Doctrine of Revenue Neutrality Applicable when Assessee gets no benefit by not reversing cenvat credit on inputs

M/s. Sanvijay Rolling & Engineering Ltd. Vs Commissioner of Central Excise (Bombay High Court)

Once the assessees derive no benefit by not reversing cenvat credit on the inputs, when sister concerns are also eligible to take that credit, then, in the absence of any cogent and reliable evidence particularly on the diversion of inputs, the principle or doctrine of revenue neutrality, which was applied in that case by the Tribunal, was rightly upheld. The principle of revenue neutrality,which was applied in that case by the Tribunal in identical facts and circumstances, was challenged by the Revenue in Appeal but the Revenue’s Appeal was dismissed on the ground that it was not raising any substantial question of law. The Tribunal follows one course in identical facts and circumstances, but refuses to follow that in another case of similar nature. This is the precise reason for which we term the order under Appeal as vitiated by an error of law apparent on the face of record and clear perversity. It is that which enables us to interfere with it and to set it aside.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

1. By these Appeals under Section 35G of the Central Excise Act, 1944 (hereinafter referred to as, “the said Act”), the assessee is challenging the final order dated 21^st July, 2015 of the Customs, Excise and Service Tax Appellate Tribunal, Mumbai (CESTAT). After hearing both sides, we are of the view that the Appeals raise substantial questions of law. The Appeals are therefore admitted on the following substantial questions of law:

a) Whether, in the facts and circumstances of the case, the demand raised by the Respondents is sustainable since even if credit is denied to the Appellants, it is simultaneously available to other factories who according to the Respondents have received the inputs under consideration?

b) Whether, in the facts and circumstances of the case, the Respondent is correct in invoking extended period of limitation under proviso to Section 11A(1) of the Central Excise Act, 1944 read with Rule 12 of the erstwhile Cenvat Credit Rules, 2002?

2. Since we have heard extensive arguments of both sides, we dispose of these Appeals by the present order.

3. The assessee has pointed out that it is a company duly incorporated under the Indian Companies Act, 1956. The respondent exercises powers and discharges duties conferred upon him under the Central Excise Act, 1944. The appellants are engaged inter alia in manufacture of rolled products of iron and steel falling under Chapter 72 of the Central Excise Tariff Act, 1985. There are six factories of M/s. Sanvijay Group of Industries (for short, “Sanvijay Group”). Out of six factories, five are located in MIDC, Hingna Road, Nagpur and one is located at MIDC, Butibori. In para 7 of the memo of Central Excise Appeal No.114 of 2016, the names of six factories and their addresses are set out. It is stated that the present Appeal (Central Excise Appeal No.114 of 2016) concerns the first of the units/companies, namely M/s. Sanvijay Rolling & Engineering Ltd. It is stated that the appellants as well as the other units received the duty paid blooms, which is their main raw material used for the manufacture of different types of rolled products. The appellants take cenvat credit of the duty paid on the raw materials received from the supplier. It is stated that four units of Sanvijay Group have a common prefix, namely “Sanvijay”. It is stated that one of the group companies M/s. Sanvijay Steel Private Limited, Butibori, Nagpur and three other units located at Hingna Road, Nagpur share the same name.

4. It is stated that when the duty paid inputs are consigned by the respective manufacturers to the various factories of this group, there have been instances of errors in the wrong delivery of consignments to the precise recipient­factory. Thus, there are cases when the inputs are wrongly delivered to unintended recipient due to similarity in name and address. Whenever such instances are occurring, the respective factories arrange to deliver the inputs to the correct recipient­factory, but without correcting the transport documents (lorry receipts) through local transport. The respective factories in whose premises the inputs were delivered may appear to be consuming these inputs on the basis of the lorry receipts, but in reality, the material is consumed by the factories in whose name the excise invoices have been issued. Thus, the material is ordered and ultimately delivered and consumed in the factory in whose name the excise invoices have been issued by the supplier. The concerned factories transport the wrongly delivered inputs to the correct recipient­factory. The local transportation of wrongly delivered inputs is therefore not backed up by further documents.

5. The appellant­assessee has set out this procedure in detail simply because the Preventive Branch of the Central Excise Headquarters, Nagpur, through its officials, visited the factory on 20^th/ 21^st May, 2003 and verification of stocks of inputs as well as finished goods was undertaken. The shortage was noticed as far as inputs are concerned, to the extent of 3.367 Metric Tons (MTs). The statements were recorded of various persons and the officers came to the conclusion that there was no proper explanation provided. It is in these circumstances, it was alleged that the appellants had taken wrong credit of Rs.21,14,189/­ on the inputs which were received and consumed in another factory of Sanvijay Group located at Butibori, whereas only duty paying documents were received in the factory of the appellants. That is how a common show cause notice dated 18^th/24^th December, 2003 was issued to all the units listing out the alleged irregularities noticed in the individual units. The appellants were therefore called upon to show cause as to why the amounts mentioned in the notice besides penalty should not be recovered.

6. Replies were filed to notice on 18^th November, 2004 after which the order­in­original was passed on 30^th March, 2007. Aggrieved thereby, an appeal was carried to the Commissioner (Appeals). The Commissioner (Appeals), after a personal hearing, proceeded to dismiss the Appeals by the order­in­Appeal dated 12^th September, 2007.

7. That is how the appellants and others preferred Appeals before the CESTAT and which have been partly allowed.

8. Our attention has been invited to the order of the CESTAT and which sustains the demand but interferes with the It is in these circumstances that the present Appeals have been filed.

9. It was argued by Mr. Sridharan, learned Senior Counsel appearing on behalf of the appellants that credit has been denied on the ground that the goods were actually delivered to the other factory of the appellants. If the credit is denied to the appellants, the same should be allowed to the other factory where the goods were alleged to be actually delivered. Thus, the entire exercise of denial of credit is revenue neutral inasmuch as credit is available to the other factory of the appellants manufacturing the same products and with identical inputs. In these circumstances, there was no question of any suppression with intent to evade payment of duty. The assessee would suppress something when he gains and by way of payment. In the sense, he does not have to pay any duty. The assessee would not suppress, for the allegations in the show cause notice themselves reveal that the goods were received, and because of the local transportation, they reached the correct recipient. They may not reach the appellant’s factory, therefore this is not a case where penalty and equivalent to the duty amount and by invoking the legal provisions should be imposed.

10. In support of these contentions, reliance is placed on two decisions, one is rendered by a Division Bench of this Court to which one of us (Shri S.C. Dharmadhikari, J.) was a party {Commissioner of C.Ex. CUS. & S.T., Vapi vs. Tarapur Grease India Pvt. Ltd. reported in 2016 (334) E.L.T. 416 (Bom.)} and the other is the one which is a view of the Tribunal but in identical circumstances {Geep Industrial Syndicate Ltd. vs. Collector of C.Ex., Allahabad, reported in 1999 (114) E.L.T. 850 (Tribunal)}. Thus, the argument as summed up is that this is a case of alleged irregularity and not illegality going to the root of the case. There was therefore, no occasion for holding that there is any evasion of duty. Further, there is no suppression when all the documents and materials are as clear as can be seen from the show cause notice itself.

11. On the other hand, Mr. Dwivedi, learned counsel appearing for the respondent would submit that there are concurrent findings of fact. They are not vitiated by any error of law apparent on the face of record or perversity warranting our interference in our further appellate jurisdiction. He would submit that once the allegations are admitted, then, the consequences must The explanation that has been given by the assessee is not reasonable and truthful. This is a case where inputs have been diverted in order to evade payment of duty. All the explanations now given are pure after thought. In the circumstances, we should dismiss these Appeals.

12. Since the paper book is complete, as noted above, we have proceeded to dispose of these Appeals. The show cause notice which is common to all the units, proceeds and alleges that the six units named therein are of M/s. Sanvijay Group of Industries. They have common registered office. That was visited by the officers of Central Excise Commissionerate, Nagpur on 20^th May, 2003 to carry out preventive checks. During the course of verification of the statutory records with the physical stocks of finished goods as well as raw materials with cenvat credit, it was prima facie revealed that there were discrepancies in the stock of finished goods as compared to the recorded balance, as well as in the raw material. Physical verification of both was conducted in the presence of independent panchas and authorized persons of the Sanvijay Group on 20^th May, 2003 and 21^st May, 2003. The verification resulted in a shortage of finished goods as well as raw materials. The details of the same are set out and then it is alleged that the Central Excise Officers recorded the statements of the authorized signatory of each unit of the Sanvijay Group, who inter alia admitted that the group comprises of six units, four of which are in close proximity to each other. It is not as if the diversion of the inputs or raw materials is to this extent that the same was not utilized at all but was disposed of in open market. On the own showing of the authorities, the consumption is by the members/units of the Sanvijay Group. The show cause notice therefore refers to all these materials and alleges that there is an inadmissible and irregularly availed cenvat credit. The noticees, therefore, were called upon to show cause as to why Central Excise duty in respect of shortage of finished foods and raw materials should not be demanded by having recourse to Section 11A of the said Act, including the proviso thereof, but once the duty is already paid by the assessee, then, why the said amount so paid should not be adjudged against the confirmed demand. Thereafter, appropriate penalty and interest was sought to be recovered.

13. It is common ground that a reply was given to this show cause notice in which the visit was admitted, the alleged deficiency and short­fall was also admitted. However, what the assessee pointed out is, that the allegations at best indicate an irregularity and not a gross or patent illegality. It is very clear that the assessee has pointed out that there are two charges and which can be culled out from the records themselves. The assessee, with reference to the stock, indicated that there has been no diversion. The raw material figures would indicate that the same was consigned to other units. That would have been used by the Butibori factory of the assessee. If it was used entirely by this factory, it could have consumed the raw materials in the quantities mentioned in the reply to the show cause notice. It is in these circumstances that the explanation or reply says that the show cause notice be dropped.

14. Both the orders, namely, the order­in­original and the order- in­Appeal, proceed on the footing that there has been no serious denial of the allegations in the show cause notice. The order­in­original goes unit wise and in the discussions and findings, the order­in­original says very clearly that the assessee did not maintain the statutory record of finished goods/raw materials correctly. If the Central Excise Officer had not detected the shortcoming, it would be continued for future and the Department would be deprived of Central Excise duty. That is a conclusion which runs throughout, but what we find from the reasons is that this surprise visit revealed that the shortage of finished goods/raw materials was noticed during verification of the statutory records with the physical stocks at the six units. The assessee did not maintain that record correctly, but in none of the findings and conclusions it is held that there was a diversion of stocks. It is only an omission to record the inter­unit transfer. It is in these circumstances that we expected the Commissioner (Appeals) at least to take an appropriate decision. However, the Commissioner (Appeals) as well, while confirming the view of the adjudicating authority, concluded that this irregularity cannot be condoned, nor there is any question of revenue neutrality.

15. When the Tribunal was approached by the assessee, the Tribunal passed a short but cryptic order. It noted the facts and which we have already set out in great details. After noting these facts and the payment of duty under protest, what the Tribunal does is to hold that the credit was availed by the unit whose name was mentioned in the invoices as consignee, whereas in investigation it was revealed that the inputs were received in some different unit of the Sanvijay Group. Therefore, this is a wrong availment of cenvat credit. Once the stock of raw materials has not gone out of the units of the Sanvijay Group or the Group as a whole, then, what ought to be apparent to all of them is that there was an irregularity and at best discrepancy, but not a wrongful availment of the cenvat credit. It is, therefore, clear that the Tribunal noted the arguments of the assessee’s Advocate, and particularly that the shortage is not due to the clandestine removal of the goods, but it is only due to the accounting method and secondly, that the difference in the stock is less than 5% which is permissible by the BIS standards. Apart therefrom, the confirmation of demand of cenvat credit was on the basis of non receipt of inputs in the respective units. The argument was that, the goods were received in some different unit, but subsequently transported and shifted to the unit in whose name the invoices were drawn. Thus, the consignee was the one whose name is mentioned in the invoices. It is in these circumstances, by mere wrong delivery at the initial stage, no inference, much less a conclusion can be drawn that there was any evasion. The Department on the other hand reiterated its argument and particularly of wrong availment of cenvat credit without receipt of inputs in the respective units. Thus, the admission on the part of the officials was taken as conclusive. The Tribunal, in para 6 holds that there is no dispute that the entire shortage found in the physical stock taken by the officers is less than 5%. It is in these circumstances and when in the assessee’s own case it was held that shortage in the range of +/­ 5% should be ignored, then, the Tribunal followed its own order in the case of this very assessee and dropped the demand in respect of shortage found in the physical stock and consequent penalty commensurate to the duty on such shortage. Thus, the Group, the units and their activities were known to the Revenue. It is not as if the shortage was noticed for the first time. The shortage was not to such an extent as would make a demand for duty interest and penalty sustainable. It was in the permissible range.

16. Thus, the Appeals succeeded

17. As far as the issue of wrongful availment of cenvat credit is concerned, the Tribunal did not consider the arguments and submissions in their proper perspective. Throughout, the admission was not of any guilt but of an irregularity. The inputs were initially received and delivered on different unit, but credit was availed of by the unit in whose name the invoices were issued. The finding is that the assessee could not produce any single evidence regarding re­transportation of inputs from wrong factory to the correct factory. Therefore, it is clear that the cenvat credit was availed by the assessee but the input was delivered at different factory and it was used in the production by the different factory. At the same time, the assessee’s explanation that this was all done by local transportation and therefore no records were maintained but there is revenue neutrality, has been conveniently brushed aside and ignored. In the sense, the inputs were also the inputs of the common finished product of all the factories/units in the Group. They were therefore entitled and eligible to take cenvat credit on these raw materials as far as finished product is concerned. Thus “A” unit may be the recipient of the goods/inputs and utilized the same as raw materials for its finished product, but “B” unit was the entity to which the consignment was delivered does not mean that “A” was not entitled to cenvat credit. Nowhere there is a finding that this cenvat credit should not have been availed of by the units. Thus, it may have been wrongfully availed of by the “A” unit, but even if that wrongful availment by “A” unit is taken into consideration, a set­off or adjustment would definitely have been admissible and permissible because “B” unit also enjoyed the cenvat credit. Thus, the goods have been consumed within the Group units and there is no cenvat credit which was wrongfully availed, but was adjusted as stated above. Thus, this was a case where the adjudicating authority so also the Commissioner (Appeals) and the Tribunal could not establish any loss of revenue. We are also not been shown any finding of such nature. Else, the penalty would not have been dropped. Once the explanation in regard to shortage of raw materials was found to be plausible and is accepted and the Appeal allowed in part, then, we do not see why for an alleged irregularity on penalty, the same view was not taken. It was imminently possible given the fact that no fraud has been established.

18. Precisely, this has been done and repeatedly by the Tribunal in the cases of this nature. The Division Bench of this Court had an occasion to consider an identical issue in the case of Tarapur Grease India Pvt. Ltd. (supra). The Revenue brought an Appeal against an identical finding and conclusion of the Tribunal. This Court, while dealing with the rival contentions, held as under:

“ 4. We have with the assistance of Mr. Oak and Mr. Shah perused the orders of the Tribunal. The Tribunal has noted the factual controversy. It has noted that three companies are indeed associate companies or concerns/firms. They are in identical business, managed and administered by common partners and directors and have a common head office. The product namely the inputs which were raw materials for all three companies/concerns arrived at the factories and were cleared without payment simply because they were exchanged with the associate companies. It is no doubt true that the procedure adopted was not in consonance with the formalities prescribed by law, however, even the examination of private books and the entries therein having been corroborated by the transporters, resulted in no revenue loss, then, the Tribunal’s conclusion cannot be said to be perverse. The Tribunal has found that the jurisdictional Gujarat High Court considered a similar controversy and questions. The Tribunal found that once the inputs have been delivered only at the factories of the assessees from the associate companies, then no loss occurs to revenue. The assessees would derive no benefit by not reversing Cenvat credit on the inputs, when sister concerns are also eligible to take Cenvat credit. Therefore, in the absence of cogent and reliable evidence particularly on the diversion of these inputs, the Tribunal applied the doctrine or principle of revenue neutrality. We do not see how the same was inapplicable in the admitted facts and circumstances.

5. Even the order­in­original and the paragraph which was relied upon by Mr. Oak does not indicate that any other material or evidence was placed. The Tribunal has taken this factual position from order­in­original itself. The only procedure that was required to be complied with was clearance of the raw materials after reversing the credit availed on it. Thus, the duty amount should have been paid and thereafter when these inputs or raw materials were utilized in the manufacture of the final product, the Cenvat credit could have been claimed but this procedure was not followed. It may be, as observed by the adjudicating authority, that this mode of clearance gives some temporary benefit to the associate companies but the objection raised was of diversion of goods. That case could not be substantiated by the Revenue as is evident from even Paragraph 67.10 of the order of the adjudicating authority.

6. In our view, therefore, merely because the penalty has been notionally imposed on all the assessees, does not mean that the Tribunal’s earlier conclusion, and by applicability of the principle of revenue neutrality, is perverse or vitiated by any error of law apparent on the face of record. Imposition of the notional penalty is for infraction of some procedural rule. That has no bearing on the main issue.”

19. From the above quoted observations and conclusions of this Court, we find that once the assessees derive no benefit by not reversing cenvat credit on the inputs, when sister concerns are also eligible to take that credit, then, in the absence of any cogent and reliable evidence particularly on the diversion of inputs, the principle or doctrine of revenue neutrality, which was applied in that case by the Tribunal, was rightly upheld. The principle of revenue neutrality,which was applied in that case by the Tribunal in identical facts and circumstances, was challenged by the Revenue in Appeal but the Revenue’s Appeal was dismissed on the ground that it was not raising any substantial question of law. The Tribunal follows one course in identical facts and circumstances, but refuses to follow that in another case of similar nature. This is the precise reason for which we term the order under Appeal as vitiated by an error of law apparent on the face of record and clear perversity. It is that which enables us to interfere with it and to set it aside.

20. As a result of the above discussion, the Appeals succeed. The orders under Appeal are quashed and set aside. There would be no order as to costs.