Customs, Excise and Gold Tribunal - Tamil Nadu
Ford India Private Ltd. vs Cce on 21 March, 2007
Equivalent citations: 2007(121)ECC192, 2007ECR192(TRI.-CHENNAI), 2007(214)ELT40(TRI-CHENNAI)
ORDER P.G. Chacko, Member (J)
1. The appellants are engaged in the manufacture of cars and parts thereof. In the precincts of their manufacturing unit (factory), they have what is called "Knock Down Pack Plant" (KDP Plant, for short) wherein they receive rust-proof oil-coated auto components procured directly from vendors and the same along with some components from the factory are stacked together in a pallet according to 'export packing slip' and such pallets are stuffed into containers which are exported to South Africa and Mexico under bond without payment of duty. The entire activities in KDP Plant, right from the receipt of auto components upto export are carried out by an agency viz. M/s. TVS Logistics Ltd. (M/s. TVS, for short) appointed by the appellants. From the scrutiny of records maintained by the appellants as also from the results of subsequent investigations, the department found that they had availed CENVAT credit on the components procured from vendors and exported in the above manner from KDP Plant during the period 7.6.2000 to 31.10.2002. It appeared to the department that the entire activity carried out at KDP Plant was merely a trading activity and, therefore, the components received there from vendors and subsequently exported did not qualify to be 'inputs' for the purpose of CENVAT credit. On this basis, three show-cause notices were issued covering the periods 7.6.2000 to 31.3.2001, 1.4.2001 to 31.12.2001 and 1.1.2002 to 31.10.2002 for recovering from the appellants duty amounts equivalent to the CENVAT credits taken on the components procured from vendors and exported from KDP Plant during the respective periods. These notices invoked the relevant rules relating to CENVAT Credit, which were in force during the respective periods. They also invoked the relevant provisions for levy of interest on the duty demanded as also for imposition of penalty. The proposals in the SCNs were contested by the party. In adjudication of the dispute, the original authority passed three separate orders confirming the demands for the aforesaid periods and imposing penalties on the party. The appellants' alternative claims for rebate of duty were also rejected by the authority in two other separate orders. All these orders of the original authority were taken in appeal to the Commissioner (Appeals), who rejected all the appeals by a common order, which is under challenge in the present appeals.
2. The appellants are challenging only the denial of CENVAT credit and imposition of penalties. In these appeals, they have not raised any grievance against rejection of rebate claim.
3. Appeal No. 622/2004 is against the decision of the appellate Commissioner in the assessee's appeal against Order-in-Original No. 12/2002 dt. 8.3.2002 passed by the original authority in adjudication of SCN No. 23/2001 dt. 4.7.2001 covering the period 7.6.2000 to 31.3.2001. The said Order-in-Original had, inter alia, deleted KDP Plant from the registered factory area of M/s. Ford (India) Ltd., but this part of the order of the original authority was accepted by them. Order-in-Original No. 12/2002 states that the revised ground plan including KDP Plant in the already registered factory premises, which was submitted by the appellants to the jurisdictional Superintendent of Central Excise on 3.4.2000, was approved by the Superintendent believing that there might be some manufacturing activity at KDP Plant. The Asst. Commissioner found that the activities carried out at KDP Plant were merely trading activities and hence the said premises were liable to be deleted from the registered factory premises. Accordingly, in Order-in-Original No. 12/2002 dt. 8.3.2002, he de-registered KDP Plant. In the result, KDP Plant had Central Excise registration upto 8.3.2002 out of the total period of dispute (7.6.2000 to 31.10.2002) involved in these appeals.
4. Heard both sides. The case of the appellants, reiterated by their counsel, is as follows: The components/parts procured from vendors and received in KDP Plant for exports undergo operations of quality checking, sequencing, packing/palleting, testing etc. which constitute "manufacture" as defined under Section 2(f) of the Central Excise Act and, therefore, such components should be treated as having been used in the manufacture of the final product. The expression "manufacture" has to be liberally construed for the purpose of exports in view of CBEC's circular No. 489/55/99-CX dated 13.10.99. Components received into KDP Plant directly from vendors were also capable of being used in the local manufacture of cars in the factory. Similarly, components brought into the factory for local manufacture of cars were capable of being used in KDP Plant for exports. In other words, the two categories of components were interchangeable. For this reason also, the components directly procured from vendors for export purpose should be considered to have been used in or in relation to manufacture of cars. In this connection, learned Counsel referred to certain statements prepared by the appellant, contained in Vol-I of their Paper Book. These included statements of "material transferred from KDP Plant to Main Plant (factory)" during the periods 7.6.2000 to 31.3.2001 and 1.4.2001 to 31.12.2001 and "lists of parts received at the Main Plant" during the said periods. The endeavour of learned Counsel was to show that some of the auto components received in KDP Plant from the market were diverted therefrom to the factory and vice versa. Ld.counsel also sought to demonstrate that the activity undertaken by his clients at KDP Plant was a part of manufacture, by them abroad, of the same model of car as the one manufactured by them in India. He submitted that the "C195" model of Ford car manufactured abroad was identical to their "IKON" model manufactured in India and, therefore, the activity, undertaken at KDP Plant, of sequencing, packing/palleting etc. of the components procured from the market for export to South Africa and Mexico for further use in the manufacture of "C195" model of car could very well be treated as amounting to manufacture of identical model (IKON) of car in India. In this view of the matter, according to ld.counsel, the components should be deemed to have been used in or in relation to manufacture of final product. In this connection, reliance was placed on the Tribunal's decision in Collector v. Rolls Prints (Packaging) Ltd. [wherein the activities of inspection, counting and packing of final product were held to be amounting to 'manufacture' under Section 2(f) of the Central Excise Act] and Prasad Films Laboratories v. CCE [wherein the activities of random sensitivity testing and labeling of final product were held to constitute an important facet of manufacture].
Alternatively, the appellants contend that, even if it be assumed that the components received at KDP Plant from the market were not actually used in manufacture but cleared as such for export, the appellants were still not required to reverse the CENVAT credit taken thereon in view of Board's circulars, No. 283/117/96-CX dated 31.12.96 and No. 345/2/2000-TRU dated 29.8.2000. Ld.counsel sought to support this case on the plank of "deemed manufacture". In this connection, he referred to Rule 57F (1) (ii) [as this provision stood prior to 29.6.2005], Rule 57AB (1) (b) and the Explanation thereto [as this provision stood between 1.4.2000 and 28.2.2001] and Rule 57AB (1C) [as this provision stood between 1.3.2001 and 30.6.2001] -- all these being provisions of the Central Excise Rules, 1944 as amended from time to time. He also referred to Rule 3(4) of the Cenvat Credit Rules, 2001 which came into force on 1.7.2001. Ld.counsel argued that, under all these provisions, which provided for removal of inputs as such from factory, there was a "fiction" of such inputs having been "manufactured" in the factory. Further, on the strength of the apex court's judgment in CIT Madras v. Urmila Ramesh , ld.counsel urged that the legal fiction should be given full effect to. In other words, the auto components procured into KDP Plant and removed as such for export should be "deemed to have been manufactured" at the said "plant" and, accordingly, reversal of CENVAT credit taken on such components should be dispensed with. In this connection, it was also pointed out by learned Counsel that KDP Plant was a part of the registered factory premises during most part of the period of dispute. He submitted that any activity undertaken in such premises was liable to be considered as part of manufacture of the final product.
5. Ld.SDR, on the other hand, referred to Order-in-Original No. 12/2002 passed by the Asst. Commissioner and restated the facts of the case as spelt out therein. The case of the Revenue, as made out by her, is that only trading activity was undertaken at KDP Plant and, therefore, the auto components received there from vendors could, by no stretch of imagination, be considered to have been used in the manufacture of cars. Such components were removed as such from KDP Plant for export to South Africa and Mexico. Even the purchase orders placed by the appellants on their vendors for purchase of the components would clearly indicate that the components were being procured only for export inasmuch as the purchase orders required the vendors to supply the items under invoices bearing markings indicating ultimate destination of the goods. Accordingly, the invoices covering components meant for export to South Africa were to show the destination bar code viz. "1688a" and invoices covering components meant for export to Mexico were to show the destination bar code viz. "1688b". After receipt of these goods from vendors, some boxes would be opened at random, at KDP Plant, to check the quantity details with the relevant documents and, thereafter, the components were cleared for export after sequencing, palleting etc. No part of the goods covered by such purchase orders was diverted to the factory. All such goods were exported from KDP Plant. The intention of the appellants to export the components received into KDP Plant from vendors was clear from the very purchase orders. They intended to undertake only a trading activity in KDP Plant. Hence the appellants' plea that the components should be considered to have been used in the 'manufacture' of cars was untenable. SDR also submitted that KDP Plant was not a part of the car manufacturing unit (factory). The activities undertaken there would not become "manufacture" merely because KDP Plant was included in the ground plan of the registered factory for some part of the period of dispute. It was also pointed out by SDR that, in reply to a representation submitted by the assessee, CBEC had clarified vide letter dt. 31.1.2002 that, where goods were procured solely for the purpose of exports and were not intended for use in the manufacture of final products, CENVAT credit was not available. The Board's circular dated 27.3.97 relied on by the party before the adjudicating and first appellate authorities was withdrawn on 20.8.2001. Ld.SDR finally submitted that, in the case of CCE Chennai I v. KCP Ltd. , this Bench has already held, on similar facts, that MODVAT/CENVAT credit was not admissible to bought out inputs and capital goods which were exported as such. The rules and circulars referred to by learned Counsel were applicable only to situations involving removal of inputs as such from factory but, in this case, there was no such removal as KDP Plant was not 'factory'. SDR also referred to the Tribunal's Larger Bench decision in the case of Eicher Tractors v. CCE Jaipur , wherein it had been held that, where inputs on which CENVAT credit had been availed were cleared as such from factory, the credit should be reversed.
6. In his rejoinder, learned Counsel pointed out that the Tribunal's decision in the case of K.C.P. Ltd. had been stayed by the Supreme Court in civil appeal No. 5509-5510 of 2003 vide 2004 (163) ELT-A41 (SC) and .
7.1. After giving careful consideration to the submissions, we find that there are certain crucial facts which are not in dispute. The appellants were maintaining what was called "KDP Plant" for the purpose of receiving bought-out auto components (coated with rust-proof oil) and random-testing, sequencing and packing/palleting the same for the purpose of export under Rule 13 of the erstwhile Central Excise Rules, 1944 during the period of currency of these rules and under equivalent provisions for subsequent periods. These components were procured from vendors against specific purchase orders which required them to mark destination bar codes ('1688a' for South Africa and '1688b' for Mexico) on the cartons containing the goods. The invoices under which these goods were received at KDP Plant also indicated these destination bar codes. At KDP Plant, these bought-out components along with some components from the appellants' manufacturing unit (factory) were stacked together in pallets and these were stuffed into containers for export to South Africa and Mexico under bond without payment of duty. The operations in KDP Plant, right from receipt of components to exports, were carried out exclusively by M/s. TVS specially employed for the purpose by the appellants. KDP Plant was part of the registered factory area till 7.3.2002. These are admitted facts.
7.2. It was after scrutiny of the purchase orders of the appellants, invoices of their vendors and the agreement between the appellants and M/s. TVS that the department found that KDP Plant had been set up for the sole purpose of procuring auto components and exporting the same to South Africa and Mexico. This finding of the department was upheld by the original authority and the first appellate authority and the same has not been successfully contested by the appellants in the present appeals. Thus it stands established that KDP Plant was set up for a trading activity only. The original authority, in Order-in-Original No. 12/2002, deleted it from registered factory area, having found that no manufacturing activity had ever been undertaken but only trading activity had been undertaken there (in KDP Plant). Neither this finding nor the de-registration of KDP Plant is under challenge in any of these appeals. The appellants have no case that the activity being undertaken in KDP Plant after its de-registration (8.3.2002) is different from that which was undertaken there before. Therefore, it is an established fact that KDP Plant was set up for a trading activity and ever used only for such activity mentioned in para (7.1) of this order.
7.3. Technically, KDP Plant remained a part of the registered factory premises till it was deleted on 8.3.2002. The appellants would say that, on account of this fact, the activity undertaken at KDP Plant during the relevant period was liable to be treated as "manufacture". This argument cannot be accepted inasmuch as, for any premises to be called "factory", it should also be shown that manufacture of any excisable goods or any process connected with such manufacture is carried on in such premises or in any part thereof vide Section 2(e) of the Central Excise Act which defines "factory" as under:
"factory" means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried or is ordinarily carried on As per Section 2(f) of the Act, "manufacture" also includes "any process incidental or ancillary to the completion of a manufactured product". The appellants manufactured cars in their factory. They have not shown that the activity undertaken at KDP Plant was a process connected with or incidental or ancillary to the production of cars in the factory. The quality-checking, sequencing, packing/palleting etc. of bought-out components, done at KDP Plant, might have been preparatory or ancillary to, or otherwise connected with, manufacture of cars abroad by the appellants and the cars so manufactured abroad might have been of a model identical to the one manufactured in India. That, however, does not serve the purpose of Section 2(e) and (f) of the Central Excise Act. For KDP Plant to be 'factory' as defined under Section 2(e), it should be shown that the activity undertaken therein was a process connected with, or incidental or ancillary to, production/manufacture of cars in the (Indian) factory, of which KDP plant is claimed to be a part. The appellants have not come anywhere near establishing this and, therefore, we reject the claim that KDP Plant was "factory" till it was de-registered on 8.3.2002. For the same reason, we also hold that the activity undertaken at KDP Plant did not amount to "manufacture" contemplated under Section 2(f) of the Act. This would, a fortiori, be so for the period from 8.3.2002 when KDP Plant was even technically not part of the registered factory premises. As KDP Plant has never been "factory" within the meaning of Section 2(e), we need not consider the cases of Rolls Prints, Prasad Films Laboratories etc., wherein the activities which were held to be amounting to "manufacture" had been undertaken in factories.
Components from the manufacturing unit (factory) were also stacked along with bought-out components, in pallets, for the purpose of export from KDP Plant. It has been stated by ld. Counsel that the components in one category were interchangeable with those in the other, i.e., the components bought out for export to be used in the foreign model of Ford car were also useable in the Indian model (IKON). But any such interchangeability of components would also not advance the appellants' case any further in view of our findings already recorded. Contextually, it may also be noted that even the claim of interchangeability has not been substantiated.
7.4. Ld. Counsel has dwelt at length on the fiction of manufacture. It was argued that there was a legal fiction that inputs removed as such for export under bond should be deemed to have been manufactured. But, again for this fiction also, the removal should be from a "factory". In this case, the goods in question were removed from KDP Plant, which was not a "factory". Hence the concept of "deemed manufacture" applicable to inputs removed as such from a factory under Rule 57F(1)(ii) or under Rule 57AB(1)(b) with Explanation thereto or under Rule 57AB (1C) would not be applicable to the goods in question viz. the bought-out components exported from KDP Plant. For the same reason, the Board's circulars relied on by ld.counsel would also not be of any support to the appellants.
7.5. It appears from the records that, in reply to a representation from the appellants, the Board in a letter dated 30.1.2002 clarified that, when the goods procured solely for the purpose of export and were not intended for use in the manufacture of final products, CENVAT credit was not available. The view taken by the Board, not challenged by the appellants, is binding on them.
7.6. Any input for CENVAT credit should be brought into factory for being used in, or in relation to, manufacture of final product. If, for any reason, it cannot be so used after having been brought into factory, it may be removed as such for home consumption on payment of duty or may be removed for export under bond without payment of duty. On the other hand, if any goods, usable as input in the manufacture of final product in factory, is purchased and exported as such by the manufacturer of final product without bringing it into the factory, it is only a commodity of trade and not an "input" at all for purposes of CENVAT scheme and there is no question of availing CENVAT credit thereon. The appellants' bought-out components exported from KDP Plant are in this category as rightly found by the lower authorities. The statements given under Section 14 of the Central Excise Act by the appellants' Manager (Export Operations) and Manager (Taxation) as also by M/s. TVS are supportive of this finding.
8. For the reasons we have already recorded, the appellants were not entitled to avail CENVAT credit on the components purchased from vendors and directly received into KDP Plant and exported to South Africa and Mexico after quality-checking, sequencing, palleting etc. during the period of dispute. If they did not utilize such credit for payment of duty on final products cleared for home consumption, they should expunge the credit. If, on the other hand, they utilized the credit for payment of duty on such final products, they are liable to pay equivalent amount of duty to the Revenue. The decision of the lower authorities to this effect is sustainable.
9. It is on record that the appellants misrepresented before the department that they were setting up an "Export Processing Plant". They set up what was called "Knock-Down-Pack-Plant" (KDP Plant) and applied to the Central Excise Range Officer for including the same as part of their car factory. The Range Officer, apparently without applying his mind to the matter, acceded to their request. But what the appellants did was to use the so-called 'KDP Plant' for receiving export-bound auto components from vendors, random-checking for quality, sequencing, palleting, packing and directly exporting to South Africa and Mexico. The quality check on the components so purchased from vendors was done at KDP Plant in a random manner, for which only some of the cartons received from vendors were opened. The other operations carried out were sequencing, palleting and packing of these components into containers for export. Departmental investigations revealed that there was no 'knockdown' of anything, nor any such thing as 'export processing', at KDP Plant. It was found that the premises was being used for the above trading activity, which was admitted by Sh. J. Arun, Manager (Export Operations) and confirmed by Sh. R. Saranyan, Manager (Taxation) and also corroborated by Sh. K.J. George, Plant Manager, TVS, i.e., purchasing auto components from the market and exporting the same after random quality check, sequencing and palleting. It was on this basis that the original authority de-registered KDP Plant, and the appellants are not aggrieved by the same. It has been established by the Revenue that the appellants had been irregularly availing CENVAT credit on the components traded by them. This conduct of the party attracted penal provisions of Rule 173Q of the Central Excise Rules, 1944 and the corresponding provisions of Cenvat Credit Rules, 2001. The following penalties were imposed by the original authority and sustained by the Commissioner (Appeals):
a) Rs. 10 lakhs where the demand of duty is to the tune of Rs. 4.09 crores for the period, 7.6.2000 to 31.3.2001;
b) Rs. 20 lakhs where the demand of duty is to the tune of Rs. 7.53 crores for the period, 1.4.01 to 31.12.01;
c) Rs. 25 lakhs where the demand of duty is to the tune of Rs. 8.15 crores for the period, 1.1.02 to 31.10.02.
In our view, the penalty of Rs. 10 lakhs imposed on the appellants by the lower authorities for the irregular availment of CENVAT credit for the period 7.6.2000 to 31.3.2001 cannot be considered to be excessive. However, by this yardstick, the penalty of Rs. 20 lakhs on the party for the same offence for the period 1.4.01 to 31.12.01 is slightly on the higher side and we reduce the same to Rs. 18 lakhs (Rupees Eighteen lakhs only). The penalty imposed by the authorities on the appellants for the above offence for the period January to October 2002 is Rs. 25 lakhs. Considering the fact that the party chose to continue to take irregular credit on bought-out components traded from KDP Plant even after its de-registration (deletion from registered factory area), we think that this penalty is reasonable.
10. In the result, with the above modification of quantum of penalty, the impugned orders are sustained and these appeals are dismissed.
(Pronounced in open court on 21.3.2007)