Custom, Excise & Service Tax Tribunal
M/S. Aurobindo Pharma Ltd vs The Commissioner Of Central Excise on 21 December, 2010
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL SOUTH ZONAL BENCH AT BANGALORE Appeal No: E/205/2009 (Arising out of Order-in-Original No: 11/2008-09 (RS) dated 25.11.2008 passed by the Commissioner of Central Excise & Customs, Visakhapatnam-I Commissionerate, Visakhapatnam.) 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 should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordship wish to see the fair copy of the Order? 4. Whether Order is to be circulated to the Departmental authorities? M/s. Aurobindo Pharma Ltd. Appellant Vs. The Commissioner of Central Excise Visakhapatnam-I Commissionerate Visakhapatnam. Respondent
Appearance Shri C. T. Krishnamurthy, Advocate for the appellant.
Shri M. Vivekanandan, SDR, for the revenue.
CORAM SHRI M. V. RAVINDRAN, HONBLE MEMBER (JUDICIAL) SHRI P. KARTHIKEYAN, HONBLE MEMBER (TECHNICAL) Date of Hearing: 30.06.2010 Date of decision: 21.12.2010 FINAL ORDER No._______________________2010 Per Shri P. Karthikeyan This is an appeal filed by M/s. Aurobindo Pharma Ltd., Pydibheemavaram (APL for short). APL is engaged in the manufacture of bulk drugs falling under Chapter 29 of the Central Excise Tariff. They manufacture 26 products. Some of these are also cleared under exemption. Three of its finished products Lamivudine, Zidovudine and Nevirapine were exempt from payment of duty in terms of Notification No.6/2002 dt. 1.3.2002 as amended, during the material period February 2005 to March 2007. Vide the impugned order, the Commissioner disposed three show cause notices issued to the assessee and held that the assessee is liable to pay cenvat credit of Rs.12,32,28,157/- availed on inputs exclusively used in the manufacture of the above three exempted final products. The Commissioner confirmed demand of the above amount, applicable interest against APL and imposed penalty of Rs.10/- lakh on it. While confirming the demand, the Commissioner considered the fact that the assessee had already reversed credit to the tune of Rs.54,88,499/- relatable to inputs cleared as such.
2. The facts of the case in brief are as follows. The show cause notices had proposed to demand the cenvat credit relatable to the following :
i. On the exclusive inputs used in the manufacture of exempted goods which were cleared on payment of 10% of the sale price of the exempted goods;
ii. On the exclusive inputs removed as such;
iii. On the exclusive inputs used in the finished goods exported;
iv. On the exclusive inputs used in the finished goods removed to 100% EOU;
v. On the exclusive inputs lying in stock;
vi. On the exclusive inputs used in the finished goods lying in stock.
The assessee manufactured both dutiable and exempted bulk drugs and opted not to maintain separate accounts for dutiable and exempted goods envisaged under Rule 6 (3) of Cenvat Credit Rules, 2002/2004. They took credit of duty paid on all the inputs used in the manufacture of exempted goods including exclusive inputs (other than common inputs) and paid 10% on the sale price of the exempted goods cleared in the domestic market. In a number of judgments in the case of the assessee, the Tribunal had held that when a manufacturer did not maintain separate accounts for both dutiable and exempted goods, the cenvat credit on the exclusive inputs used in the exempted goods could not be denied if 10% of the sale price of such exempted goods was paid at the time of their clearance. The government issued Notification No.27/2005 dated 16.5.2005 and amended Rule 6 (3) of Cenvat Credit Rules, 2004 (CCR) by inserting the following Explanation III :
For the removal of doubts, it is hereby clarified that credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted services.
3. It is submitted that as regards item (i) of para 2, the impugned order had wrongly followed CBEC Circular No.754/70/2003 Cx. dt 9.10.2003 which had been overruled by the Tribunal in its several judgments and erred in holding that the Explanation III inserted under Rule 6 (3) was clarificatory in nature. The amount relatable to this category confirmed was Rs.30,76,937/-. Removals of exclusive inputs as such of item (ii) were squarely covered by sub rule (5) of rule 3 of CCR. The appellants had reversed the credit at the time of clearance of inputs following the above provision. There was no requirement in law of payment of interest from the date of actual clearance to the date on which debit entry was made. As regards the items (iii) and (iv), APL contended that denial of credit on the exclusive inputs used in the exempted finished products cleared to a 100% EOU and which were cleared for export under bond was not correct in law as they were squarely covered by sub-clauses (ii) & (v) respectively of Sub Rule (6) of Rule 6 of CCR. The demand was contrary to the above provisions of law. The dispute was squarely covered by the judgment of the Honble High Court of Bombay in Repro India Ltd. Vs. UOI and Another [ 2008 (88) RLT 481 (Bombay)] in favour of the assessee. The appellant relied on the following case laws which had held to the same effect.
(i) Medispan Ltd. Vs.. CCE, Chennai - 2004 (178) ELT 848 (Tri.-Chennai)
(ii) Jobelle Vs. CCE, Mumbai I - 2006 (203) ELT 627 (Tri.-Chennai)
(iii) Punjab Stainless Steel Industries Ltd. Vs. CCE, Delhi - 2008 (226) ELT 587 (Tri.-Delhi) In holding that inputs used in the dutiable goods alone were eligible for taking credit, the Commissioner had relied on the judgment of the Honble Andhra Pradesh High Court in WP No.16909/2006 dt 23.11.2007. This judgment was no more valid in view of the admission of fresh WP No.2747/2009 WPMP No.3532/2009 by the Honble Andhra Pradesh High Court pursuant to the direction contained in Supreme Court order in SLP No.4969/2008. Moreover the vires of Explanation - III of Rule 6 (3) of CCR was pending before the Honble Andhra Pradesh High Court. The credit involved on this account was Rs.30,76,934/- which had already been paid by the appellant under protest.
3.1 The demand of Rs.12,01,12,418/- pertaining to exclusive inputs used in the exempted finished goods exported / removed to EOU, in the impugned order was contrary to the law laid down by the Honble High Court Bombay in the case of Repro India Ltd. (supra).
3.2 As regards the denial of credit on the exclusive inputs lying in the factory and those contained in the exempted finished goods lying in the factory, it is submitted that it was not known whether the exclusive inputs lying in stock would be used in exempted goods that may be exported or cleared for domestic sale on payment of 10%. Similarly, it was also not known whether the exempted finished goods lying in the factory were going to be exported or were going to be cleared on payment of 10% of the sale price of the exempted finished goods.
3.3 As the issue involved a question of validity of the impugned Explanation, imposition of penalty was illegal, unjust and uncalled for. The appellant relied on the following decisions of the Tribunal in support.
(i) Delphi Automative Systems Vs. CCE, Noida 2004 (163) ELT 47 (Tri.-Delhi)
(ii) SPBL Ltd. Vs. CCE, Jaipur 2004 (712) ELT 495 (Tribunal.-Delhi) In both these decisions, the Tribunal had held that the issue involved therein being one of interpretation, no penalty was imposable on the appellant.
4. In a letter received in the registry on 29.5.2009, the assessee intimated that vide its order WPMP No.11303/2009 dt.27.4.2009 the Honble Andhra Pradesh High Court had permitted it to withdraw WPMP No.3532/2009 to enable it to pursue the appeal before the Honble CESTAT, Bangalore.So we take up the appeal.
5. We have heard both sides.
5.1 We have carefully examined the case records and studied the rival submissions. As per the judgment of Honble Andhra Pradesh High Court in WPMP No. 11303 of 2009 in W.P. No.2747 of 2009 dated 27.4.2009, the assessee is allowed to pursue the appeal against the impugned order insofar as it relates to interpretation and granting benefit of Rule 3 and Rule 6 (6) of CCR.
5.2 Rule 3 of Cenvat Credit Rules 2004 reads thus:
(1) A manufacturer or producer of final products or a producer of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of---
(i) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, leviable under the Excise Act;
(ii). to (xi) (6) Rule 6 of Cenvat Credit Rules 2004 reads as follows.
RULE 6.?Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services. - (1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or exempted services, except in the circumstances mentioned in sub-rule (2).
[Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.] (2)?Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, [ *?*?* ], and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.
(3)?Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely :-
(a) if the exempted goods are
(i) goods falling within (heading 2207) of the First Schedule to the Excise Tariff Act (hereinafter in this rule referred to as the said First Schedule);
(ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;
(iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;
(iv) Naptha (RN) falling within Chapter 27 of the said First Schedule used for generation of electricity;
(v) (newsprint, in rolls, sheets or reels, falling within chapter 48) of the said First Schedule;
(vi) final products falling within Chapters 50 to 63 of the said First Schedule;
(vii) goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the Ministry of Finance (Department of Revenue), namely:-
(1) No.70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June 1992;
(2) No.62/95-Central Excise, dated the 16th March, 1995, G. S. R. 254 (E), dated the 16th March, 1995;
(3) No.63/95-Central Excise, dated the 16th March, 1995 G.S.R. 255 (E), dated the 16th March, 1995;
(4) No.64/95-Central Excise, dated the 16th March 1995, G.S.R.256(E), dated the 16th March 1995, [(viii) Liquefied Petroleum Gases (LPG) falling under tariff items 2711 12 00, 2711 13 00 and 2711 19 00 of the said First Schedule;]
(ix) Kerosene falling within heading 2710 of the said First Schedule, for ultimate sale through public distribution system.] the manufacturer shall pay an amount equivalent to the CENAT credit attributable to inputs and input services used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or the manufacturer shall pay an amount equivalent to the CENAT credit attributable to inputs and input services used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or
(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to ten percent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory;
(c) the provider of output service shall utilize credit only to extent of an amount not exceeding twenty per cent of the amount of service tax payable on taxable output service.
Explanation I The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer or provider of output service by debiting the CENVAT credit or otherwise.
Explanation II If the manufacturer or provider of output service fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 14, for recovery of CENVAT credit wrongly taken.
Explanation III For the removal of doubts, it is hereby clarified that credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted services.
(4)?No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.
(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.
(6)?The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either -
(i) cleared to a unit in a special economic zone or
(ii) cleared to a hundred per cent. export-oriented undertaking; or
(iii) cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or
(iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 108/95-Central Excise, dated the 28th August, 1995, number G.S.R. 602 (E), dated the 28th August, 1995; or
(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or
(vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or [zinc by smelting; or] [(vii) all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under section 3 of the said Customs Tariff Act when imported into India and supplied against International Competitive Bidding in terms of [notification No.6/2002-Central Excise dated the 1st March, 2002 or Notification No.6/2006-Central Excise, dated the 1st March, 2006, as the case may be.] Though Rule 3 of CCR allows credit of duties specified in the sub-rule (1) and paid by a manufacturer, the scheme also places certain restrictions on the above right. As per Rule 6 (1) of CCR, credit shall not be allowed on such quantity of input or input service used in the manufacture of exempted goods or for provision of exempted services , except in circumstances specified in sub rule (2). As per sub rule (2), where a manufacturer or provider of output service avails of CENVAT credit and manufactures such final products or provides such output services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. As per sub rule (3) the manufacturer or provider of output service opting not to maintain separate accounts shall follow either of the follwing two conditions , as applicable to him, namely :-
(a) if the exempted goods are .
(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to ten percent of the total price , excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from their factory;
Condition (c) restricts the CENVAT credit that can be utilized by a service provider to 20% of the service tax payable on the output service.
Explanation I to this subrule (3) lays down that the amount payable as per conditions (a) and (b) can be paid from the CENVAT credit or otherwise. Explanation II lays down that in case of failure of the assessee to pay the amount as prescribed under conditions (a) and (b), the same shall be recovered as provided under Rule 14 along with interest.Explanation III clarifies that no credit shall be allowed on inputs and input services used exclusively for the manufacture of exempted goods or services.The Explanation reads as follows:
For the removal of doubts, it is hereby clarified that credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted services.
We find that the explanation does not say anything inconsistent with the CENVAT scheme of allowing credit of duty paid on inputs that go into production of goods or services that suffer duty so that there is no cascading effect of goods or services having to suffer double taxation. A position that informed the legislative policy all along is reiterated by expressly denying credit where the final products or services are not subject to tax. We note that the Explanation has been issued for the removal of doubts. The Explanation is in the nature of a clarification and so applies retrospectively. Exceptions to the Rule 3 are specified in sub-rule (6) of Rule 6 of CCR. Therefore an assessee which uses inputs exclusively for the manufacture of exempted goods and services but makes clearances in any manner specified in sub-rule (6) of Rule 6 shall be entitled to credit on exclusive inputs used for the production of exempted final products or provision of exempted services. However, in cases not covered by such exceptions, taking of credit on inputs by such assessees shall be irregular in view of the sub-rule (3) of Rule 6 of CCR. Such credit involved can be recovered along with interest as provided in Rule 14 of CCR. There is no justification to collect 10% of the sale price of exempted goods manufactured using exclusive inputs. There is no legal sanction for such recovery. In the case on hand, sub rules 1, 2, 3 and 4 shall not be applicable in the case of inputs relatable to excisable goods that are removed without payment of duty either to a hundred percent EOU or cleared for export under bond in terms of provisions of Central Excise Rules, 2002. As regards the credit involved in balance inputs and inputs contained in the finished goods in stock, we find that these demands are premature. The recovery of input credit involved in these cases shall be regulated in the manner we have indicated, namely, subject to sub-rule (6) of Rule 6 of CCR.
5.3 In its judgment in the case of CCE Vs. Drish Shoes Ltd. [2010 (179) ELT 0155 (HP)] the Honble High Court of Himachal Pradesh held that an assessee manufacturing goods chargeable to nil duty is eligible to avail cenvat credit paid on the inputs under the exception clause to Rule 6 (1) as contained in rule 6 (6) of CCR used in the manufacture of such goods, if the goods are exported. We note that their lordships of the Honble High Court of Himachal Pradesh relied on a Division Bench judgment of the Bombay High Court in Repro India Ltd. (supra) dealing with a similar situation involving entitlement to CENVAT credit of duty paid on inputs used in the manufacture of exempted goods which are exported.
5.4 The above judgments of the High Courts pertain to exception contained in sub rule (6) of Rule 6 of CCR relating to excisable goods removed without payment of duty and cleared for export under bond in terms of provisions of Central Excise Rules, 2002. We note that the exception is with reference to sub clause (v) of Rule 6 (6). A similar exception applies to excisable goods removed without payment of duty to a 100% export oriented undertaking as per clause (ii) of Rule 6 (6) of CCR. Therefore, the impugned order is not sustainable to the extent it confirmed demand of CENVAT credit relatable to inputs used in the manufacture of excisable goods which were exported or were cleared to 100% EOU without payment of duty. These judgments pertain to transactions prior to 16.5.05 when the impugned Explanation was introduced. These authorities therefore did not consider the scope of these rules as clarified by the impugned Explanation.
5.5 The impugned order demands interest on the credit of duty paid on inputs cleared as such. We find that on a conjoint reading of Rule 6 (1) and Rule 14 of CCR, unless it is shown that APL had not used the credit involved and the same had remained an entry in their CENVAT account, the impugned demand of interest is in accordance with law. We remand the dispute relating to the interest for a fresh decision by the Commissioner after verifying the facts. As regards the penalty, we hold that the same is not sustainable in view of the fact that the dispute involves provisions now being interpreted. The impugned order is set aside. The appeal is allowed by way of remand.
(Pronounced in open Court on 21.12.2010 )
(P. KARTHIKEYAN)
Member(T)
(M. V. RAVINDRAN)
Member (J)
/rv/
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