Nava Bharat Ventures Limited Vs The Commissioner of Central Excise Customs & Service Tax (CESTAT Hyderabad)
Rule 15 (Confiscation and penalty) of CENVAT Credit Rules, 2004 provides for imposition of penalty if CENVAT credit has been wrongly availed which allegation must be made in the show cause notice with a proposal to recover such wrongly availed CENVAT credit under Rule 14 but such a demand has not been made. Instead, a demand of an amount equal to 8%/ 10% of the exempted goods under Rule 6(3) has been made in the show cause notice, which is only an option to the assessee and cannot be demanded under Rule 14. Since the show cause notice itself has been issued without authority of law, any penalty imposed in the impugned order in pursuance of it needs to be set aside too.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
These two appeals have been filed by the assessee and the Department assailing the same order-in-original dated 31.01.20131 passed by the Commissioner of Customs and Central Excise, Hyderabad – III deciding four show cause notices dated 15.05.2008, 02.02.2009, 05.02.2010 and 25.01.2011 for successive periods, all dealing with the same issue. The total demand in these show cause notices is Rs. 100,10,55,027/-, of which the Commissioner has confirmed an amount of Rs.5,52,03,415/- in the impugned order and imposed an equal amount as penalty. The assessee has already paid an amount of Rs.3,60,03,450 on the basis of its own calculations and is disputing the rest on the ground that Rule 6(5) of the Cenvat Credit Rules, 20042 entitles it to such credit. The assessee is also aggrieved by the penalty imposed in the impugned order. Revenue is in appeal against part of the demand that has been dropped by the Commissioner and wants the entire demand as per the show cause notice to be confirmed.
2. The appellant/assessee manufactures Ferro-Manganese and Silico-Manganese classifiable under Chapter 72 of Central Excise Tariff and pays Central Excise Duty. It has a captive power plant and part of the electricity generated is used in the manufacture of the final products and part is wheeled out to A.P. Transco, Subhash Kabini Power Corp. Ltd., Reliance Energy Trading Limited, A.P. Power Purchase Co-ordination Committee, etc. To the extent, the electricity is captively used in manufacture of final products, there is no dispute. The dispute is regarding the CENVAT Credit availed on the inputs and input services used in production of electricity to the extent it is wheeled out.
3. The assessee reversed proportionate amount of CENVAT Credit attributable to the inputs/input services to the electricity which is wheeled out. However, while calculating this proportionate amount of CENVAT credit, the credit on the input services mentioned in Rule 6(5) of CCR was not taken into account and no proportionate reversal was done on such input services. The show cause notice demanded an amount equal to 8%/10% of the value of the electricity that was wheeled out under Rule 6(3A) of CCR. In the impugned order, the adjudicating authority accepted the proportionate reversal and therefore, did not confirm the demand in the show cause notice of 8% or 10% of the assessable value. However, the input services under Rule 6(5) while calculating the amount to be reversed was not excluded and hence the amount confirmed is higher than as per the assessee‘s calculations. The adjudicating authority also imposed a penalty on the appellant. Assessee is aggrieved both by the calculation in the impugned order without excluding the credit of input services under Rule 6(5) and also by the imposition of penalty. Revenue is aggrieved by the fact that the adjudicating authority allowed proportionate reversal which is permissible subject to some conditions which, according to the Revenue, have not been fulfilled by the assessee and hence the Commissioner should have confirmed the entire amount of demand as per the show cause notice.
4. The issues which fall for consideration, therefore, are:
a) Is the assessee entitled to reverse proportionate amount of CENVAT credit as asserted by the assessee and disputed by the Revenue?
b) If the assessee can reverse the credit proportionately, can the assessee exclude the credit taken on services under Rule 6(5) as done by the assessee, but disputed by the Revenue and disallowed in the impugned order?
c) Can a show cause notice be issued demanding an amount under Rule 6(3A) of the CCR?
d) Is the penalty imposed upon the appellant sustainable?
5. We proceed to consider the arguments of both sides with respect to each of the above questions.
6. CCR allow a manufacturer of dutiable products or provider of taxable services to take credit of the duty paid on inputs and service tax paid on input services which are used in the manufacture of dutiable final products or provision of taxable services and utilise such credit to pay excise duty or, as the case may be, service tax. There is no one-to-one correlation between the inputs/input services on which credit is taken and the final products or services and credit taken can be used to pay excise duty or service tax. The principle in CCR as well its predecessor rules is that no credit can be taken on the inputs/input services used in manufacture of exempted goods or provision of nontaxable services. To avail CENVAT Credit, Rule 6 places some obligations on the assessee in the form of various alternatives. Rule 6(1) disallows CENVAT credit on inputs and input services used in manufacture of exempted products or provision of nontaxable services. Rule 6(2) requires the assessee who manufactures both dutiable and exempted products and/or provides both taxable and non-taxable services to maintain separate accounts of the receipt, consumption, etc. of the inputs and input services. Rule 6(3) requires an assessee who does not maintain separate accounts to pay an amount equal to 8%/ 10% of the value of the exempted goods. Later, with effect from 1.4.2008, Rule 6(3A) was introduced providing for reversal of proportionate amount of CENVAT credit as a further alternative. Rule 6(5) excludes certain types of services from Rules 6(1), 6(2) and 6(3) unless such services are used exclusively for manufacture of exempted goods or provision of non-taxable services. In other words, full credit in respect of the services covered by Rule 6(5) is available even if the service is used to some extent for manufacture of dutiable goods and/or providing taxable services. If CENVAT Credit is taken irregularly, such credit can be recovered under Rule 14 and a penalty can be imposed under Rule 15.
Reversal of proportionate amount of CENVAT Credit
7. It has been submitted on behalf of the assessee that it is entitled to reverse the proportionate amount of CENVAT Credit for the following reasons:
i. The inputs and input services have been used in the production of electricity only part of which is wheeled out and reversal of proportionate credit is as good as not taking credit at all. This meets the requirement under Rule 6(1). Reliance is placed on the judgment of the Supreme Court in Chandrapur Magnet Wires (P) Ltd. versus Collector of Central Excise, Nagpur3.
ii. Proportionate reversal also meets the requirement of maintenance of separate accounts as envisaged under Rule 6(2).
iii. From 1.4.2008, Rule 6(3A) was introduced and it specifically provided for proportionate reversal and also gave a formula for reversal. The assessee has reversed the credit accordingly.
iv. For period prior to 1.4.2008, since there was confusion, a retrospective amendment has been made by Finance Act, 2010 providing for proportionate reversal which requires, inter alia, a declaration to be made to the Commissioner and the amounts to be reversed along with interest. The assessee appellant has also fulfilled these requirements.
8. On behalf of the Revenue, it has been submitted that the assessee is not entitled to make proportionate reversal. Proportionate reversal was provided for specifically under Rule 6(3A) with effect from 1.4.2008 and for the past period by Finance Act, 2010. Both these provisions had some requirements which were not met by the appellant assessee. For the period after 1.4.2008, the assessee was required, as per Rule 6(3A), to intimate the jurisdictional Superintendent of Central Excise, which the appellant has not done. For period prior to 1.4.2008, as per the Finance Act, 2010, the assessee was required to make an application to the Commissioner, which it has not done. The application claimed to have been submitted by the appellant assessee was filed before the Deputy Commissioner of the division in Warangal and not before with the Commissioner (who is located in Hyderabad) and therefore, it does not meet the requirement. The Finance Act, 2010 also required the amounts to be paid along with interest. The interest in this case was paid much later and not along with the reversed amounts. For these reasons, the appellant is not entitled to the proportionate reversal.
9. We find that Rule 6(1) prohibits taking of credit on inputs and input services used in manufacture of exempted goods or provision of non-taxable services. In some cases, if only some portion of such inputs or input services goes into exempted goods or services, reversal of such proportion of the credit meets the requirement of Rule 6(1). An illustration which everyone can relate to makes this position clear. A man buys a packet of milk worth Rs. 70 and gives the shopkeeper a hundred rupee note. The currency note cannot be cut to give 70% of its value to the shopkeeper. Therefore, the shopkeeper returns him thirty rupees. It amounts to the man paying seventy rupees only although he gave a hundred rupee note. Similarly, if credit is taken on an invoice of input or input service and part of the input or input service has gone into exempted products, proportionate reversal is as good as not taking the credit to that extent at all.
10. Rule 6(2) requires separate accounts to be maintained by someone manufacturing both dutiable and exempted products or providing taxable and non-taxable services. It however, does not prescribe a particular format for maintaining such accounts nor does it require the inputs to be purchased and stored separately for dutiable and exempted products. In case of common input or input services, it is often impossible or extremely difficult to do segregate the two at the stage of taking credit. The only practical way of maintaining separate accounts when the same input or input service procured by the assessee is to take credit and debit entries. Either the assessee can take credit of only that proportion of the inputs/input services which has gone into the manufacture of dutiable goods or it can take the entire credit and reverse that portion of the inputs/input services which have gone into producing exempted products. Such an accounting practice becomes all the more necessary in cases such as this when the output good viz., electricity itself is common and becomes either exempted (if wheeled out) or not (if it is used captively for manufacture of dutiable goods). Even in the normal accounting practices, debit notes and credit notes are issued to make adjustments towards excess payments or short payments. In our view, reversal of proportionate amount of CENVAT credit is a sufficient requirement under Rule 6(2). Supreme Court in Chandrapur Magnets also held so and the decision applies to this case.
11. After 1.4.2008, Rule 6(3A) specifically provides for proportionate reversal and provides a formula for the purpose and the assessee has followed it. Revenue‘s objection to accepting such reversal is on the ground that the assessee has not made the required declaration before the Superintendent but the assessee asserts that it made the declaration. Even if such a declaration was not made, in our considered view, such a technicality cannot deprive the assessee of its opportunity to avail Rule 6(3A). Thus, reversal of proportionate amount of CENVAT credit also satisfies the requirement under Rule 6(3A), in addition to meeting the requirement under Rule 6(1) and 6(2).
12. For the period prior to 1.4.2008, following the Finance Act, 2010, the assessee has reversed the credit and interest. Revenue‘s objection is that the declaration was filed with the jurisdictional Deputy Commissioner instead of the Commissioner and that the interest was not paid along with the reversal but much later. On the first question of declaration, we find that if the assessee made a declaration with the Central Excise department itself, even if wrongly with the Deputy Commissioner instead of the office of the Commissioner, it may be technically incorrect but such hyper-technicality should not deprive the assessee of substantial benefit. Similarly, Revenue‘s argument that interest was paid much later does not hold much water as long as it has been paid.
13. We, therefore, find that reversal of proportionate amount of CENVAT credit by the assessee in this case is not only sustainable under Rule 6(3A) for the period post 1.4.2008 and under Finance Act, 2010 (for the period pre 1.4.2008) but such reversal itself meets the obligations of the assessee under Rule 6(1) (of not taking credit of inputs and input services used in exempted goods) and Rule 6(2) (of maintaining separate accounts).
Exclusion of the credit taken on services under Rule 6(5) while reversing
14. The Commissioner has, in the impugned order, accepted the assessee‘s contention that proportionate amount of CENVAT credit has been reversed but had disputed the assessee‘s calculation whereby it had availed entire amount of credit in respect of services enumerated into Rule 6(5). It is the contention of the assessee that credit on certain services was admissible as per Rule 6 (5) unless such services were used exclusively for manufacture of exempted goods or providing exempted services. Since the electricity was not entirely exempted, this Rule applies. Rule 6 (5) reads as follows :-
“(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p) (q), (r) (v) (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of Section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services‖.
15. The services in question which were used according to the appellant in their power plant and Ferro Alloy plant are as follows :-
6 (5) services used only in power plant
