CESTAT, MUMBAI BENCH
Loreal India (P.) Ltd.
Commissioner of Central Excise, Pune
FINAL ORDER NO. A/121/2012-WZB/C-II(EB)
APPEAL NO. E/557 OF 2008
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Sahab Singh, Technical Member
Loreal India Pvt. Ltd. (hereinafter referred to as ‘the appellants’) are engaged in the manufacture of various types of Cosmetic preparations falling under Chapter 33 of Central Excise Tariff Act, 1985. They have their Head Office at Mumbai and Branches located at various parts of the country. During the scrutiny of records of the appellants by the Central Excise Officers, Pune, it was noticed that they were importing and trading in certain types of cosmetic preparations from their Head Office at Mumbai. The same were being imported by their Head Office and subsequently cleared directly to customers or to their branches located at various parts of the country. They were availing Cenvat credit on inputs and input services used in or in relation to manufacture of their final products. Cenvat credit on inputs and capital goods was availed on the basis of duty paid on inputs and capital goods received by them in their factory. Cenvat credit on input services was availed on the basis of input services received by them for their factory as well as on input services received for their Head Office and various branches. As per provisions of Rule 2(1) and Rule 2(p) read with 2(h) of the Central Excise Rules, 2004, the Department felt that Cenvat credit can be availed on services which are used for providing any ‘output service’ or used directly or indirectly, in or in relation to the manufacture of final product. However, the trading activity undertaken by the appellants from their Head Office at Mumbai is neither an output service nor a final product for them and as such they are not entitled to avail Cenvat credit on services used for such trading activity.
2. It was also revealed from the scrutiny of the records that some of the cosmetic preparations were not excisable goods as they contained alcohol. All such goods containing alcohol fall under the State list of the Constitution and are known as excisable goods for the purpose of Central Excise Act. Under Rule 2(p) of the Cenvat Credit Rules, ‘input’ means all goods used in or in relation to manufacture of final products whether directly or indirectly and whether contained in the final product or not and Cenvat credit can be availed on the duty paid on any input received in the factory of manufacture of the final product. ‘Final product’ as per Rule 2(h) of the Cenvat Credit Rules means excisable goods manufactured or produced from input, or, using input service. Therefore, it was held by the department that raw materials which were used for the manufacture of non-excisable goods do not qualify as inputs as per Rule 2(k) of the Cenvat Credit Rules, 2004 and the Cenvat credit availed by them on such raw material used for non-excisable goods was not admissible to them.
3. Accordingly, a show-cause notice dated 26-6-2007 was issued to the appellants demanding duty under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 11A(1) of the Central Excise Act. In the show-cause-notice, inadmissible credit of Rs. 3,52,38,785/- of Service tax, plus Rs. 7,04,776/- of Education Cess on Service tax availed on services used for traded and non-excisable goods for the period from 10-9-2004 to 31-3-2007 was demanded and inadmissible credit of Rs. 58,83,743/- as BED, plus Rs. 1,10,448/- as Education Cess, plus Rs. 3,73,328/- as AED on raw material used for non-excisable goods for the period April, 2004 to August, 2006 was demanded. It was also proposed to impose penalty under Rule 15 of the Cenvat Credit Rules, 2004 read with Section 11AC of the Central Excise Act and also charging of interest at the appropriate rate under Section 11AB of the Central Excise Act. The said show-cause notice was adjudicated by the Commissioner of Central Excise, Pune-I vide order dated 5-3-2008 in which the amounts demanded in the show-cause notice were confirmed under Rule 14 of the Cenvat Credit Rules, 2004 read with proviso to Section 11A(1) of the Central Excise Act, 1944 and the amount already paid by the appellants were appropriated against the total duty demanded as above. Penalty of Rs. 4,23,11,080/- was imposed on the appellants under Rule 15 of the Cenvat Credit Rules read with Section 11AC of the Act and interest amounting to Rs. 19,94,658/- already paid was adjusted against the total interest liability. The appellants are in appeal before the Tribunal against the impugned order.
4. Ld. Counsel appearing for the appellants submitted that prior to the visit of the officers to their factory, they were under the bona fide belief that the goods containing alcohol were exempted under the Central excise as they were taxable under State excise duty. They thought that they were covered by Rule 6(3)(b) of the Cenvat Credit Rules, 2004 and accordingly they were availing the credit on the whole of the inputs and were reversing Cenvat credit equal to 10% of the total price excluding sales tax and other taxes of such goods. On receipt of letter dated 18-8-2006, it was pointed out by the department that the goods containing alcohol are non-excisable goods and they are not entitled to avail Cenvat credit on those inputs which are used in the products containing alcohol. On being pointed out by the department, they have paid an amount of Rs. 58,83,743/- as BED plus Rs. 1,10,448/- as Education Cess, plus Rs. 3,73,328/- as AED and interest of Rs. 7,80,711 as inadmissible Cenvat credit on the raw material and services used for such non-excisable goods for the period April, 2004 to August, 2006. They also contended that they have not at all gained by reversal of 10% as the total amount reversed under Rule 6(3)(b) was Rs. 90,86,941/- whereas the Cenvat credit attributable to inputs used in the goods containing alcohol was Rs. 63,67,519/-. They contended that very fact that the Cenvat credit equal to 10% of the price was more than attributable credit in the case of the goods containing alcohol shows that there was no intention to take ineligible credit.
5. As regards the trading activity undertaken by the appellant, the ld. Advocate submitted that they were under the bona fide belief that the credit attributable to activities which are neither manufacturing nor service are not contemplated in Rules and therefore credit which could be attributable to trading activities can be availed due to interpretation of definition of the exempted goods and exempted services in Rule 2 of the Cenvat Credit Rules and the interpretation of Rule 6 of the Cenvat Credit Rules. By reading of these two Rules, they were under the bona fide belief that they can legally avail Cenvat credit on all input services as in case of input services used for dutiable as well as exempted goods services. They also contended that no method was provided in the Cenvat Credit Rules at the material point of time for bifurcation in case of common services and the department has relied on the provisions of Rule 6(3)(d)(iii) which was introduced with effect from 1-4-2007 only. Therefore, the ld. Advocate submitted that they were under the bona fide belief that they were entitled to avail whole of the credit common to manufacture, service and trading activity. He further added that when the department explained the stand, they have paid back the credit amounting to Rs. 75,37,812/- as service tax, Rs. 1,50,755/- as Education Cess on service tax along with interest of Rs. 12,13,974/- and they have done this even before the issue of show-cause notice. He, therefore, submitted that they do not have any intention to avail the ineligible credit, therefore, they are not liable to penalty under Rule 15 of the Cenvat Credit Rules.
6. Ld. Addl. Commissioner (A.R.) appearing for the Revenue reiterated the finding of the Commissioner and stated that the appeal filed by the appellants needs to be dismissed.
7. After hearing both sides, we find that the first issue involved in the appeal is whether the Cenvat credit available on raw materials and services used for non-excisable goods is admissible to the appellants. Under the Cenvat Credit Rules, input means all goods 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 Cenvat credit can be availed on the duty paid on any input received in the factory of manufacture of the final product. This is an accepted fact that the goods containing alcohol are not final product since the same are not excisable goods under the Central Excise Act. As such the inputs which are used for manufacture of such goods do not qualify as inputs and credit availed by them on such inputs is not admissible. The appellants claimed that on being pointed out, they have paid the entire credit taken by them for the period April, 2004 to August, 2006. They submitted that since they were reversing 10% of the price of non-excisable goods, the total amount reversed under Rule 6(3)(b) of the Cenvat Credit Rules was Rs. 90,86,941/- which is much more than the amount paid by them on being pointed out by the Revenue. Therefore, there cannot be any intention on the part of the appellants to take ineligible credit and no finding has been given by the Commissioner on this aspect of their submission. We, therefore, remand the matter back to Commissioner for giving a finding on this aspect before taking any view on imposition of penalty.
8. The second issue is regarding whether the Cenvat credit availed on services used for traded goods was admissible to them or not. We find that the trading activity undertaken by the appellants from their Head Office is neither an output services nor it is their final product. As such the appellants are not entitled to avail any Cenvat Credit on the services which are used for trading activity. On being pointed out by the department, they have paid back the credit amounting to Rs. 75,37,812/- as service tax, Rs. 1,50,755/- as Education Cess and Rs. 12,13,947/- as interest even before the issue of show-cause notice. On going through the Order-in-Original, it is found that the Commissioner has stated that the method prescribed under Rule 6(3)(d)(iii) of the Cenvat Credit Rules, 2004 for apportioning common services between dutiable service and exempted services can be taken as a guideline on a rational basis. The appellants are contesting this method of quantification of their liability towards ineligible credit. It is a fact that Rule 6(3)(d)(iii) of the Cenvat Credit Rules was introduced in the Statute Book from 1-4-2007 for apportioning common services between dutiable service and exempted service based on the percentage of sale of finished products. The period involved in the show-cause notice is prior to 1-4-2007. The appellants had paid back the ineligible credit as per work-sheet prepared by them and they contended that the work-sheet was not rejected by the Commissioner but the Commissioner has stated that the appellants have not furnished the basis for quantification of such work-sheet and they failed to produce any documentary evidence in this regard. Their contention is that balance demand of Rs. 2,77,00,973/- as BED plus Rs. 5,54,021/- as Education Cess as payable by them is totally incorrect. They contended that the total amount of Cenvat credit attributable to the traded goods as per work-sheet prepared by them is already paid by them and no demand is payable. This submission of the appellants has considerable force. We find that the work-sheet submitted by the appellants has not been rejected by the Commissioner and it is open to the Commissioner to call upon the appellants to substantiate their computation of the work-sheet in respect of the credit availed and the appellants should be given an opportunity of being heard to explain their case in respect of the calculation as mentioned in the work-sheet. We, therefore, remand the matter back to the original authority in view of the above observation and he should pass a fresh adjudication order, after giving an opportunity of being heard to the appellants. The appellants should also co-operate with the adjudicating authority by submitting all the documents used for preparation of the work-sheet.
9. The appeal is allowed by way of remand in the above terms.