Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
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Reserved on: 18 April, 2012
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% Date of Decision: 29 May,2012
+ CEAC NOs.11/2011
HARSH INTERNATIONAL (KHAINI) PVT. LTD. .... Appellant
Through: Dr.Seema Jain with Mr.Ajay K.Jain
and Mr.Dushyant K.Mahant,
Advocates
VERSUS
COMMISSIONER OF CENTRAL EXCISE …..Respondent
Through: Mr. Satish Kumar, Sr. Standing
Counsel
+ CEAC NOs.12/2011
HARSH INTERNATIONAL PVT. LTD. .... Appellant
Through: Dr.Seema Jain with Mr.Ajay K.Jain
and Mr.Dushyant K.Mahant,
Advocates.
VERSUS
COMMISSIONER OF CENTRAL EXCISE …..Respondent
Through: Mr. Satish Kumar, Sr.Standing
Counsel
CEAC-11& 12/2011 Page 1 of 15
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
1. Whether Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporters or not ? Yes
3. Whether the judgment should be reported in the Digest? Yes
R.V. EASWAR, J.:
COMMON FACTS
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The following substantial question of law was framed by us on 20
December, 2011in both the appeals:-
“Whether the appellant is liable to pay tax, penalty and
interest on the cenvat credit which was taken on capital goods
which were subsequently sold under Rule 3(5) of the Cenvat
Credit Rules, 2004?”
2. The brief facts leading up to the filing of the present appeals may
be noticed. M/s. Harsh International Pvt. Ltd., one of the appellant,
herein, is a company engaged in the manufacture of chewing tobacco. It
was registered under the Central Excise Law for the manufacture of
chewing tobacco under the brand name of “Mehak Chaini Khaini”. The
company was availing the Cenvat credit on the capital goods under the
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Cenvat Credit Rules, 2004. On 1 July, 2007, it informed the Central
Excise Authorities that pursuant to the withdrawal of the licences issued
by the licensor, it has stopped production and clearance of the goods and
CEAC-11& 12/2011 Page 2 of 15
that the factory would remain closed for an indefinite period and all
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manufacturing activity would stand suspended from 30 June, 2007. By
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letter dated 18 July, 2007, the appellant also surrendered in original the
registration certificate issued by the Central Excise Authorities stating that
it was no longer required. In the months of June and July, 2007, it sold
the capital goods such as “old used filter pouch packing machine”, “old
used HFFs machine PK 85”, “old used dust collector”, “old used packing
and sealing machine”, “old used air compressor”, “old used grinder” and
some other used machines to its sister concern, viz., Harsh International
(Khaini) Pvt. Ltd., the other appellant herein, and did not pay any excise
duty thereon, taking the position that under Rule 3(5) of the Cenvat Credit
Rules, 2004 used capital goods, did not affect any duty nor was it required
to reverse the cenvat credit which it availed of at the time of purchase
between 2003 and 2005.
3. In the course of the scrutiny of the assessee’s records, it was found
by the Central Excise Authorities that the appellant had availed of the
credit under the Cenvat Credit Scheme on capital goods. The appellant
was asked to furnish the details of the credit as required by Rule 3(5) of
the Cenvat Credit Rules, 2004, hereinafter referred to as the “Rules”. On
verification of the detailed furnished by the appellant, it was noticed by
the Central Excise Authorities that the appellant-assessee had removed
almost all the capital goods in respect of which Cenvat Credit was availed
of without intimating the Central Excise Department, even before
CEAC-11& 12/2011 Page 3 of 15
surrendering the registration certificate and without payment of an amount
equal to the credit of cenvat availed thereof. Accordingly, Harsh
International (Pvt.) Ltd. was asked to show cause why no payment of the
amount equivalent to the credit availed of in respect of the capital goods
was paid by them when such goods had been removed. In response
thereto the assessee informed the Central Excise Authorities that it was
not liable to reverse the Cenvat Credit on the removal of the capital goods
since such goods had been put to use by it.
4. By the same show-cause notice, M/s. Harsh International (Khaini)
Pvt. Ltd. was also asked to showcase against confiscation of the goods
already seized on 07.04.2008. Its contention was that since no excise duty
was payable, there no justification for confiscating the goods.
5. The central excise authorities were not satisfied with the assessee’s
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reply. By order dated 30 September, 2009 the Commissioner (Central
Excise) (“CCE”) adjudicated upon the assessee’s case. He held that the
capital goods were consigned to M/s Harsh International(Khaini) Pvt.
Ltd., Kundli (Sonipat) and that they were removed without payment of
the appropriate amount and thus there was a violation of the Rules. The
goods were accordingly liable to be confiscated under Rule 15. The
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goods had been seized on 7 April, 2008 and on 26 May, 2008 they were
provisionally released on execution of bond equal to the value of the
goods and on furnishing bank guarantee of Rs.20 lacs. After noticing
CEAC-11& 12/2011 Page 4 of 15
these facts, the CCE recorded the following findings, rejecting the
contentions of the appellant to the contrary: -
1. The capital goods were cleared neither as waste or
scrap but as used capital goods which did not exhaust
their useful life at the time of clearance.
2. The departmental understanding of the relevant rule
was that even after use, the identity of the capital
goods does not change, and, therefore, they remain
“as such” and , therefore, their clearance will be
treated as clearance of capital goods and the assessee
would be liable to pay an amount equal to the credit
availed in respect of such capital goods. The removal
shall also be made under in invoice.
3. The capital goods have been removed without
intimating the department.
4. The used capital goods were removed by the assessee
in June and July 2007. It was only from 13.11.2007
that an amendment was made to the relevant rule
which added a proviso to the effect that if the capital
goods, of which cenvat credit has been taken, are
removed after being used, the manufacturer will be
CEAC-11& 12/2011 Page 5 of 15
liable to pay a reduced amount of the cenvat credit
taken on the capital goods, such reduction being 2.5%
for each quarter or a year or part thereof from the
date of taking the cenvat credit. Therefore, prior to
the said date it did not matter that the capital goods
were removed after being put to use, because even
after being put to use, they still retained their
character as capital goods.
6. The CCE also referred to certain decisions of the CESTAT in
support of his view that even though the capital goods were removed after
being used, they still retained their character as capital goods “as such”
within the meaning of Rule 3(5) of the Cenvat Credit Rules. He,
therefore, held that by not reversing the Cenvat Credit the appellant
committed a violation of the aforesaid Rule. He also noted the
amendment made to the Rule with effect from 13.11.2007 by which a
proviso was added to the Rule which gave a concession in the case of
capital goods removed after being used. According to the CCE in cases of
removal of capital goods from the factory prior to 13.11.2007, central
excise would become payable as per rule 3(5) even if they had been
removed after being used.
7. On the aforesaid basis the CCE passed an order on 30.09.2009.
This is a common order passed by him against Harsh International Pvt.
Ltd. and Harsh International (Khaini) Pvt. Ltd., the appellants in the
CEAC-11& 12/2011 Page 6 of 15
present appeals. As regards Harsh International Pvt. Ltd., the direction
was to pay excise duty of ` 58,88,038/-, which is the amount equal to the
credit of the duty, and the interest thereon at the applicable rate. It was
also directed to pay a penalty of 58,88,038/- in addition to the duty and
`
the interest. As regards the other appellant, namely, Harsh International
(Khaini) Pvt. Ltd., it was directed by the CCE to pay a penalty of
` 2,90,000/- under Rule 25 of the Central Excise Rules, 2002 and was also
given the option to redeem the capital goods on payment of redemption
fine of ` 9,15,500/- under Section 34 of the Central Excise Act. M/s.
Harsh International Pvt. Ltd. was given the benefit of paying only 25% of
the penalty if they make the payment of duty and the interest within 30
days from the date of communication of the order. It was clarified that
the benefit of reduced penalty will be available only if the amount of
penalty determined as above is also paid within the period of 30 days.
8. The appellants carried the matter in appeal before the CESTAT.
The CESTAT disposed of the appeals by a combined order passed on
16.12.2010. According to the CESTAT, both before and after the
amendment, the basic requirement of Rule 3(5) relating to payment and
reversal of the credit of excise duty remained constant in the sense that the
obligation to pay the duty or to reverse the credit equivalent to what was
availed of, related to the capital goods in the months of June and July,
2007. Thus capital goods had been used by Harsh International Pvt. Ltd.,
after they were purchased during the period 2003-05. In June and July,
CEAC-11& 12/2011 Page 7 of 15
2007 the capital goods were sold to Harsh International (Khani) Pvt. Ltd.
The Rule, as it stood amended with effect from 6.5.2005, according to
Tribunal, was clear in the sense that capital goods removed “as such”
from the factory was liable to excise duty or to reverse the cenvat credit.
It was only from 13.11.2007, when the proviso was added to the Rule,
that used capital goods were subjected to a concessional rate of duty, that
is, an amount equal to the cenvat credit taken in respect of the capital
goods and reduced by 2.5% for which quarter of the year or part thereof
from the date of taking the credit. In this view of the matter, the Tribunal
observed as follows:-
“ 10. Plain reading of above provisions of law discloses that
at the relevant time, that is, when the capital goods were
removed as such from the factory by the appellants, they
were required to pay an amount equal to the credit availed
by them in respect of such capital goods. Once it is
apparent that the appellants had not paid such amounts,
there was clear violation of the Rule in force at the relevant
time. ”
9. As regards the contention that Rule 3(5) as it existed prior to
13.11.2007 did not apply to used capital goods, the Tribunal referred to
the larger Bench decision in the case of Modernova Plasty Pvt. Ltd. CCE,
Rigad 2008 (232) ELT 29 and held that in this decision it has been clearly
held that the expression “as such” cannot be restricted to mean only new
or unused capital goods. The interpretation of the words “as such” sought
CEAC-11& 12/2011 Page 8 of 15
to be placed by the assessee was not, therefore, accepted by the Tribunal.
Several orders of the Tribunal were cited before the Tribunal in support of
the assessee’s interpretation, but the Tribunal felt bound by the decision of
the larger Bench (Supra) and was unable to give effect to the assessee’s
submissions. The Tribunal ultimately concluded the appeals against the
assessees in the following manner:-
“ 19. Once the provision of law clearly required the
appellants to pay an amount equal to the credit availed in
respect of capital goods which were removed as such, and
that the same was required to be paid at the time of such
removal of the goods, and admittedly the appellants having
not complied which the said obligation, the consequences
provided under the statutory provisions are bound to follow.
It cannot be held in such circumstances that the removal of
the goods was not with any intention of avoiding the revenue
liability. As in case of claim of exemption from payment of
duty, the burden lies upon the assessee to establish that the
assessee falls within the four corners of the provision
granting the exemption, similarly in a case of non-payment of
duty or discharge of any revenue liability, it is for the
assessee to establish that he or she was not liable to
discharge such revenue liability for valid reasons. Mere
contention that on account of frequent changes in the
provision of law, which itself is devoid of substance, cannot
be a justification to avoid the penal liability resulting from
failure to discharge the revenue liability by the assessee. ”
Thus, the appeals were dismissed.
CEAC-11& 12/2011 Page 9 of 15
10. It is against the aforesaid common order passed by the CESTAT
that both the assesses are in appeal before us.
DECISION IN THE CASE OF M/S. HARSH INTERNATIONAL PVT.
LTD.
11. In the case of Harsh International Pvt. Ltd., the first question is
whether it is liable for the duty of 58,88,038/- under Section 11A of the
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Act. According to Rule 3(5), as it stood amended with effect from
6.5.2005, the following was the position:-
“ When inputs or capital goods, on which cenvat credit has
been taken, are removed as such from the factory, or
premises of the provider of output service, the manufacturer
of the final products or provider of output service, as the case
may be, shall pay an amount equal to the credit availed in
respect of such inputs or capital goods and such removal
shall be made under the cover of an invoice referred to in
Rule 9 ” (underlining ours)
12. On 13.11.2007 a proviso was added to Rule 3(5) and the same is as
follows:-
“ Provided further that if the capital goods, on which
CENVAT Credit has been taken, are removed after being
used, the manufacturer or provider of output services shall
pay an amount equal to the CENVAT Credit taken on the
said capital goods reduced by the percentage points
calculated by straight line method as specified below for
each quarter of a year or part thereof from the date of
taking the CENVAT Credit, namely:-
CEAC-11& 12/2011 Page 10 of 15
(a) for computers and computer peripherals:
for each quarter in the first year
@ 10%
for each quarter in the second
year @ 8%
for each quarter in the third year
@5%
for each quarter in the fourth and
fifth year @1%
(b) for capital goods, other than computers and computer
peripherals @ 2.5% for each quarter. ” (underlining ours)
13. M/s Harsh International Pvt. Ltd. admittedly sold the capital goods
in June and July, 2007 to M/s Harsh International (Khaini) Pvt. Ltd. The
dates of sale thus fall prior to the amendment made with effect from
13.11.2007. The Tribunal has rightly pointed out that the case of Harsh
International Pvt. Ltd. falls under Rule 3(5) as it stood amended from
6.5.2005 but before being amended on 13.11.2007. However, we note
that the view taken by the Tribunal in the impugned order is that the
words “as such” appearing in Rule 3(5) also took in the used capital
goods. Thus according to the Tribunal, used capital goods when removed
continued to remain capital goods “as such” and therefore the cenvat
credit availed of on the capital goods has to be repaid. Thus the
substantial question of law raised in the appeal is whether used capital
goods on which cenvat credit was availed are capital goods removed “as
such”. The words “as such” have been interpreted by the Punjab &
Haryana High Court in Commissioner of C. Ex., Chandigarh v. Raghav
CEAC-11& 12/2011 Page 11 of 15
Alloys Ltd. , 2011 (268) ELT 161 (P&H) to refer to “unused” capital
goods and do not take in the used capital goods. It has been observed as
under: -
“ 8. We have heard arguments of both the Ld. Counsel.
The Tribunal has rightly noted that unlike inputs, which get
consumed 100% with the same are taken up for use in
relation to manufacture of finished goods, capital goods are
used over a period of time. The capital goods loose their
identity as capital goods only when after use over a period
of time, the same has become in-serviceable and fit to be
scrapped. The object of Cenvat Credit on capital goods is to
avoid the cascading effect of duty. If even after use for a
couple of years, the Cenvat Credit is required to be reversed
then it would certainly defeat the object of the scheme. To
avoid misuse of the scheme in the Rules, it has been
provided that if the machines are cleared as such the
Assessee shall be liable to pay duty equal to amount of
Cenvat Credit availed. The machines which are cleared
after utilization cannot be treated as machines cleard as
such. With effect from 13.11.2007, a proviso has been
added to Rule 3(5) of the Cenvat Credit Rules providing that
if the capital goods on which Cenvat credit has been taken
are removed after being used, the manufacturer shall pay
the amount equal to Cenvat Credit taken on the said capital
goods reduced by 2.5% for each quarter of year or part
thereof from the date of taking the Cenvat Credit. The
board has also in the Circular dated 1.7.2002 clarified that
in the case of clearance of goods after being put into use, the
value shall be determined after allowing the benefit to
depreciation as per rates fixed in Boards‟ Letter dated
26.5.1993. The Respondent has utilized the machinery for
nine years and paid duty on transaction value. The machine
cleared after putting into use for nine years cannot be
CEAC-11& 12/2011 Page 12 of 15
treated as Cleared „as such‟. Insertion of proviso w. e. f.
13.11.2007 makes it clear that there is difference between
machines cleared without putting into use and cleared after
use. The Bombay High Court has upheld the view of the
Tribunal in the case of Cummins India Limited v. CCE,
Pune-III, 2007 (219) E.L.T. 911 (Tri. – Mumbai). The
Tribunal in the case of Nahar Fibres has also dismissed
Appeal of the Revenue and there is nothing to show that the
said decision of the Tribunal has been set aside by any
Court.”
9. In these circumstances, we are of the considered
opinion that the Appeal of the Revenue is bereft of merits so
deserves to be dismissed.
10. The questions raised by Revenue are answered in
favour of Assessee and Appeal is dismissed. ”
14. Our attention was drawn to the judgment of the Bombay High
Court in the case of Cummins India Ltd. v. CCE, dated 23.07.2008. The
High Court has affirmed the order of CESTAT, holding that the view that
used capital goods cannot be said to be capital goods removed “as such”
for the purposes of Rule 3 (5), “is in consonance with the law”. This
judgment of the Bombay High Court has been noticed by the Punjab &
Haryana High Court in the above decision.
15. In the present case the appellant purchased the capital goods in the
period between 2003 and 2005 and used them in its factory till they were
sold to M/s. Harsh International (Khaini) Pvt. Ltd. in June and July, 2007.
Thus the capital goods were used for a period of 2 to 4 years. They
CEAC-11& 12/2011 Page 13 of 15
cannot therefore be stated to be sold “as such” capital goods. They were
sold as used capital goods. We agree with the Bombay and Punjab &
Haryana High Courts and hold that the appellant was not liable to pay
excise duty in accordance with Rule 3 (5) when it removed the used
capital goods and consigned them to M/s. Harsh International (Khaini)
Pvt. Ltd.
16. As a result, there is no question of paying any penalty under
Section 11AC of the Act or any interest on the duty. Thus the appellant is
not liable to the payment of duty, interest or penalty. The substantial
question of law is answered in the negative, in favour of the appellant and
against the Central Excise Department.
DECISION IN THE CASE OF M/S. HARSH INTERNATIONAL
(KHAINI) PVT. LTD.
17. The substantial question of law to be framed in this appeal would
be: -
“Whether the appellant is liable to pay redemption fine
under Section 34 of the Act and interest under Rule 25 of the
Central Excise Rule, 2002 in respect of the used capital
goods confiscated from it?”
18. The above question of law is substituted in the place of substantial
question of law already framed which does not seem to bring out the
controversy arising in the appellant’s case properly.
CEAC-11& 12/2011 Page 14 of 15
19. Since we have held that there is no liability to pay excise duty on
the used capital goods, as a consequence the goods are not liable to be
confiscated. They are, therefore, liable to be released without payment of
any redemption fine. Moreover, there is also no question of the appellant
paying any penalty under Rule 25 of the Central Excise Rules, 2002. The
capital goods if still under seizure are directed to be returned to the
appellant without payment of any redemption fine. The question of law is
answered in the negative and in favour of the assessee.
20. In the result both the appeals are allowed with no order as to costs.
R.V. EASWAR, J.
SANJIV KHANNA, J.
MAY 29, 2012
Bisht
CEAC-11& 12/2011 Page 15 of 15