Section, Evaporator Body of Boiling House etc. and duly verified by the Chief Engineer are enclosed herewith as desired in your aforesaid letter. You can verify the uses by visiting our factory.

You are, therefore, very kindly requested to allow the Cenvat Credit on these Iron and Steel used as Input to Capital Goods to aforementioned machineries falling under chapter 84 of the Central Excise Tariff Act, 1985, for manufacture of final Products Sugar and Molasses as provided under the Act and is allowable as per earlier consistent decisions of Hon’ble Tribunal in our cases.

Thanking you,

Yours faithfully

For The Dhampur Sugar Mills Limited”

24. The letter enclosed summary of the specific use of the items along with machinery they were used in.

25. The panchnama prepared by the panchas who had been called by the Central Excise Officers to witness the verification of inputs used in the manufacture of ^„capital goods^‟, also gives details of the verification that was conducted to establish that the parts were used in the machines for fabrication work. The panchnama also records that the Officers were provided photocopies of relevant purchase invoices along with store issue slips of material duly signed by the concerned technical authority.

26. It is, therefore, clear that the materials on which CENVAT credit had been taken had all been used for fabrication work of machines which are capital goods.

27. In any view of the matter the show cause notices do not allege that the raw materials on which CENVAT credit had been taken had not been utilized for fabrication of ^„capital goods^‟. The Commissioner, therefore, could not have examined this issue.

28. It is, therefore, not possible to sustain the finding recorded by the Commissioner that the items in question have not been used for fabrication of ^„capital goods^‟.

29. In this connection, it would be useful to refer to a decision of the Division Bench of this Tribunal in case of the appellant itself in M/s M/s DSM Sugar, Rajpura Vs. Commissioner of Central Excise, Hapur⁴, wherein after relying upon the earlier decision of the Tribunal rendered on 07.12.20 17, the Tribunal observed as follows:-

“We note that there is no dispute that the said inputs were used for fabrication and manufacture of machines and machines parts. We note that on fabrication of machines, machines parts and accessories out of the above stated inputs appellant had obtained a Certificate from the Technical Person of their factory and the same was submitted with reply to Show Cause Notice along with drawings of machines, machinery, parts and accessories thereof fabricated and the use of items in question duly certified by Chartered Engineer to the Original Authority. We note that the appellant submitted before the Original Authority that Welding Electrodes used in fabrication of machines and that of support structure. On hearing both the sides and on perusal of the facts on record we note that the issue is no more res-integra and the same has been decided by this Tribunal in appellant’s own case through Final Order No. 70814- 70817/2018 dated 07/012/2017. For the purpose of ready reference, we reproduce the findings of said Final Order recorded in Para 7 as follows:-

7. Having considered the rival contentions, we find that the appellants had led evidence before the Courts below that the items in question like Welding Electrodes, MS electrodes, MS plate, Shape and Section etc have been utilised for fabrication of mostly Capital Goods. The appellants had filed Annexure-A to the reply to show cause, wherein they have explained item-wise usage and stated that the same has been used in fabrication of accessory to boiler, evaporator, clarifier and other machinery or its part in the factory of production. The said explanation/ usage duly filed under certificate of the head of Technical Department of the appellants, have not been found to be untrue by the Authorities below. We, further find that the definition of inputs in Rule-2 (k) read with Explanation-2 provides- input includes goods used in the manufacture of capital goods which are further used in the factory of the manufacturer. Thus, in view of the specific provision for allowing Cenvat credit on inputs either used as inputs directly or indirectly in the manufacture of final products or used in the factory of production for manufacture of further capital goods which are further used in the factory of manufacturer, the Cenvat credit is allowable. The issue is also covered by the judgments referred & relied by appellants in Para-4 above. Accordingly, we hold that the appellants are entitled to Cenvat credit on the items in question as discussed hereinbefore. Since, the Cenvat credit on items in question is admissible neither the penalty on appellant company nor on Managing Director is maintainable.

2. We find that earlier findings in said Final Order dated 07/12/2017 are squarely applicable in the present case. We, therefore, set aside the impugned order and allow the appeal.”

30. The imposition of penalty upon the Gautam Goel, for the aforesaid reasons, cannot also be sustained. Even otherwise, the learned counsel for the appellant is justified in asserting that there was no evidence on record to suggest that he was involved in the day to day affairs of the appellant, particularly with regard to availment of CENVAT Credit.

31. It is, therefore, not possible to sustain the order dated 10.2009 that has been assailed in Excise Appeal No. 314 of 2010 and Excise Appeal No. 315 of 2010 and the order dated 23.10.2009 that has been assailed in Excise Appeal No. 323 of 2010 and Excise Appeal No. 324 of 2010. The two orders are, accordingly, set aside and the appeals are allowed.

(Order pronounced on 18.07.2023)

Notes

1 the appellant

2 the Commissioner

3. the CENVAT Rules

4. Excise Appeal No. 70485 of 2017 decided on 13.02.2019