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Cenvat credit not to be reversed on transfer of capital goods to sister concerns without physical movement

In view of settled legal position regarding need for physical removal of capital goods or inputs, in order to attract the provisions of Rule 3 (5) of Cenvat Credit Rules, 2004, we find that there is no justification to invoke such provision to demand and recover any amount from the appellant in this case

M/s. Vodafone Mobile Services Limited Vs. Commissioner of Central Excise & ST (CESTAT Ahmedabad)

It is an admitted fact that of the case that there was no physical removal of the capital goods from the factory of the respondent. The central point for consideration is whether the amount is required to be paid under Rule 3(4) of the Cenvat Credit Rules is to be paid by taking such capital goods as removed from the factory. Revenue relied upon the decision of the Honble Karnataka High Court in which a view was taken, in the light of the erstwhile Rule 57Q of the Central Excise Rules, that such an amount would be payable even in the absence of any physical removal of capital goods. The Honble High Court held that the transaction of sale of the entire power plant to different entity is nothing short of physical removal.

However, the respondent has relied upon several case laws in which contra view has been taken. Ld. Counsel has relied on the decision of the Honble Supreme Court in J.K. Cotton Spinning and Weaving Mills Ltd. vs. UOI – 1987 (32) ELT 234 (SC) – 1987-VIL -04-SC-CE wherein the meaning of the word removal has been examined. The Apex Court held as follows: There can be no doubt that the word removal contemplates shifting of a thing from one place to another. In other words, it contemplates physical movement of goods from one place to another. In the Tribunal decision in the case of L.G. Balakrishnan and Bros. Limited (supra), the Tribunal has examined a similar question as is before us and considered the meaning of the word removal as explained by the Honble Supreme Court and held as under:

10. In view of the above settled decision, we find that the provisions of Rule 3 (5) are not attracted in the present case. The original authoritys attempt to distinguish the above findings is not appropriate. He found that these decisions are regarding change of ownership of whole factory whereas here only a part of the factory is transferred. We find such finding as untenable. Further, regarding question of issue of invoice by the appellant for sale and transfer of capital goods and inputs to the new legal entity, we find on perusal of sample invoice that these are not invoices in terms of Rule 11 of Central Excise Rules, 2002. The appellant contended that the goods were identified with value for the purpose of business transaction and not for sale transaction in terms of Sales Tax or Central Excise provision. We note that the invoices issued did not contain the details of any removal, mode of transport, rate of duty, duty payable thereon etc., as per the requirement of Rule 11 (2) of Central Excise Rules, 2002. We also note that based on these invoices no credit can be availed by any buyer as these are not in terms of Rule 9 of Cenvat Credit Rules, 2004. In view of settled legal position regarding need for physical removal of capital goods or inputs, in order to attract the provisions of Rule 3 (5) of Cenvat Credit Rules, 2004, we find that there is no justification to invoke such provision to demand and recover any amount from the appellant in this case. As such, we find no justification for the confirmation of demand towards capital goods. The same reasoning is applicable to the recovery of amount for the inputs amounting to Rs. 91,76,449/-. The demand towards such recovery is also not sustainable. There is no allegation or finding regarding any irregular credit availed on inputs or capital goods or usage of these goods for other than approved purposes.

FULL TEXT OF THE CESTAT JUDGMENT

The appellant is in appeal against the impugned order wherein Cenvat credit taken on capital goods sought to be denied in terms of Rule 3(5) of Cenvat Credit Rules, 2004 on transfer of capital goods to their sister unit.

2. The brief facts of the case are that the appellant is service provider of telecommunication The appellant procured optical cables which were to be laid down and later on, some of the optical fibre cable was not used by the appellant therefore, the same was transferred to their sister unit. The Revenue is of the view that, as the said capital goods has been transferred to their sister unit therefore, in terms of rule 3(5) of Cenvat Credit Rules, 2004 the appellant is required to reverse the Cenvat credit availed on said capital goods. Therefore, for the period 2008-09, a show cause notice dated 29.09.2014 was issued to the appellant by invoking extended period of limitation. The matter was adjudicated and it was held that appellant is required to reverse Cenvat credit. Consequently, duty was demanded along with interest and equivalent amount of penalty was imposed. Against the said order, the appellant is before me.

3. The ld. Counsel submits that, in terms of Rule 3(5) of Cenvat Credit Rules, 2004 they are required to reverse Cenvat credit on removal of capital goods. It is his contention that the capital goods were never removed but the ownership of the capital goods were transferred to their sister unit. Therefore, the provisions of Rule 3(5) of Cenvat Credit Rules, 2004 are not applicable to the facts of this He further submits that the issue has been examined by the Honble Allahabad High Court in the case of Hero Motors Limited vs. CCE, Ghaziabad 2014 (310) ELT 729 (All.) and in the case of CCE, Tiruchirappali vs. CESTAT, Chennai 2015 (323) ELT 290 (Mad). Further, in the case of Commissioner vs. Ultra Tech Cement Limited 2014 (310) ELT 554 (Tri. Bang.) and he also relied upon the decision of this Tribunal in the case of CCE, Raipur vs. Bhilai Steel Plant 2017-VIL-01-CESTAT-DELHI-CE to say that as the capital goods has not been removed physically, they are not required to reverse Cenvat credit.

4. The ld. Counsel further submits that as these capital goods has been transferred to their sister unit, therefore, it is a case of Revenue neutrality and to support his contention he relied on the decision of Honble Gujarat High Court in the case of CCE & Cus., Vadodara vs. Indeos ABS Limited 2010 (254) ELT 628 (Guj.).

5. On the other hand, ld. AR opposed the contention of the ld. Counsel and submits that the issue has already been decided by the Honble Karnataka High Court in the case of CCE, Belgaum vs. Associated Cement Co. Limited 2009 (236) ELT 240 (Kar.) wherein the goods transferred to another unit, it was held by the Honble High Court that in terms of Rule 3(5) of Cenvat Credit Rules, 2004, the assessee is required to reverse the Cenvat credit. He further submitted that the same view has been taken by this Tribunal in the case of J.K. Paper Mills vs. CCE & ST., Bhubneshwar 2014 (309) ELT 359 (Tri. Kolkata). Therefore, the impugned order has to be upheld.

6. In rebuttal to the arguments advanced by the ld. AR, ld. Counsel submits that as there were divergent views of different High Courts, in that circumstances also, the extended period is not invokable and admittedly the show cause notice has been issued by invoking the extended period of Therefore, the show cause notice is barred by limitation.

7. Heard the parties and considered the submissions. On careful consideration of the submissions made by both sides, I find that the issue to be decided by me is, whether the appellant is required to reverse the Cenvat credit on transfer of capital goods to their sister unit, in terms of Rule 3(5) of Cenvat Credit Rules, 2004 or not? The ld. Counsel for the appellant relied on various judicial pronouncements. Therefore, the issue is to be decided whether in terms of Rule 3(5) of Cenvat Credit Rules, 2004 the capital goods are required to be physically removed or mere transfer can be said that goods have been removed. The said issue has been examined by the Hon’ble Apex Court in the case of J.K. Spinning and Weaving Mills Limited vs. UOI 1987 (32) ELT 234 (SC) wherein the Hon’ble Apex Court observed as under:-

38. It is submitted on behalf of the appellants that the Explanations to Rule 9 and Rule 49 are ultra vires the provision of Clause (b) of sub-section (4) of Section 4 of the Act inasmuch as place of removal as defined therein, does not contemplate any deemed removal, but a physical and actual removal of the goods from a factory or any other place or premises of production or manufacture or a whatehouse etc. This contention is unsound and also does not follow from the definition of place of removal. Under the definition place of removal may be a factory or any other place or premises of production or manufacture of the excisable goods etc. The Explanations to Rules 9 and 49 do not contain any definition of place of removal, but provide that excisable goods produced or manufactured in any place or premises at an intermediate stage and consumed or utilised for the manufacture of another commodity in a continuous process, shall be deemed to have been removed from such place or premises immediately before such consumption or utilisation. Clause (b) of sub-section (4) of Section 4 has defined place of removal, but it has not defined removal. There can be no doubt that the word removal contemplates shifting of a thing from one place to another. In other words, it contemplates physical movement of goods from one place to another.

As per the said decision of Hon’ble Apex Court, for the goods are required to be physically removed, in Cenvat Credit Rules or in Central Excise Act, nowhere removal has been defined. Therefore, the verdict of Hon’ble Apex Court is binding on me. Moreover, the decision of Associated Cement Co. Limited (supra) was examined by this Tribunal in the case of Bhilai Steel Plant (supra) wherein this Tribunal observed as under:-

Jam, Id. Advocate for the respondent.

10. A. R. submits that in terms of Rule 3(4) of the Cenvat Credit Rules, the payment of an am6untequiv`lent to the credit availed on capital goods is required to be made inasmuch as the power plant stands sold to M/s BESCL even though there is no physical removal of goods even after sale. He argued that the transaction was nothing short of physical removal of the capital goods. He relied upon the decision of the Honble Karnataka High Court in the case of Commissioner of Central Excise, Belgaum vs. Associated Cement Co. Limited – 2009 (236) ELT 240 (Kar.) – 2007-VIL-Ol-KAR-CE. He emphasised that the decision of the Honble High Court was in similar facts.

11. .. ..

12. It is an admitted fact that of the case that there was no physical removal of the capital goods from the factory of the respondent. The central point for consideration is whether the amount is required to be paid under Rule 3(4) of the Cenvat Credit Rules is to be paid by taking such capital goods as removed from the factory. Revenue relied upon the decision of the Honble Karnataka High Court in which a view was taken, in the light of the erstwhile Rule 57Q of the Central Excise Rules, that such an amount would be payable even in the absence of any physical removal of capital goods. The Honble High Court held that the transaction of sale of the entire power plant to different entity is nothing short of physical removal.

However, the respondent has relied upon several case laws in which contra view has been taken. Ld. Counsel has relied on the decision of the Honble Supreme Court in J.K. Cotton Spinning and Weaving Mills Ltd. vs. UOI – 1987 (32) ELT 234 (SC) – 1987-VIL -04-SC-CE wherein the meaning of the word removal has been examined. The Apex Court held as follows: There can be no doubt that the word removal contemplates shifting of a thing from one place to another. In other words, it contemplates physical movement of goods from one place to another. In the Tribunal decision in the case of L.G. Balakrishnan and Bros. Limited (supra), the Tribunal has examined a similar question as is before us and considered the meaning of the word removal as explained by the Honble Supreme Court and held as under:

10. In view of the above settled decision, we find that the provisions of Rule 3 (5) are not attracted in the present case. The original authoritys attempt to distinguish the above findings is not appropriate. He found that these decisions are regarding change of ownership of whole factory whereas here only a part of the factory is transferred. We find such finding as untenable. Further, regarding question of issue of invoice by the appellant for sale and transfer of capital goods and inputs to the new legal entity, we find on perusal of sample invoice that these are not invoices in terms of Rule 11 of Central Excise Rules, 2002. The appellant contended that the goods were identified with value for the purpose of business transaction and not for sale transaction in terms of Sales Tax or Central Excise provision. We note that the invoices issued did not contain the details of any removal, mode of transport, rate of duty, duty payable thereon etc., as per the requirement of Rule 11 (2) of Central Excise Rules, 2002. We also note that based on these invoices no credit can be availed by any buyer as these are not in terms of Rule 9 of Cenvat Credit Rules, 2004. In view of settled legal position regarding need for physical removal of capital goods or inputs, in order to attract the provisions of Rule 3 (5) of Cenvat Credit Rules, 2004, we find that there is no justification to invoke such provision to demand and recover any amount from the appellant in this case. As such, we find no justification for the confirmation of demand towards capital goods. The same reasoning is applicable to the recovery of amount for the inputs amounting to Rs. 91,76,449/-. The demand towards such recovery is also not sustainable. There is no allegation or finding regarding any irregular credit availed on inputs or capital goods or usage of these goods for other than approved purposes.

13. We also note that the Tribunal has taken similar view in all the cases cited by the respondent. The Tribunal decision cited in the case of Steel Authority of India Limited – 2007 (219) ELT 960 (Tri-Del.) – 2007-VIL-60-CESTAT-DEL-CE has dealt with identical facts pertaining to another unit of respondent at Rourkela. We also note that the respondent has cited similar decision from the Honble Allahabad High Court as well as Madras High Court.

Further, I find that after the decision of Associated Cement Co. Limited, the Honble Karnataka High Court itself has examined the issue again in the case of Commissioner vs. Ultra Tech Cement Limited 2015 (321) ELT A150 (Kar.) and dismissed the appeal filed by Revenue, affirming the decision of this Tribunal, reported in 2014 (310) ELT 554 (Tri. Bang.). In that circumstances, I hold that appellant is not required to reverse the Cenvat credit as the goods have not been physically removed from their premises to their sister unit.

8. Further, I find that in the case of Indeos ABS Limited (supra), the jurisdictional High Court observed as under:-

3.As can be seen from order of the Tribunal dated 10-11-2008 impugned in this appeal, the Tribunal has disposed of the appeal holding that the goods manufactured by the assessee were being cleared to its own sister concern, who is availing the benefit of Modvat Credit. The Tribunal has further found that as such whatever duty the assessee was paying was available as credit to its own unit (sister concern) and hence the entire exercise was revenue neutral.

As the goods have been transferred to their sister unit, in that circumstance, it is a Revenue neutrality situation. In that circumstance also, the appellant is not required to reverse the Cenvat credit.

9. On limitation also, I examined the issue. As there were divergent views of various High Courts during the relevant period, in that circumstance, the show cause notice cannot be issued by invoking the extended period of limitation. Although the knowledge of non reversal of Cenvat credit came in the knowledge of department after one year of the availment of Cenvat credit, in that circumstance also, from the date of knowledge, within one year, the Revenue was required to issue show cause notice, as there were divergent views on the subject. Therefore on limitation also, the appeal succeeds.

10. In view of the above analysis, I hold that appellant has correctly availed Cenvat credit and is not required to reverse Cenvat credit in terms of Rule 3(5) of Cenvat Credit Rules, 2004. In result, the appeal is allowed.

(Order dictated and pronounced in the court)

Categories: Excise Duty
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