EOU entitled to Cenvat Credit Refund in respect of goods sold to SEZ units

Mylan Laboratories Limited Vs Commissioner of Central Tax (CESTAT Hyderabad)

Observing that the definition of DTA under SEZ Act includes everything located outside SEZs, CESTAT Hyderabad has held that 100% EOU located outside SEZ, constitutes DTA as far as SEZ Act is concerned. It also observed that Section 51 of the SEZ Act makes it clear that this Act prevails over any other law. The Tribunal held that the appellant (EOU) is entitled to refund of Cenvat Credit under Cenvat Rule 5 in respect of the goods which they had sold to SEZ units. CESTAT Chennai Order in case of Orbis India (P) Ltd. was relied on.

FULL TEXT OF THE CESTAT JUDGEMENT

1. The appellant herein is a manufacturer of pharmaceuticals and is registered with Central Excise Department. They availed CENVAT Credit under CCR 2004. Three show cause notices dated 27.01.2016, 05.02.2016 and 28.04.2016 were issued to the appellant seeking to demand in all an amount of Rs. 22,99,424/- under Rule 6(3) of CCR 2004 along with interest and proposing to impose penalty upon the appellant. The period of dispute is April 2011 to December 2015. The issues which fall for consideration in this case are:-

(a) Whether the appellant is liable to pay an amount under Rule 6(3) of CCR 2004 in cases where they have cleared the inputs as such for sale and have also reversed the CENVAT Credit availed on such inputs under Rule 3(5) of CCR 2004.

(b) Whether the appellant is liable to pay an amount under Rule 6(3)(1) when they have reversed proportionate amount of CENVAT Credit on the inputs used in manufacture of exempted products.

(c) Whether the interest is leviable on the aforesaid two demands, and

(d) Whether any penalties imposable upon the appellant.

2. It is the case of the Revenue that sale of goods amounts to trading which is undisputedly an exempted service. When the goods which were purchased and CENVAT Credit was taken on them and were later re-sold by the appellant, it is nothing but a trading activity which is an exempted service. Rule 6(3) of CCR 2004 requires the appellant to pay an amount calculated as per rule when they used the inputs for the exempted service viz; trading. Ld. DR relies on the definition of “trading” in the following two Dictionaries:-

(a) “P. RAMANATHAN IYER’s – MAJOR LAW LEXICOM

The business of buying and selling or bartering commodities (Indian Contract Act (9 of 1872).

(b) BLACK’s LAW DICTIONARY

The business of buying and selling esp. of commodities and securities”.

3. It is the case of Ld. Counsel for the appellant that Rule 3(5) of CCR 2004 has a specific provision as far as removal of inputs as such is concerned. It reads as follows:

“When inputs or capital goods on which CENVAT Credit has been taken, are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or the provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an Invoice referred to in Rule 9.”

4. He would submit that this rule does not distinguish between the clearance of the inputs as such for sale or for any other purpose. As long as they fall within the scope of definition of Rule 3(5) and have operated within it, they cannot be burdened with a demand under Rule 6(3). He would submit that there is no dispute that they have cleared the inputs as such after reversing CENVAT Credit availed on them. It is his assertion that being a pharmaceutical industry, they have a standard mode of operation in which various chemicals which serve as inputs are bought and kept in stock. These chemicals can be used for manufacture of a variety of products and they manufacture them as per demand and orders. At times, they sell the inputs as such. At the time of receiving the inputs they take full amount of CENVAT Credit on the inputs. When they remove the inputs under Rule 3(5), they reverse the CENVAT Credit availed on such inputs. Therefore, they are not required to pay amount under Rule 6(3) in respect of such clearances. He relies on the case law of Suyash Auto Press Components & Assemblies Pvt. Ltd. Vs. CCE, Pune-III [2018(5)TMI 208-CESTAT-Mumbai] to assert that removal of inputs as such does not amount to trading.

5. On the other hand, Ld. DR asserts that from the definition of “trading” it is evident that whenever the goods are bought and sold, such activity is called trading and what the appellant had traded and has not removed the inputs for some other purposes. Therefore, they are clearly covered by the definition of “trading” which is an exempted activity. Therefore, they are required to pay an amount under Rule 6(3).

6. The second issue is regarding reversal of CENVAT Credit on proportionate basis in respect of exempted goods manufactured by the appellant. Ld. Counsel for the appellant submits that they purchase various chemicals in bulk to meet the production requirements, from time to time. These chemicals have multiple potential uses and because of the very nature of industry, they cannot be assigned to particular final products. For instance, a solvent like Acetone can be used in manufacture of several pharmaceutical products. They use them as required. Some quantity of the same chemical may be used for manufacture of dutiable product and subsequently some quantity of the same chemical may be used for manufacture of another exempted final product. Therefore, they have reversed proportionate amount of CENVAT credit. For manufacture of 1 Kg of each final product, there are standard norms as to how and what quantity of different chemicals are required. They have calculated the amount of CENVAT Credit availed based on these norms and reversed the amount. He draws the attention of the Bench to the Work sheet at Page 153 of the paper book to explain how the amount was reversed. He would rely on the case laws of Astrix Laboratories Limited vs. CCE, C&ST, Hyderabad-I [2019(5)TMI 1344-CESTAT-HYDERABAD] and Matrix Laboratories Ltd. vs. CCCE&ST, Hyderabad-I [2018(8) TMI 1440-CESTAT-Hyderabad] to assert that such reversal is acceptable in case of pharmaceutical industry.

7. Ld. DR draws the attention of the Bench to Rule 6 of CCR 2004, which reads as follows:

“Rule 6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.-

(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2):

Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-

(i) the manufacturer of goods shall pay an amount equal to five per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to six percent. of value of the exempted services; or

(ii) the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).

Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.

(3A) For determination and payment of amount payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider of output service shall follow the following procedure and conditions, namely:-

(a) while exercising this option, the manufacturer of goods or the provider of output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely:-

(i) name, address and registration No. of the manufacturer of goods or provider of output service;

(ii) date from which the option under this clause is exercised or proposed to be exercised;

(iii) description of dutiable goods or taxable services;

(iv) description of exempted goods or exempted services;

(v) CENVAT credit of inputs and input services lying in balance as taxguru.in on the date of exercising the option under this condition;

(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month,-

(i) the amount equivalent to CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, denoted as A;

(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional)= (B/C) multiplied by D, where B denotes the total value of exempted services providedduring the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services

provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value ofexempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

(c) the manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner, namely:-

(i) the amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods, denoted as H;

(ii) the amount of CENVAT credit attributable to inputs used for provision of exempted services = (J/K) multiplied by L, where J denotes the total value of exempted services provided during the financial year, K denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year and L denotes total CENVAT credit taken on inputs during the financial year minus H;

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services = (M/N) multiplied by P, where M denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during thefinancial year, N denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year, and P denotes total CENVAT credit taken on input services during the financial year;

(d) the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per condition (c) and the aggregate amount determined and paid as per condition (b), on or before the 30th June of the succeeding financial year, where the amount determined as per condition (c) is more than the amount paid;

(e) the manufacturer of goods or the provider of output service, shall, in addition to the amount short-paid, be liable to pay interest at the rate of twenty-four per cent. per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date;

(f) where the amount determined as per condition (c) is less than the amount determined and paid as per condition (b), the said manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount;

(g)  the manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment,as per condition (d) and (f) respectively, the following particulars, namely:-

(i) details of CENVAT credit attributable to exempted goods and exempted services, month wise, for thewhole financial year, determined provisionally as per condition (b),

(ii) CENVAT credit attributable to exempted goods and exempted services for the whole financial year,determined as per condition (c),

(iii) amount short paid determined as per condition (d), along with the date of payment of the amount short-paid,

(iv) interest payable and paid, if any, on the amount short-paid, determined as per condition (e), and

(v) credit taken on account of excess payment, if any, determined as per condition (f);

(h) where the amount equivalent to CENVAT credit attributable to exempted goods or exempted services cannot be determined provisionally, as prescribed in condition (b), due to reasons that no dutiable goods were manufactured and no taxable service was provided in the preceding financial year, then the manufacturer of goods or the provider of output service is not required to determine and pay such amount taxguru.in provisionally for each month, but shall determine the CENVAT credit attributable to exempted goods or exempted services for the whole year as prescribed in condition (c) and pay the amount so calculated on or before 30th June of the succeeding financial year.

where the amount determined under condition (h) is not paid within the said due date, i.e., the 30th June, the manufacturer of goods or the provider of output service shall, in addition to the said amount, be liable to pay interest at the rate of twenty four per cent. per annum from the due date till the date of payment.

Explanation I.- “Value” for the purpose of sub-rules (3) and (3A) shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made there under.

Explanation II.-The amount mentioned in sub-rules (3) and (3A), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation III.- If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rule (3) or as the case may be sub-rule (3A), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.”

8. He would argue that in terms of Rule 6(1), the assessee cannot take CENVAT Credit in respect of the inputs used in manufacture of the exempted products. In terms of Rule 6(2) where the manufacturer is manufacturing both exempted and dutiable products, he has to maintain separate accounts and take CENVAT Credit only on the inputs which are used in manufacture of dutiable products. If the assessee cannot do either of the above and takes CENVAT Credit on the entire quantity, they have to follow Rule 6(3) i.e. either pay an amount equal to 6% of the value of exempted goods and exempted services or pay an amount as determined under Rule 6(3A). In this case, undisputedly, the appellant took CENVAT Credit on inputs used in manufacture of dutiable as well as exempted products and by the assessee’s own admission, they have not maintained separate records of the inputs but have taken CENVAT Credit on the entire amount. Therefore, they are not covered by the Rule 6(1) or 6(2) of CCR 2004. Therefore, they fall under Rule 6(3). Under Rule 6(3), they have an option of paying an amount equal to 6% of the final product or an amount determined under Rule 6(3A). Rule 6(3A) has a specific formula for calculating the amount to be reversed and such reversal has to be done every month. The appellant has not reversed the amount every month nor has seen and followed the formula in Rule 6(3A). He has adopted his own formula which has no force of law. In view of the above, the appellant has to pay an amount under Rule 6(3) i.e., an amount equal to 6% of the value of exempted goods. The demand on this account is therefore sustainable and needs to be upheld. As far as the case laws of Astrix Laboratories Limited (supra) and Matrix Laboratories Limited (supra) relied upon by the Ld. Counsel are concerned, he would submit that those cases were different inasmuch as in those cases the appellant has only taken CENVAT Credit on the amount attributable to dutiable products. In this case the appellant has taken CENVAT Credit on the entire amount.

9. On a specific query from the Bench as to under which rule their activity of reversing an amount based on the formula which they have adopted falls, Ld. Counsel would submit that effectively they have maintained separate accounts though not at the stage of receipt of the inputs because of the nature of the pharmaceutical industry. Rule 6(2) does not require separate stocks of inputs to be maintained. In the case of Astrix Laboratories Limited (supra) and Matrix Laboratories Ltd. (supra), the appellant had not taken CENVAT Credit at the receipt of the inputs but had taken proportionate amount of CENVAT Credit when these inputs were issued for manufacture of dutiable goods. They, on the other hand, have taken the CENVAT Credit at the time of receipt but have reversed the amount of CENVAT Credit attributable to the inputs which have gone into the manufacture of final products. In both the cases, the formula which has been adopted was based on the standard norms for manufacture of each pharmaceutical drug. Therefore, their activity is covered under Rule 6(2) of CCR 2004.

10. I have considered the arguments on both sides and perused the records. The first question is whether the appellant is required to pay amount under Rule 6(3) in respect of exempted service viz: ‘trading’ undertaken by them or they could reverse an amount under Rule 3(5) when the inputs are removed as such. I find from the rules that both options are open. Rule 3(5) does not make a distinction based on the purpose for which the inputs are removed as such; whether the inputs are removed as such for sale or otherwise makes no difference to the applicability of Rule 3(5) of CCR 2004. It is true that ‘trading’ is an exempted service and Rule 6(3) covers exempted services. However, having reversed an amount under Rule 3(5) of CCR 2004, the appellant will not be covered by Rule 6(3) because the credit attributable to the inputs removed as such, has already been reversed. In view of the above, I find that the demand on this account needs to be set aside.

11. As far as the second question of demand under Rule 6(3) of CCR 2004 in respect of the inputs which were used for manufacture of the exempted products is concerned, I find that Rule 6(2) provides the assessee an option to maintain separate accounts for receipt consumption, inventory of inputs used in relation to manufacture of exempted goods and dutiable goods and take CENVAT Credit only on inputs used in manufacture of dutiable goods. In the case of Astrix Laboratories Ltd. (supra) and Matrix Laboratories Ltd. (supra), the appellant had taken CENVAT Credit only on the inputs which have gone into manufacture of dutiable goods. A plain reading of Rule 6(2) does not require separate stocks of inputs to be maintained. It also does not require that the inputs should be bought under different invoices. What is required is maintenance of separate accounts. The appellant in this case has, by reversing the proportionate amount of credit as per the standard formula, has, in effect, maintained such accounts. I find in the impugned order that Ld. Commissioner (Appeals) has also, inter alia, observed that it is not shown by the appellant how they calculated the amounts reversed or paid. In the appeal book of this case, I find such calculation at page 153. These figures can be verified by the original authority to ensure that the appellant has indeed, reversed the amount of CENVAT Credit attributable to the inputs used in the manufacture of final products. Hence, I find it appropriate to remit the matter to the original authority for the limited purpose of verification of the amounts reversed. If they have done so, the demand, interest and penalties are not sustainable and are liable to be set aside.

12. In view of the above, the appeal is allowed by way of remand to the original authority for the limited purpose of verification of the amounts debited by the appellant.

(Pronounced in open Court on 18.11.2019)