Faze Three Limited Vs C.C.E & S.T.-Silvasa (CESTAT Ahmedabad)
Introduction: The legal landscape can be intricate, especially when navigating cases involving tax demands, exemptions, and capital goods usage. The case of Faze Three Ltd vs CCE & S.T. provides a fertile ground for exploration into the nuanced legal aspects surrounding exempted product clearance. In this comprehensive analysis, we delve into the detailed legal intricacies of the case, scrutinizing the mismatch between the show cause notice and adjudication order, contestations over capital goods usage, lapsing of credit, and the conditional nature of exemption.
1. Mismatch in Show Cause Notice and Adjudication Order: The foundational issue in the Faze Three Ltd case lies in the misalignment between the show cause notice and the subsequent adjudication order. While the notice proposed a demand of 10% under Rule 6 (3) of Cenvat Credit Rules, the adjudication order veered into a different territory by ordering the lapse of credit balance. Legal precedents emphasize the importance of consistency between the allegations in the notice and the subsequent adjudication order for the latter to be deemed valid.
This discrepancy opens the door for a compelling legal argument by Faze Three Ltd. The established principle that the order cannot transcend the scope of the show cause notice forms a robust foundation for contesting the validity of the demands made.
2. Demand on Capital Goods Usage: The second facet of contention revolves around the demand of Rs. 40,66,510 pertaining to the balance of credit related to capital goods. Faze Three Ltd vehemently challenges this demand, asserting that the capital goods were utilized for both dutiable and exempted products. This assertion challenges the very essence of the allegation that the capital goods were used exclusively for exempted final products.
Legal precedents, particularly the case of Bannari Amman Spinning Mills Ltd, echo the argument made by Faze Three Ltd. The judgment in Bannari Amman Spinning Mills Ltd unequivocally states that when goods are subject to duty, denying capital goods credit is unwarranted. This legal precedent serves as a powerful tool in dismantling the basis of the demand on capital goods usage.
3. Lapsing of Credit Balance: Rule 11 (3) of Cenvat Credit Rules forms the crux of the lapsing of credit balance argument put forth by the authorities. However, Faze Three Ltd challenges this provision, contending that it is inapplicable when the assessee manufactures both dutiable and exempted goods.
Legal precedents, such as the case of Shri Baba Exports vs. CCE, Meerut-II, provide a solid foundation for contesting the lapsing provision. The judgment underscores that Rule 11 (3) is applicable only when final products become fully exempt from duty, and not when multiple final products, some exempt and others dutiable, are manufactured. This legal standpoint fortifies Faze Three Ltd’s position against the demand for lapsing credit.
4. Exemption Based on Conditions: A pivotal argument presented by Faze Three Ltd revolves around the conditional nature of the exemption. The appellant posits that since the exemption is contingent upon certain conditions, the lapsing provisions, which typically apply to unconditional exemptions, are not relevant.
Rule 11 (3) explicitly states that lapsing occurs when an assessee avails an unconditional notification. Faze Three Ltd leverages this provision to challenge the applicability of lapsing in their case, reinforcing the notion that the demand lacks a solid legal foundation.
5. Exported Exempted Goods and Cenvat Credit: The appellant’s defense against the denial of cenvat credit for partially exported exempted goods rests on the premise that such denial is unwarranted. Faze Three Ltd argues that the cenvat credit cannot be denied for goods that have been exported, emphasizing the need for a nuanced approach to the issue.
The legal argument here hinges on the fact that the main allegation in the show cause notice, regarding the availing of cenvat credit on common input services attributable to exempted goods, is rendered moot by the resolution of a prior show cause notice. Legal precedents supporting the argument are essential in solidifying Faze Three Ltd’s position.
6. Capital Goods Exclusivity Challenge: Challenging the allegation of using capital goods exclusively for exempted goods forms a critical aspect of Faze Three Ltd’s defense. Legal precedents, including the case of Nahar Industrial Enterprise Ltd, support the view that when an assessee is manufacturing both dutiable and exempted goods, denial of capital goods credit is untenable.
The judgments emphasize that Rule 6 (4) of Cenvat Credit Rules, dealing with the exclusive use of capital goods for the manufacture of exempted goods, is not applicable when multiple final products are manufactured. This legal standpoint bolsters Faze Three Ltd’s argument against the demand related to capital goods exclusivity.
Conclusion: In unraveling the legal complexity of Faze Three Ltd vs CCE & S.T., it becomes evident that the case is layered with nuanced legal arguments. The misalignment between the show cause notice and adjudication order, coupled with contestations over capital goods usage, lapsing of credit, and the conditional nature of exemption, presents a multifaceted legal challenge.
Faze Three Ltd’s legal stance gains substantial support from a myriad of legal precedents, each intricately woven into their defense. As the case unfolds, the judiciary is tasked with weighing the intricacies of tax laws, exemptions, and procedural nuances to arrive at a verdict that not only does justice in this specific instance but also contributes to the jurisprudential landscape surrounding similar cases.
FULL TEXT OF THE CESTAT AHMEDABAD ORDER
The brief facts of the case are that on the basis of the investigation and recording of the statements of the employees of the appellant, a show cause notice dated 19.12.2013 was issued to the Appellant inter-alia demanding an amount of Rs. 1,40,23,501 being 10% of the clearance value of exempted product under Rule 6 (3) of CCR and Rs. 40,66,510/-pertaining to credit availed on capital goods allegedly used exclusively in manufacture of exempted product and lying in balance as on 07.12.2008 along with interest and penalties. The said notice also proposed to impose personal penalty on other two appellants under Rule 26 of Central Excise Rules,2002.
1.2 The Adjudicating Authority vide order-in-original dated 24.06.2015 ordered as under :-
“(i) Ordered to lapse the credit of Rs. 1,20,80,589/- lying in the balance as on 07.12.2008 under the Section 11A (2) and 11A (10) of the Credit Rules.
(ii) An amount of Rs. 48,663/- (being 10% of the local clearance of the exempted product) under Rule 6 (3) of CCR attributable to the local clearance;
(iii) confirmed the demand of Rs. 40,66,510/- towards balance of credit pertaining to capital goods lying as on 07.12.2008. However, since the said amount was included in the amount of Sr. No. (i) above the same was not demanded again.
The respondent also imposed penalty of Rs. 20,00,000/- on Mr. S.P Kalsi and Rs. 25,00,000/- on Ms. Rashmi Anand under Rule 26 of CER.
1.3 The one relevant fact is also that earlier a show cause notice dated 29.08.2013 was issued to the appellant demanding cenvat credit of Rs.35,82,694/- attributable to inputs and input services used in manufacture of exempted product along with interest and penalty. After remand by the Tribunal the Adjudicating Authority confirmed the demand of Rs. 9,48,034 along with interest and equal penalty which the appellant has accepted and proceeding related to the cenvat credit attributable to the exempted goods was concluded.
2. Shri Prakash Shah, Learned Counsel with Shri Mihir Mehta and Shri Mohit Raval, Learned Advocates appearing on behalf of the appellant submits that the show cause notice proposed to demand an amount of Rs. 1,40,23,501/- being 10% of the value of the cleared exempted goods under Rule 6 (3) Cenvat Credit Rules, 2004 whereas the Adjudicating Authority has gone altogether on different ground and ordered the lapse of credit of Rs. 1, 20,80,589/- lying in balance as on 07.12.2008. It is his submission that it is a completely different issue which was not raised in the show cause notice, therefore, order which is traveled beyond the show cause notice, irrespective of any fact and legal issue, will not sustain on this ground alone.
2.1 As regard the demand of Rs. 40,66,510/- the balance of credit pertaining to capital goods as on 07.12.2008, it is his submission that this demand was raised on the ground that capital goods was used exclusively in manufacture of exempted final product. He submits that the capital goods were received by the appellant much before the final product became exempted and during the receipt till the final product became exempted, the capital goods were being used for manufacture of dutiable goods. Therefore, the allegation in this regard is absolutely without any basis and beyond the fact that the capital goods were used for both dutiable as well as exempted goods and not used exclusively for exempted goods.
2.2 Without prejudice, he further submits that even though the order is for lapsing of credit, but it is also not tenable for the reason that as per Rule 11 (3) of Cenvat Credit Rules, after reversal of the credit on input, input in process or input contained in the final product whatever the balance remains, the same shall lapse only when the assessee avail unconditional notification, whereas in the present case exemption is based on the condition, therefore, lapsing provision shall not apply on the fact of the present case.
2.3 He also submits that even though so called exempted goods have been exported partly and to that extent the cenvat credit cannot be denied. He further submits that as regard the main allegation in the show cause notice that since the appellant had availed the cenvat credit on the common input service attributed to the exempted goods, the same will not sustain for the reason that as per the proceeding of earlier show cause notice dated 29.08.2013, the case stand concluded and according to which whatever cenvat credit attributable to the exempted goods stand paid along with interest and also paid 25% penalty. As per this admitted position in the present case, there is no case of availment of cenvat credit on the common input services attributable to the exempted goods, therefore, the entire basis of this show cause notice dated 19.12.2013 does not exists and without any foundation for this reason also even the demand on the basis of the allegation made in the show cause notice also does not sustain. He placed reliance on the following judgments:-
