Commissioner of Central Excise vs Ashima Dyecot Ltd.

K.A. Puj, J.—The Commissioner of Central Excise has filed the above three tax appeals u/s 35G of the Central Excise Act, 1944 with a proposal to formulate the following substantial questions of law:

(a) Whether the Tribunal is justified in holding that credit availed of and reversal would amount to the effect as if the same was not availed and would thus satisfy the condition of Notification No. 30/2004-C.E., dated 9-7-2004?

(b) Whether the Tribunal is justified in rendering the present judgment and order in view of explanation to Rule 3 of Cenvat Credit Rules, 2004 and whether the credit availed of by the respondent under the said Rules and reversal would amount to non-fulfilment of the condition prescribed under Notification No. 30/2004-C.E., dated 9-7-2004?

Same questions of law are framed in all the three tax appeals. As a matter of fact, all the three tax Appeals arose out of the common order passed by the Customs, Excise & Service Tax Appellate Tribunal. West Zonal Bench, Ahmedabad in Appeal Nos. E/4101/05, E/328/2006 and E/71/07 dated 16-4-2007/A-836-838/WZB/A''bad-07.

For the sake of brevity and convenience, the facts are taken from Tax Appeal No. 1032 of 2007. The respondent-assessee is engaged in the business of manufacture of cotton fabrics falling under Chapter 52 of the Central Excise Tariff Act, 1985. The respondent uses grey cotton, dyes, chemicals, packing material, etc. as inputs for manufacture of cotton fabrics and is availing benefit of Notification Nos. 29/2004 and 30/2004 both dated 9-7-2004.

2.1 The above mentioned notifications have been issued in exercise of powers conferred u/s 5A(1) of the said Act. The notification No. 29/2004-C.E., dated 9-7-2004 exempts excisable goods of the description specified in column (3) of the table and falling within the chapter, Heading No. or Sub-Heading No. of the First Schedule of the Central Excise Tariff Act, 1985 specified in the corresponding entry in Column (2) of the said table, from so much of the duty of excise specified thereon under the First Schedule to the Central Excise Tariff Act, as is in excess of the amount calculated specified in the corresponding entry in column (4) of the said table.

2.2 So far as the second Notification No. 30/2004-C.E., dated 9-7-2004 is concerned, it stipulates that the assessee manufacturing excisable goods of the descriptions specified in Column (3) of the table of the Chapter, Heading No., Sub-Heading No. of the First Schedule of the Central Excise Tariff Act, 1985 (5 of 1986), specified in the corresponding entry in Column (2) of the said table were exempted from whole of the duty of excise leviable thereon under the said Act. However, it provides that nothing contained in this notification shall apply to the goods in respect of which credit of duty on inputs has been taken under the provisions of the Cenvat Credit Rules, 2002.

2.3 The Government of India, Ministry of Finance, Department of Revenue, New Delhi issued Circular No. 795/28/04-CX., dated 28-7-2004 clarifying that where a manufacture of textiles or textile articles avails full exemption under the above mentioned second Notification No. 30/2004-C.E., dated 9-7-2004 as well as clears similar or dissimilar goods on payment of duty availing benefit of the first Notification No. 29/2004-C.E. dated 9-7-2004, simultaneously, that Notification No. 29/2004-C.E., dated 9-7-2004 prescribes optional duty at the rate of 4% for pure cotton goods and 8% for other goods, is independent of Notification No. 30/2004-C.E., which provides for full exemption and there is no restriction of availing both benefits simultaneously under the said two notifications. However, the essential condition for availing the benefit in the said notifications simultaneously is that the manufacturer should maintain separate books of account for goods availing of Notification No. 29/2004-C.E., dated 9-7-2004 and for goods availing of Notification No. 30/2004-C.E., dated 9-7-2004.

2.4 A bare perusal of the second Notification No. 30/2004-C.E. makes it clear that it is very specific about non-availment of Cenvat credit on inputs stage for availing duty exemption conferred thereunder. In other words, the benefit of the said notification can be availed of only if there is non-availment of Cenvat credit on input stage by an assessee.

2.5 The Board (CBEC) had further clarified that both the notifications are independent and there is no restriction of availing the benefit conferred on both of them simultaneously provided separate books of accounts are maintained as is stated hereinabove.

2.6 The scrutiny of ER-1 returns submitted by the respondent for the period from February-2005 to November-2005 revealed that the respondent had started availing of benefits under both the notifications simultaneously with effect from February-2005. Prior to February-2005, the respondent was clearing goods on payment of applicable duty under Notification No. 29/2004-C.E., dated 9-7-2004. It was noticed that the respondent had started availing benefit of both the notifications simultaneously. However, the respondent was not maintaining separate accounts for receipt of inputs being used in the manufacture of fabrics subsequently cleared without payment of duty availing of the benefit of second Notification No. 30/2004-C.E., dated 9-7-2004, which is a mandatory condition.

2.7 In view of the above, a letter from the Range Office dated 26-12-2005 was issued to the respondent requesting it to intimate as to whether the separate records were being maintained as required for the purpose of availing of simultaneous benefits under the said two notifications and in view of the circular issued by the Board. The respondent was also informed that if the condition of maintaining separate accounts was not fulfilled, the required duty should be paid on the goods cleared. In response to the said letter of the Range Office, the respondent through its letter dated 11-1-2006 disputed the contents of the letter of the Range Office and contended that the RAC meeting had very clearly recognised that the unit was required to maintain separate books of accounts only for the final goods. It was also contended that if the manufacturer reverses credit before clearance, it must be taken that the credit was never availed of. It was contended that the assessee was not required to maintain separate accounts and storage of input and not to take any credit at all in the first place. It was also contended that the letter issued by the Range Office was incorrect on the ground that neither the Board''s circular nor the clarification issued in the RAC meeting require the manufacturer to maintain separate accounts with regard to the inputs rather they were required to maintain separate books of accounts only for the final goods. However, while replying thereto, the said letter contains an admission that the respondent was not maintaining separate records and that it had practical difficulties in following specific imaginary procedure requiring the respondent to comply with the rule prescribed leading to no revenue gain. Vide a further letter dated 18-1-2006. the respondent admitted that they kept account only for consumption of inputs used for final products cleared under both the notifications separately and reversing proportionate Cenvat credit taken on the inputs used for the final goods cleared under Notification No. 30/2004-C.E., dated 9-7-2004. It was noticed that condition of the said notification clearly provided that no Cenvat credit can be availed on the goods cleared without payment of duty in view of the provisions of the Cenvat Credit Rules, 2001 and therefore, availing Cenvat credit first and subsequent proportionate reversal disentitles the respondent from the availment of the benefit or exemption under the second Notification No. 30/2004-C.E., dated 9-7-2004. The statement of the concerned person of the respondent was recorded u/s 14. In the said statement, there was an admission of the duty amount calculated and was shown as annexure.

2.8 On scrutiny of ER-1 return submitted by the respondent for the period from February-2005 to December-2005 and the details available for the period from 1-1-2006 to 17-1-2006, it appears that the respondent had cleared quantity of fabrics of 4,40,15,136 mtrs. And 5,013 kgs. of processed fabrics valued at Rs. 88,09,49,089/- for availing benefit of Notification No. 30/2004, dated 9-7-2004 and by reversing the duty to the tune of Rs. 45,28,982/- (basic Rs. 44,40,902/- + Education Cess Rs. 88,080/-). These goods were cleared without maintaining separate books of account and thus, there was contravention of Notification No. 30/2004 and the clarificatory circular issued by the Board. It was therefore felt that the respondent was liable to pay duty on the aforesaid quantity of fabrics cleared without payment of duty. It also appeared that the duty payable on the above mentioned goods cleared during the above period without payment of duty under Notification No. 30/2004 and without maintaining separate books of account came to Rs. 3,59,42,723/- (Duty Rs. 3,52,37,964/- + Education Cess Rs. 7,04,759/-). Thus, the respondent had cleared goods without maintaining separate books of accounts and fulfilling the conditions of Notification.

2.9 In view of the above facts, the Revenue has taken the view that the respondent has contravened the provisions of the notification read with the clarification issued rendering it liable for penal action u/s 11AC of the Act and after issuance of the show cause notice and considering the reply tendered by the respondent, the Commissioner of Central Excise, Ahmedabad passed the Order-in-Original No. 25/Commissioner/2006 in November-2006 confirming the duty of Rs. 3,59,42,723/- u/s 11A of the Act. The Commissioner of Central Excise has also imposed penalty of the equivalent amount u/s 11AC of the Act. He further directed to recover the interest at the prescribed rate from the respondent-assessee u/s 11AB of the Act.

2.10 Being aggrieved by the said order of the Commissioner of Central Excise, the respondent assessee took the matter before the Customs, Excise & Service Tax Appellate Tribunal ("Tribunal" for short) and the Tribunal, vide its order dated 18th April, 2007 held that the law on the point stands declared by the Hon''ble Supreme Court in case of Chandrapur Magnet Wires (P) Ltd., Nagpur Vs. Collector of Central Excise, Central Excise Collectorate, Nagpur, wherein it is held that the reversal of credit of duty originally availed of would amount to the effect as if no credit has been availed. In light of this judgment, the Tribunal held that the credit availed and reversed would amount to the situation as if the same was not availed, thus satisfying the condition of Notification No. 30/04-C.E. Tribunal has also referred to the decision of 2007 (208) ELT 521 wherein also identical issue was involved and the appeal was decided in favour of the assessee.

Being aggrieved by the said order of the Tribunal, the present Tax Appeals have been filed by the Revenue.

In Tax Appeal No. 1640 of 2007, this Court has passed an order on 4th February, 2008 directing the learned Counsel appearing for the Revenue to place on record the facts as to whether the order of the Tribunal on the same issue which was in favour of some other assessee was accepted or not finally by the Department. Till this date, nothing has been placed before the Court. In the above view of the matter, all the three appeals are taken up for admission hearing.

Mr. Y.N. Ravani, learned Standing Counsel appearing for the Revenue, has submitted that the Tribunal has referred to and relied upon the decision of the Honourable Supreme Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra), however, the facts are clearly distinguishable and the relevant notification which is under consideration in the present appeals was not before the Honourable Supreme Court and hence, the said decision cannot be made applicable to the facts of the present case. He has further submitted that there is certain principle of law that when a notification is issued by the Department, it has to be strictly construed and neither anything has to be added in that notification nor anything has to be read beyond what is specifically stated in the notification.

In this context, he relied upon the decisions in the case of (i) Eagle Flask Industries Limited Vs. The Commissioner of Central Excise, Pune, ; (ii) Commissioner of C. Ex., Trichy Vs. Rukmani Pakkwell Traders, (iii) The Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal etc., and (iv) Commissioner of Central Excise, Chandigarh-I Vs. Mahaan Dairies, . He submitted that in all these decisions, the Honourable Supreme Court has taken a consistent view that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. To be entitled to the benefit of the notification, a person has to strictly comply with the conditions of the notification. If on a plain reading of the notification, the benefit is not available, then, merely on the basis of the principles applied in infringement cases, benefit cannot be claimed. He has further submitted that the decision of the Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal (supra) is rendered by the three Judges of the Honourable Supreme Court, wherein it is held that when an assessee seeks exemption under a notification, which prescribes compliance of Chapter X, there is a linkage between levy of duty on one hand and accountability of goods received/used in factory where final product is manufactured.

Therefore, one cannot ignore strict compliance of Chapter X rules while claiming exemption under such notification. Based on these findings and observations made by the Honourable Supreme Court, it has been submitted by Mr. Ravani that in the present case, since the conditions laid down in Notification No. 30/2004, dated 9th July, 2004 are not complied with, the respondent-assessee is not entitled to claim exemption simply on the basis of the cenvat credit subsequently reversed by the respondent-assessee.

We have considered the submissions made by the learned Standing Counsel appearing for the Department and we have also gone through the orders passed by the authorities below. Though there is not much discussion in the order of the Tribunal, the learned Commissioner of Central Excise, has discussed the entire issue at great length. After discussing about the relevant provisions contained in the notifications, rules and submissions of the assessee''s representative, the Commissioner of Central Excise has decided the matter against the asscssee only on the ground that manufacturer had not maintained separate books of accounts for the goods availing of the benefit of Notification No. 29 of 2004 and for the goods availing of the benefit of Notification No. 30 of 2004. He has further observed that the circular does not speak of final goods or inputs, but, it refers to the goods only and then, he came to the conclusion that as the subjected two notifications refer to the aspect of credit being taken or otherwise of inputs, maintenance of separate accounts for inputs is of prime importance. Since this condition was not satisfied, he confirmed the levy of duty, penalty, etc. This finding of the learned Commissioner of Central Excise is not in consonance with the observations made and the ratio laid down by the Honourable Supreme Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra).

The findings rendered by the Honourable Supreme Court in the case of Chandrapur Magnet Wires (P) Ltd. (supra) are clearly applicable to the present matters. In that case also, the case of the Department was that reversal of credit entries is not permitted by the rules. The assessee is not entitled to remove the copper wires without payment of duty since credit of the duty paid on the inputs used in the manufacture of copper wire had already been taken in accordance with Rule 57A. Once appropriate entries have been made in the register, there is no rule under which the process could be reversed. It is true that the assessee has not maintained separate accounts or segregated the inputs utilised for manufacture of dutiable goods and duty free goods, as should have been done. But, the Court''s attention was drawn to the departmental circular according to which in a case where the manufacturer produces dutiable final products and also final goods which are exempt from duty and it is not reasonably possible to segregate inputs utilised in manufacture of the dutiable final products from the final products which are exempt from duty based on this, the Court held that the manufacturer may take credit of duty paid on all the inputs used in the manufacture of final products on which duty will have to be paid and in view of this clarification by the Department, the Court saw no reason that why the assessee should not make a debit entry in the credit account before removal of the exempted final product and hence, it cannot be said that the assessee has taken credit for the duty paid on the inputs utilised in the manufacture of the final exempted product under Rule 57A. The Court, therefore, took the view that the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken the credit of the duty paid in the inputs used in manufacture of these goods. The ratio laid down in this decision is squarely applicable to the facts of the present case and maintenance of separate books of accounts at the initial stage cannot be considered to be a condition precedent for the purpose of claiming the benefit of exemption to the respondent-assessee.

Even Rule 6(3) of the Cenvat Credit Rules, 2004 says that 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) xxx xxx xxx xxx

(ii) xxx xxx xxx xxx

(iii) xxx xxx xxx xxx

(iv) xxx xxx xxx xxx

(v) xxx xxx xxx xxx

(vi) final products falling within Chapter 50 to 63 of the said First Schedule;

xxx xxx xxx xxx xxx xxx xxx xxx

Even otherwise, Rule 3 says that the manufacturer or producer of the final product or provider of output services shall be allowed to take credit on various items enumerated therein.

This issue had come up for consideration before the Allahabad High Court in the case of Hello Minerals Water (P) Ltd. Vs. Union of India (UOI), wherein it is held that reversal of Modvat credit amounts to non-taking of credit on the inputs. Hence, the benefit has to be given of the notification granting exemption/rate of duty on the final products since the reversal of credit on the input was done at the Tribunal''s stage. While arriving at this conclusion, the Allahabad High Court has referred to various judgments under which such reversal was made subsequently and still the benefit was given to the assessee.

Since the Tribunal has correctly applied the law laid down by the Honourable Supreme Court and the issue is well settled, we are of the view that no question of law, much less any substantial question of law, arises out of the order of the Tribunal and hence, all the three appeals are, accordingly, dismissed.