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2016 DIGILAW 58 (GUJ)

Commissioner of Central Excise v. Dashion Ltd

2016-01-08

AKIL ABDUL HAMID KURESHI, MOHINDER PAL

body2016
JUDGMENT : Akil Abdul Hamid Kureshi, J. 1. These appeals arise in common background. We may therefore notice facts from Tax Appeal No. 415 of 2013. 2. On 01.05.2013, the Tax Appeal was admitted for consideration of following substantial question of law:- "Whether Customs Excise & Service Tax Appellate Tribunal committed an error in fact and in law in reversing the order of CIT(Appeals) confirming the demand for wrongfully availed Cenvat credit of Rs. 1,07,07,142/- on the ground that the issue is revenue neutral?" 2.1 By the same order dated 01.05.2013, another question regarding penalty under Section 11AC of the Central Excise Act proposed by the Revenue was dismissed. We are, however, informed that the Revenue carried this issue in appeal before the Supreme Court and by order dated 03.08.2015, also admitted the additional question of penalty proposed by the Revenue. We, therefore, frame second question for consideration as under:- Whether the CESTAT was right in setting aside the penalty under Section 11ACof the Central Excise Act, 1944 on the Cenvat Credit availed by the assessee though the same was inadmissible? 3. The respondent assessee was engaged in manufacture of water treatment plant and other connected items and was availing benefit of Cenvat credit on the duty paid on inputs, capital goods and input services as permissible under Cenvat Credit Rules, 2004 (hereinafter to be referred as "the Rules of 2004"). The assessee had five manufacturing units and had its registered office at Vatva, Ahmedabad. The assessee was also providing several taxable services such as erection and commissioning, repairing and maintenance of water treatment plant, etc. 3.1 The revenue authorities, during scrutiny of the records of the assessee, noticed that it was availing the credit of service tax paid for various services by one unit for the purpose of clearance of other unit. After gathering details from the assessee, the adjudicating authority issued show cause notice dated 02.06.2008 calling upon the assessee why the Cenvat credit of service tax on input service amounting to Rs. 1.51 crores (rounded off) should not be recovered with interest and penalties. In the show cause notice itself, the adjudicating authority had referred to sub-rule (3) of Rule 15 of the Rules of 2004 as basis for such proposal. 1.51 crores (rounded off) should not be recovered with interest and penalties. In the show cause notice itself, the adjudicating authority had referred to sub-rule (3) of Rule 15 of the Rules of 2004 as basis for such proposal. Two primary objections of the Department appear to be that the assessee had not registered itself under the Service Tax (Registration of Special Category of Persons), Rules 2005 (hereinafter to be referred as "the Rules of 2005") and that the tax credit from one unit was utilized for discharging tax liability of another unit instead of pro rata distribution amongst different units. Despite resistance from the assessee, the adjudicating authority by the Order in Original dated 15.12.2008 confirmed the duty demands with interest and penalties, making following observations:- "16. As can be seen from the discussions above, the noticee has violated all the rules pertaining to the availment and utilization of service tax credit and the notifications made there under. By any stretch of imagination, it cannot be accepted that violation of rules can be termed as procedural/technical lapse. The Rules are framed for conveying and implementing the legislative intent. Once the same are not followed, the whole purpose and intent behind such legislation are defeated. A Rule has to be followed in substance. All variation of observance of such rule cannot be termed as procedural lapse. In this case, the noticee has not followed the whole substance of concerned rule. In view of this, the lapses on the part of the said noticee cannot be accepted as a mere procedural/technical lapse. Before availing the Cenvat credit on goods in question, the noticee should have fulfilled the basic conditions to avail the Cenvat credit such as Rule 3(1) and Rule 9 of Cenvat credit Rules, 2004. In this case, since the said noticee has not fulfilled the said conditions, they are not entitled for the said credit at their Vatva manufacturing unit which they have wrongly availed and utilised, which has been rightly demanded vide show cause notice. 18. In view of the above, I hold that the said noticee is eligible for service tax credit amounting to Rs. 44,01,429/- (Rs. 43,13,921/- + 86,349/- + 1,159/-) availed and utilized by the said noticee at their manufacturing unit at Vatva, which cannot be denied or recovered from them. 18. In view of the above, I hold that the said noticee is eligible for service tax credit amounting to Rs. 44,01,429/- (Rs. 43,13,921/- + 86,349/- + 1,159/-) availed and utilized by the said noticee at their manufacturing unit at Vatva, which cannot be denied or recovered from them. To that extent the noticee is eligible for the service tax credit out of the total credit demanded to be recovered from the noticee. The cenvat credit of service tax pertaining to the other units is not eligible to them as discussed above. 3.2 In order to impose penalty, it was observed as under:- "20. All the above said acts of omissions and commissions, on the part of the said noticee have rendered them liable to penalty as provided under Section11AC of the CEA, 1944 Sub-rule (3) of Rule 15 of CCR, 2004 in as much as they have wrongly taken inadmissible Cenvat Credit of Service Tax and utilized the said credit for payment of Central Excise Duty, by reason or willful mis-statement, suppression of facts, or in contravention of the provisions of Central Excise Act, 1944 and Rules framed there under and thereby evaded payment of Central Excise duty. However, since I am imposing penalty under Section 11AC of Central Excise Act, 1944, which is the maximum, I refrain from imposing penalty under Sub-rule (3) of Rule 15 of CCR, 2004." 3.3 The assessee carried the matter in appeal before the Tribunal. The Tribunal by the impugned judgment reversed the order of the adjudicating authority and allowed the appeal. The Tribunal noted the contention of the assessee that the assessee had maintained all the registers in the excel sheets and that the Department could have easily verified the correctness of the credits availed. The Tribunal held and observed as under:- "5. We have considered the submissions made by both sides. We find considerable force in the arguments advanced by the learned counsel. The registered office and Vatva office both are located in the same place and appellant has simply utilized the credit at Vatva instead of distributing it to various units. As submitted by the learned counsel, during the relevant period, there was no restriction for utilization of such credit without allocating proportionately to various units. The registered office and Vatva office both are located in the same place and appellant has simply utilized the credit at Vatva instead of distributing it to various units. As submitted by the learned counsel, during the relevant period, there was no restriction for utilization of such credit without allocating proportionately to various units. The omission to take registration as an Input Service Distributor can at best be considered as procedural irregularity and in view of the decisions cited, has to be considered sympathetically. Further, it is also noticed that appellant has not got any extra benefit by doing this. In fact from the statement of Shri Chandresh C. Shah, as explained that above cenvat credit available to them, 20% of service tax payable only was paid and balance was paid in case. In fact, proper distribution would have enabled them to utilize full credit. It would show that the exercise is totally Revenue neutral and no loss has been caused to the Revenue (infact Revenue has gained). In the absence of any legal requirement to avail credit based on the services received during the relevant time and in the light of the decision cited by the learned counsel, the procedural irregularity has to be ignored and the demand confirmed has to be set-aside on this ground. In the result, demand for cenvat credit of Rs. 1,07,07,132/- with interest and penalty equal to the same imposed under Section 11AC of the Central Excise Act, 1944 are set-aside." 4. It is undisputed that the Rules of 2004 provide for a scheme for distribution of credit by input service distributor. Term "input service distributor" has been defined in Rule 2(m) of the Rules of 2004 as to mean an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be. 5. Rule-7 pertains to manner of distribution of credit by input service distributor. 5. Rule-7 pertains to manner of distribution of credit by input service distributor. At the relevant time, this Rule-7 permitted input service distributor to distribute Cenvat credit in respect of service tax paid on the input service to its manufacturing units or units providing output service, subject to the two conditions, viz.:- "(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; (b) credit of service tax attributable to service [used by one or more units] exclusively engaged in manufacture of exempted goods or providing of exempted service shall not be distributed;" 5.1 It was only later on that additional condition by way of Clause-(d) to Rule 7 was added, which reads as under:- "credit of service tax attributable to service used by more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period." 6. The first objection of the Department therefore that the credit from one unit was utilized for the purpose of duty liability of other unit without pro rata distribution by the input service distributor therefore would not survive in view of no previous restriction of this nature flowing from Rule 7 of the Rules of 2004. In fact, the Tribunal has seen entire situation as a Revenue neutral, since as pointed out by the assessee, it had availed only 20% of the credit for payment of service tax and the balance was paid in cash. 7. The second objection of the Revenue as noted was with respect of non-registration of the unit as input service distributor. It is true that the Government had framed Rules of 2005 for registration of input service distributors, who would have to make application to the jurisdictional Superintendent of Central Excise in terms of Rule 3 thereof. Sub-rule (2) of Rule 3 further required any provider of taxable service whose aggregate value of taxable service exceeds certain limit to make an application for registration within the time prescribed. Sub-rule (2) of Rule 3 further required any provider of taxable service whose aggregate value of taxable service exceeds certain limit to make an application for registration within the time prescribed. However, there is nothing in the said Rules of 2005 or in the Rules of 2004 which would automatically and without any additional reasons dis-entitle an input service distributor from availing Cenvat credit unless and until such registration was applied and granted. It was in this background that the Tribunal viewed the requirement as curable. Particularly when it was found that full records were maintained and the irregularity, if at all, was procedural and when it was further found that the records were available for the Revenue to verify the correctness, the Tribunal, in our opinion, rightly did not dis-entitle the assessee from the entire Cenvat credit availed for payment of duty. Question No. 1 therefore shall have to be answered in favour of the respondent and against the assessee. 8. Coming to the question of penalty, right from the show cause notice stage till the final disposal of the show cause notice proceedings, we find little evidence to support the allegations of willful misstatement, suppression, fraud or collusion on the part of the assessee. In fact, perusal of the show cause notice would show that the entire basis of the Revenue was wrongfully availment of the credit. Mere wrongfully availment without element of mens rea and that too for the purpose of evading payment of duty would not be sufficient to impose penalty. The adjudicating authority, without any basis or evidence, merely mechanically recorded that the assessee had, by reason of willful misstatement, suppression of fact or in contravention of the provisions of the Rules, evaded payment of central excise duty. He was not even sure whether this was a case of willful misstatement or suppression of fact or contravention of provisions of the Rules. 9. Question No. 2, therefore, is also answered against the Revenue. 10. Before closing, we may notice that Rule 6(3) of the Rules of 2004 simply has no application, though pressed in service by the Revenue. Rule 6 pertains to obligation of a manufacturer or producer of final produces and a provider of output service. 9. Question No. 2, therefore, is also answered against the Revenue. 10. Before closing, we may notice that Rule 6(3) of the Rules of 2004 simply has no application, though pressed in service by the Revenue. Rule 6 pertains to obligation of a manufacturer or producer of final produces and a provider of output service. Sub-rule (1) provides that Cenvat credit shall not be allowed on such quantity of input used in or in relation to the manufacture of exempted goods under certain circumstances. Sub-rule (2) provides that where as manufacturer of output service avails of Cenvat credit in respect of any inputs or input services and manufactures such final produces or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider or output service shall maintain separate accounts. Sub-rule (3) in this context provides that notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service opting not to maintain separate accounts shall follow any of the options mentioned therein. Sub-rule (3) of Rule 6 would, therefore, necessarily apply where the manufacturer of goods or provider of output service engaged in manufacture or providing of service which is taxable as well as one which is exempt, which is not the case in the present appeal. 11. In the result, both appeals are dismissed.