Custom, Excise & Service Tax Tribunal
M/S Swati Menthol & Allied Chemicals Ltd vs Cce, Meerut Ii on 30 September, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL West Block No. 2, R.K. Puram, New Delhi 110 066. Principal Bench, New Delhi COURT NO. III DATE OF HEARING : 23/07/2014. DATE OF DECISION : 30/09/2014. Excise Appeal No. 1500 of 2010 [Arising out of the Order-in-Original No. 106/Comm/M-II/2010 dated 26/02/2010 passed by The Commissioner, Customs & Central Excise, Meerut - II.] For Approval and signature : Honble Ms. Archana Wadhwa, Member (Judicial) Honble Shri Rakesh Kumar, Member (Technical) 1. Whether Press Reporters may be allowed to see : the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it would be released under Rule 27 of : the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair : copy of the order? 4. Whether order is to be circulated to the : Department Authorities? M/s Swati Menthol & Allied Chemicals Ltd. Appellant Versus CCE, Meerut II Respondent
Appearance Shri S.K. Mathur, Advocate for the appellant.
Ms. Sweta Bector, Authorized Representative (DR) for the Respondent.
CORAM : Honble Ms. Archana Wadhwa, Member (Judicial) Honble Shri Rakesh Kumar, Member (Technical) Final Order No. 53783/2014 Dated : 30/09/2014 Per. Rakesh Kumar :-
The facts leading to filing of these appeals are, in brief, as under.
1.1 The appellant in their factory at Bareilly Road, Opposite Akashwani, Post Office Madipur, Distt. Rampur, manufacture Menthol Flake and Menthol Crystals falling under sub-heading 29061100 and 30039021 respectively and also De-Mentholized Oil (DMO) and other essential oils/flavouring agents derived from DMO, falling under sub-heading 33012590 of the Central Excise Tariff. The raw material for these final products is duty paid crude Menthol in respect of which Cenvat credit was taken, which till 29/02/08 was being utilized for payment of duty on their final products. W.e.f. 01/03/08 while Menthol Flakes falling under heading 29061100 and Menthol Crystals falling under sub-heading 30039021 became fully exempt from duty under Notification No. 4/08-CE dated 01/03/08, the other final products namely DMO and essential oils derived from DMO remained dutiable. In terms of the provisions of Rule 6 (1) of Cenvat Credit Rules, 2004, Cenvat credit shall not be allowed on such quantity of inputs, which has been used in or in or in relation to manufacture of the exempted goods except in the circumstances mentioned in sub-Rule (2). In terms of sub-Rule (2) of Rule 6 ibid when a manufacturer has used Cenvat credit availed inputs or input services in or in relation to manufacture of dutiable final products as well as exempted final products, he either has to maintain separate account and inventory of the inputs used in or in relation to manufacture of dutiable final product and exempted final product and confine the Cenvat credit availment only to that quantity of inputs/input services which have been used in or in relation to manufacture of dutiable final products, and if he does not maintain any account and inventory, he is required to pay an amount at the time of clearance of the exempted final product, as per the provisions of sub-Rule (3) of this Rule, which is either 5%/10% of the sale value of the final product or is the Cenvat credit attributable to the inputs/input services used in the manufacture of the final product to be calculated as per the formula prescribed in this sub-Rule. In terms of sub-Rule (3) of Rule 11 of the Cenvat Credit Rules, 2004 introduced w.e.f. 01/03/07, a manufacturer of final product shall be required to pay an amount equivalent to the Cenvat credit, if any, taken by him in respect of inputs received for use in the manufacture of the said final product, which are lying in his stock or are in process or are contained in the said final product lying in stock, if
(i) he has opted for exemption from whole of the excise duty leviable on the said final product manufactured or produced by him under an exemption Notification issued under Section 5A of the Central Excise Act, 1944 ; or
(ii) The said final product has been exempted absolutely by a notification issued under Section 5A of the Act and in these situations, after deducting the said amount from the balance of the Cenvat credit, if any, lying in his credit, the Cenvat credit balance, if any still remaining, shall lapse and shall not be allowed to be used for payment of duty on any final product whether cleared for home consumption or for export.
1.2 In this case when out of the various final products being manufactured, two final products Menthol Flakes and Menthol Crystals became absolutely exempt from duty w.e.f. 01/03/08 by Notification No. 4/08-CE while the other final products remained dutiable, the appellant had 5040 kg. of crude menthol involving Cenvat credit of Rs. 4,74,268/- in their stock and 98,651 kg. of Cenvat credit availed Menthol involving Cenvat credit of Rs. 95,51,299/- in process. The Department was of the view that on account of absolute exemption being extended to Menthol Flakes and Menthol Crystals w.e.f. 01/03/08 notwithstanding the fact that other final products (DMO and essential oils derived from DMO) still remained dutiable, the provisions of Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 would become applicable and the appellant would be required to pay an amount of Rs. 95,51,299/- and the remaining Cenvat credit after debiting this amount would lapse and could not be utilized for payment of duty on any final product whether for home consumption or for export.
1.3 It was also found that one consignment of Menthol had been cleared under invoice No. 106 dated 29/02/08 for export under claim for rebate of duty and the duty involved on this consignment which had been paid through Cenvat credit was Rs. 7,68,608/-. This consignment was shown as sales return and the duty debited at the time of clearance was re-credited in RG-23A Pt. I register on 07/03/08. Department was of the view that since the Menthol cleared earlier on 29/02/08 had become fully exempt from duty w.e.f. 01/03/08, on the date of its return to the factory the appellant would not be eligible to avail the credit of the duty earlier paid in terms of Rule 16 of the Cenvat Credit Rules and as such, it appeared that Cenvat credit of Rs. 7,68,608/- would also not be admissible to the appellant.
1.4 It is in view of the above facts that a show cause notice dated 27/03/09 was issued to the appellant for -
(a) recovery of Cenvat credit amounting to Rs. 1,07,94,175/- under Rule 6 and Rule 11 of the Cenvat Credit Rules, 2004 readwith Section 11A (1) of Central Excise Act, 1944 alongwith interest thereon under Section 11AB of the Central Excise Act, 1944 ; and
(b) imposition of penalty on the appellant under Section 11AC of Central Excise Act, 1944 readwith Rule 25 of the Central Excise Rules, 2002.
1.5 The above show cause notice was adjudicated by the Commissioner vide order-in-original No. 106/Commr/M-II/2010 dated 26/02/10 by which the above-mentioned Cenvat credit demand was confirmed against the appellant alongwith interest thereon under Section 11AB and beside this, penalty of equal amount was imposed on them under Rule 25 of the Central Excise Rules readwith Section 11AC of the Central Excise Act, 1944.
1.6 Against the above order of the Commissioner, this appeal has been filed.
2. Heard both the sides.
3. Shri S.K. Mathur, Advocate, the learned Counsel for the appellant, pleaded that till 29/02/08, all the final products of the appellant namely Menthol Flake, Menthol Crystals, DMO and essential oils derived from DMO like Peppermint Oil, Menthone, Concentrated Mint Oil, CIS-3 Hexanol etc. were dutiable, and as such, the Cenvat credit availed in respect of the duty paid inputs could be used by the appellant for payment of duty on their final products whether cleared for home consumption or for export, that w.e.f. 01/03/08, only two products Menthol Flake and Menthol Crystals became fully exempt from duty under Notification No. 4/08-CE, but other final products DMO and Peppermint oil, Menthone, Concentrated Mint Oil, CIS-3 Hexanol etc. derived from DMO remained dutiable, that the Department seeks to invoke Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 and recover an amount equal to the Cenvat credit involved on the inputs lying in the stock, in process and contained in the final products lying in the stock as on 01/03/08, that the provisions of Rule 11 (3) are not applicable at all, as this sub-Rule is applicable when only one final product is being made out of one or more Cenvat credit availed inputs, and that final product has become fully exempt from duty or in case of more than final products being manufactured out of Cenvated inputs, all the final products have become fully exempt from duty, that this sub-Rule would not be applicable to this case, as out of a number of final products being manufactured out of cenvated inputs, only two final products Menthol Flake and Menthol Crystals have become fully exempt from duty w.e.f. 01/03/08 and the other final products DMO and the essential oils derived from DMO have remained dutiable, that the provisions of Rule 6 (1) are not applicable to this case, as at the time of receipt of the inputs, all the final products were dutiable, that the provisions of sub-Rule (2) of Rule 6 of the Cenvat Credit Rules can be applied only w.e.f. 01/03/08 when out of various products, two products - Menthol Flake and Menthol Crystals became fully exempt from duty and other final products remained dutiable, but upto 29/02/08, all the goods manufactured by the appellant were chargeable to duty and as such the provision of Rule 6 were not applicable during the period prior to 01/03/08, that since neither Rule 6 (1) nor Rule 6 (2) readwith Rule 6 (3) was applicable upto 29/02/08, the Cenvat credit in respect of the stock of inputs as on 01/03/08 or the quantity of the inputs in process or the quantity of inputs contained in the exempted final product in stock as on 01/03/08, cannot be demanded by invoking Rule 6, that since neither Rule 6 nor Rule 11 is applicable, the impugned order confirming the Cenvat credit demand of Rs. 95,51,299/- is not sustainable, that as regards the demand of Rs. 7,68,608/- in respect of the Menthol earlier cleared on 29/02/08, but subsequently returned on 07/03/08, the demand is without any basis, as at the time of clearance of the goods, the same were dutiable and the duty had been correctly paid and when the goods were returned, the Cenvat credit of the duty earlier paid would be admissible in terms of the provisions of Rule 16 of the Central Excise Rules, 2002 and in view of the above submissions, the impugned order is not sustainable.
4. Ms. Sweta Bector, learned DR, defended the impugned order by reiterating the findings of the Commissioner.
5. We have considered the submissions from both the sides and perused the records.
6. The undisputed facts are that the appellant were using duty paid crude Menthol for manufacture of Menthol Flake and Menthol Crystals, DMO and other essential oil derived from DMO like Peppermint Oil, Menthone, Concentrated Mint Oil, CIS-3 Hexanol etc. During period till 29/02/08, all the final products being manufactured were dutiable and as such the appellant were using the Cenvat credit availed in respect of the duty paid inputs for payment of duty on their final products. W.e.f. 01/03/08 by Notification No. 4/08-CE two final products - Menthol Flakes and Menthol Crystals became fully exempt from duty but the other final products DMO and essential oils derived from DMO remained dutiable. As on 01/03/08 the appellant had 5040 kg. of crude Menthol involving Cenvat credit of Rs. 4,74,268/- and 98651 kg. of Menthol involving Cenvat credit of Rs. 95,51,299/- in process and thus the total Cenvat credit involved on the cenvated inputs either lying in stock or in process was Rs. 1,00,25,567/-. The point of dispute is as to whether on account of absolute exemption extended to Menthol Flake and Menthol Crystals w.e.f. 01/03/08, this Cenvat credit would be recoverable from the appellant. The Department seeks to recover the Cenvat credit by invoking Rule 6 (1) as well as Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004.
7. Before coming to the main point of dispute in this case it would be worthwhile having a look at the provisions of sub-Rule (1), sub-Rule (2) and sub-Rule (3) of Rule 6 and also of Rule 11 (3) of the Cenvat Credit Rules.
8. According to the provisions of sub-Rule (1) of Rule 6, Cenvat credit shall not be allowed on such quantity of inputs or input services which have been used in or in relation to manufacture of exempted goods except in the circumstances mentioned in Sub-Rule (2). According to the sub-Rule (2) of Rule 6, when a manufacturer or provider of output service avails of Cenvat credit in respect of any inputs or input services for manufacture of dutiable as well as exempted final products, he has either to maintain separate account and inventory of inputs/input services meant for dutiable and exempted final product and confine the Cenvat credit availment only in respect of that quantity of inputs and/or input services, which have been used in or in relation to manufacture of dutiable final product and if does not maintain, such account and inventory and does not follow the above practice, he is required to pay an amount at the time of clearance of the exempted final product as per the provisions of sub-Rule (3). The amount payable in terms of sub-Rule (3) is either the notional amount @ 5%/10% of the sale value of the exempted final product or is the Cenvat credit attributable to the inputs used in the manufacture of the exempted final product to be determined as per the provisions of this sub-Rule. From a reading of sub-Rule (1), (2) and (3) of Rule 6 of Cenvat Credit Rules, 2002 it is clear that the basic principle behind these sub-Rules of Rule 6 is that Cenvat credit would not be available in respect of inputs or input services which have been used in or in relation to manufacture of exempted final products. Apex Court in the case of CCE, Vadodara vs. Gujarat Narmada Fertilisers Co. Ltd. reported in 2009 (240) E.L.T. 661 (S.C.) considered the question as to when duty paid fuel inputs have been used for generation of steam which, in turn, was used for generation of electricity, a portion which was used for manufacture of fertilizers, an exempted final product, whether proportionate Cenvat credit would be reversible in respect of the quantity of the electricity used in relation to manufacture of fertilizer. The Apex court while answering this question in the negative, has in para 10 of its judgment observed that in our view sub-Rule (1) is plenary. It reiterates the principle namely, that Cenvat credit for duty paid for inputs used in the manufacture of exempted final product is not admissible. This principle is inbuilt in the very structure of Cenvat scheme. Sub-Rule (1), therefore, merely highlights that principle.
9. Rule 11 (3) provides that a manufacturer or produce of a final product shall be required to pay an amount equivalent to the Cenvat credit, if any, taken by him in respect of inputs received for use in the manufacture of the said final product and lying in stock or in process or contained in the finished product lying in stock, if -
(i) he opts for exemption from whole of duty of excise leviable on the said final product manufactured or produced by him, under a notification issued under Section 5A of the Act ; or
(ii) The said final product has been exempted absolutely by an exemption notification, issued under Section 5A of the Act and after deducting the said amount from the balance of said credit, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any final product whether cleared for home consumption or for export or for payment of service tax on any output service whether provided in India or exported.
9.1 From a perusal of the above sub-Rule, it is clear that this sub-Rule would be applicable only in the case when there is only one final product being made from one or more cenvated inputs and that final product has become exempt from duty or if there are more than one final products being made out of one or more cenvated inputs, all the final products have become exempt from duty at the same time. This Rule would not be applicable if more than one final products are being manufactured out of one or more final product and out of them only some have become fully exempt but other final products have remained dutiable. In our view, in such a situation, it would be incorrect to apply this sub-Rule and prohibit the utilization of the Cenvat credit available as on the date of the exemption for payment of the duty on the dutiable final products, as in terms of Rule 3 (4) of the Cenvat Credit Rules, 2004, the Cenvat credit can be utilized for payment of any duty of excise on any final product. Needless to say, various Rules of the Cenvat Credit Rules, 2004, have to be read harmoniously and, therefore, Rule 11 (3) cannot be given an interpretation which is in-conflict with the provisions of Rule 3 (4). However, the Rule 11 (3) would be subject to the provisions of Rule 6 and in this regard we do not accept the appellants plea that the provisions of Rule 6 (1) are not applicable. From a perusal of Rule 11 (3) as well as 11 (2) it is clear that these two sub-Rules of Rule 11 are also in accordance with the general principles of the Cenvat credit that no Cenvat credit would be admissible in respect of inputs or in put services which have been used in or in relation to manufacture of the exempted final products. As observed by the Apex court in its judgment in the case of CCE, Vadodara vs. Gujarat Narmada Fertlisers Co. Ltd. (supra) mentioned above, this principle is inbuilt in the very structure of the Cenvat credit scheme and Rule 6 (1) and Rule 6 (2) also merely reiterate and highlight this principle. Therefore, no Cenvat credit would be admissible in respect of any inputs which have been used in or in relation to manufacture of final product.
9.2 In this case as on 01/03/08, the appellant had stock of cenvated inputs and also the certain quantity of cenvated inputs in process. They would be eligible for Cenvat credit in respect of the quantity of the cenvated inputs lying in stock and in process only to the extent the same were used in the manufacture of dutiable final products and to the extent these cenvated inputs were used in the manufacture of exempted final product Menthol Flake and Menthol Crystals, they would not be eligible for Cenvat credit.
10. In view of the above discussion, we hold that while the provisions of Rule 11 (3) (ii) of the Cenvat Credit Rules, 2004 are not applicable, the availability of the Cenvat credit in respect of the inputs lying in stock and in process as on 01/03/08 would be subject to the provisions of Rule 6 and the Cenvat credit would be admissible only to the extent these inputs were used in or in relation to manufacture of dutiable final product and would not be admissible in respect of the quantity of the inputs which were used in the manufacture of exempted final products. Accordingly, in respect of clearance of exempted final products, an amount equal to the Cenvat credit involved on the inputs used in the manufacture of those final products shall be payable.
11. As regards the Cenvat credit demand of Rs. 7,68,608/- since this amount represents the duty paid on a consignment of Menthol on 29/02/08 under No. 106 dated 29/02/08 and since Menthol flakes/crystals become fully exempt from duty only w.e.f. 01/03/08, this duty has been correctly paid and therefore when this consignment of Menthol was returned to the factory on 07/03/08 for reprocessing, Cenvat credit of the duty of Rs. 7,68,608/- paid earlier has been correctly taken under Rule 16 of the Central Excise Rules, 2002. However, if after reprocessing the goods were cleared for home consumption without payment of duty by availing full duty exemption, this credit would not be admissible.
12. The impugned order, therefore, is set aside and the matter remanded to the Commissioner for denovo adjudication for re-quantification of the demand keeping in view our observations in this order. The penalty imposable shall be according to the re-quantified demand. The appeal stands disposed of as above.
(Pronounced in open court on 30/09/2014.) (Archana Wadhwa) Member (Judicial) (Rakesh Kumar) Member (Technical) PK ??
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