Case Study in Excise

1

BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S

VISHWKARMA INSTITUTE OF MANAGEMENT

KONDHWA, PUNE 411048

A

PROJECT REPORT

ON

CASE STUDY IN EXCISE

AT

AMEYA MANAGEMENT CONSULTANCY PVT LIMITED.

SUBMITTED BY

ASHISH.D.KULKARNI

MBA II

SUBMITTED IN PARTIAL FULFILMENT FOR DEGREE OF MASTER OF

BUSINESS ADMINISTRATION

DURING THE YEAR

2006-2007

2

BANSILAL RAMNATH AGRAWAL CHARITABLE TRUST S

VISHWKARMA INSTITUTE OF MANAGEMENT

KONDHWA, PUNE 411048

DATE: - 20th AUGUST 2006

CERTIFICATE

This is to certify that Mr. ASHISH. D. KULKARNI is a Bonafied

student of our Institute. He gas successfully carried out his Summer

Project Titled CASE STUDY IN EXCISE.

This is the Original study of ASHISH.D.KULKARNI and the important

sources used by him, have been acknowledged in his report.

The report is submitted in the Partial Fulfillment of Two years Full

time Course MASTER OF BUSINESS ADMINISTRATION (M.B.A.)

as per rule of PUNE UNIVERSITY.

Dr. Sharad. Joshi Prof.Mahesh Halale

(Director) (Project Guide)

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ACKNOWLEDGEMENT: -

I am very grateful to Mr. R.M Khadilkar the Proprietor and Managing

Director of Ameya Consultancy Pvt ltd. for providing me an opportunity to

complete my summer training in the Ameya Consultancy Pvt Ltd.

I avail this opportunity to give my thanks to Mr. R. M .Khadilkar

Director, and the staff for extending their support towards successful completion

of the project. In spite of their busy schedule they took out the time to answer my

queries patiently and helped me throughout the project.

My sincere thanks to all staff of Ameya Management Consultancy Pvt

Ltd. for all the cooperation and assistance to me at any time without which the

project would have been incomplete.

I am proudly indebted to my Project Guide Prof. Mahesh. Halale for all

his support and guidance towards the completion of my project.

Last but not least I am thankful to The Director, All Departmental Staff of

Vishwakarma Institute of Management and my friends for providing me the moral

support towards the completion of this project.

Ashish . D. Kulkarni

4

INDEX

Sr.no Particulars Page. No.

1 Executive Summary 1

2 Objective and Scope of the project 3

3 Company s Profile 4

4 Theoretical background 15

5 Actual Case 25

7 Data collection & findings 28

8 Conclusion 50

9 Bibliography 52

5

EXECUTIVE SUMMARY

A) INTRODUCTION OF THE PROJECT

The project is regarding a Show cause notice to an reputed

organization

(identity kept anonymous for the purpose of confidentiality) regarding the

contravention of the Rule 3 of Cenvat Credit Rules, 2004 for wrongly availing

and utilizing Cenvat Credit on H.R Coils meant for trading.

B) PROJECT TITLE

Case Study in Excise

C) WHY HAVE YOU CHOSEN THIS FIRM AND THIS PROJECT

I chose AMEYA MANAGEMENT CONSULTANCY PVT. LTD.

because they are the MANAGEMENT AND TAX CONSULTANTS FOR

INDIRECT TAXES IN INDIA. My choice of this project was based upon the

following factors-:

1) The selection of case study inculcated an orderly approach towards work and

helped me in understandings the intricacies pertaining to Cenvat with respect to

this case

2) It helped me a lot in clearing my concepts as well as the way in which points

are to be put up for the purpose of fighting a legal battle.

3) And last but not the least it helped me in developing an insight , and the points

that are to be concentrated upon and the points to be left out. Though the insight

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of looking a case shall improve only after continual experience but still it provided

me with the necessary launch pad.

D) LOCATION

The Address of Firm is as follows: 514, 5th floor, Siddharth Towers,

Near City Pride Theater,

Off Karve Road, Kothrud

Pune-411029.

E) DURATION: 54 days, 1st June, 2006 to 30th July, 2006 .

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OBJECTIVE

TITLE

DIFFERENT OBJECTIVES-:

Primary objective-:

1) To know how to approach a case pertaining to excise and learning how

to present relevant points defending the allegations.

2) To understand the concept of Cenvat credit and the charging section of

the same.

3) To understand the situations in which Cenvat credit can be availed .

4) To know the various section relating to penalties if the Cenvat credit is

wrongly availed.

Scope -:

1) The basic condition governing this project was that all information

regarding the client on whom the case was filed will be made

available only if no information like the name of the Client company

or any information relating to its location are published by which the

identity of the company is revealed. As it would result into breach of

trust.

2) The project was limited towards understanding and putting up

relevant points for the purpose of solving case and not beyond that.

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COMPANY PROFILE

COMPLETE NAME OF THE COMPANY-: Ameya management consultancy pvt.

Limited.

ADDRESS-: 514, 5th Floor, Siddharth Towers,

Near City-Pride theater,

Off Karve Road, Kothrud,

Pune-411029

SERVICES OFFERED-:

1) Management & Taxation Consultancy in Indirect Taxes in

India.

2) Systems [ERP like SAP, ORACLE etc.] development &

Management.

3) Computerization of Financial, materials and related

records.

4) Realization of export benefits.

5) Liaison with offices of Director General Foreign Trade,

Customs, Software Technology Parks of India,

Development Commissioner [SEEPZ, Mumbai].

6) In-house awareness/ training Programs in Indirect as well

as Direct Taxation in India.

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7) Identification of resource organization and tie up with

them in areas of logistics, warehouse management,

infrastructure providers.

Note: The Organization is aided and headed by professionals having versatile

working experience in the capacity of head of the departments like Excise,

Commercial & Stores in major Indian Corporate and MNC s for last fifteen years.

This includes areas like compliance to Central Excise & Service Tax law,

systems, dispatches and materials management.

The organization at present is engaged in soliciting advises to various

manufacturing MNC s, Industries in organized Sector and Infra-structure projects

in respect of Central Excise, Customs & Service Tax laws. It also helps to the

corporate sector for conducting in-house training programs for their employees

so as to upgrade their skills in these laws.

The organization also provides aid for developing a system, system audit, up

gradation of the system and verification of records to ensure the statutory

compliance required under various provisions of the said fiscal laws i. e. Central

Excise, Customs & Service Tax.

The organization also provides consultation in replying to the queries raised by

the Government Departments. It also provides support and assistance in legal

disputes before quasi-judicial and judicial authorities up to the Apex court in India.

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CONSULTANCY

We provide consultancy in

Indirect Taxes.

1 Central Excise Act, 1944

2 Service Tax ( chapter V of the Finance Act, 1994)

Liaison & logistics

1. With Customs, DGFT, STPI, SEEPZ

2. With infra-structure providers and logistics providers

Central Excise Act, 1944

The Central Excise Act, 1944 is one of the major revenue contributors and the

same is revenue for the union Government. The said Act allows levy and

collection of duty on the activity of production or manufacture of Excisable Goods

in India. The said tax is payable by the manufacturer of the Excisable goods. The

Central Excise Law certainly ranked as the most complicated branch of law in the

country. It has to be understood by getting conversant through an entangled and

confused mass of Central Excise Act, Central Excise Tariff Act, Central Excise

Rules, 2002, Central Excise Appeals Rules, 2001, Cenvat Credit Rules, 2004,

Central Excise (Settlement of Cases) Rules, 2001, Central Excise (Removal of

Goods at Concessionals Rate of Duty for Manufacture of Excisable Goods)

Rules, 2001, Central Excise Valuation (Determination of Price of Excisable

Goods) Rules, 2000. In addition to the above one also will have to get conversant

with around 20 Acts and Rules relating to additional duties of Excise & Cess. The

confusion further gets compounded by an astonishing number of amendments

brought about by various Notifications that are issued each year.

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penal provisions like penalty equal to the duty, Interest @ 13% P. A. on the duty

sought to be evaded etc. make it obligatory on the part of the manufacturer to

keep a cautious approach to the said act. EOUs registered with Excise

Department and related services such as procurement of CT3 s from Department,

Bonding & de-bonding, Re-warehousing Certificates, DTA Sale Permissions,

Job-Work permissions, etc.

We provide advice to the manufacturer so as to enable him to discharge the

correct duty liability to avoid litigations in future. We also extend help in defending

the case at the appropriate levels such as Commissioners (Appeals), Customs

Excise Service Tax Appellate Tribunal (CESTAT). We also extend help in

preparing periodic returns, verification of records maintained by the manufacturer

and Excise Audits in line with EA 2000.

SERVICE TAX

The Finance Act, 1994, introduced the said Tax for first time in the year

1994.Atpresent more than 90 Services, which have been brought under the tax

net. It s expected that in forthcoming years some more services also will be

brought so as to compensate the revenue loss, which Government is likely to

incur due to rationalization of rates in Customs and Central Excise. The Tax is on

the activity of providing specified services and the service provider is liable to pay

the tax the periodic returns are required to be filed.

We provide help to fulfill all the procedural requirements and also discharge

correct tax liability. We also provide service to contest the Notices to Show

Cause at various Appellate forums.

Recently Government had introduced intra-sectoral Credit. This is very important

as far as industry. We give adequate support to develop, understand the new

terminology and train staff, officers to work accordingly. Now the Excise & service

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tax is to be seen as profit center and we take proper initiative to guide industry to

keep age.

IN-HOUSE AWARENESS/TRAINING PROGRAMS

Since the policy of the Central Government is to bring broad base reasonable

taxation in the field of Direct as well as Indirect Taxes, many changes are

brought in particularly in the field of Central Excise Law. The Objective of these

changes is to simplify the procedures required to be followed by the

manufacturer. It is our experience that many number of times the execution

department like materials, stores, marketing etc. commit number of mistakes

unconsciously due to lack of awareness/Updation about the changed procedure

provided in the law. The said mistake therefore results in to litigations and penal

actions on the organization.

To avoid these mistakes arranging regular awareness programs within the

organization immensely help the company to prevent such type of mistakes. We

provide such in-house awareness programs wherein the procedures required to

be followed are explained in simple layman s language. After the awareness it

was experienced that employees brings out many practical difficulties they face

in their day-to-day working. The solution to these difficulties also helps to the

organization to make necessary modifications in its internal control system. In

majority of cases it is experienced that 90% of the procedural lapses gets

automatically solved and litigations gets reduced. The confidence of the

employee s increases and overall working becomes smooth. It is advisable to

arrange this type of programs at least two times a year to enable the staff

members to keep them selves up-to-date on the recent changes. These

programs are generally conducted in the field of Customs, Excise & Service Tax.

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SYSTEM AUDIT

Since 1986 the Central Excise Law can be looked as one of the effective tools for

the purpose of increasing the competitiveness, profitability of the organization.

The resent approach of the Government and the simplification major

implemented in law suggest on line proper system of accounting of a transaction

from its inception to the closure. Slowly the statutory records, which were

required to be maintained under various laws stands, abolished and private

records maintained by the organization are replacing the same. The

manufacturer is now law bound declare his private records maintained by him in

respect of purchases, receipt of material, storage of material, issue of material,

accounting of finished goods and removal thereof. He is also required to give the

complete details, audit trails in case the records are maintained on computers. In

short the complete details are now to be declared to the Excise Authorities. The

Excise Authorities on the basis of these declarations is likely to conduct the

audits of the company. It is therefore advisable to monitor the system periodically

so as to make it completely foolproof. It is also necessary that periodic

reconciliation if any of the various returns filed under various laws is done. Our

organization extends help in this area too.

The verification of various private records in maintained in connection with

Central Excise Law.

The method of excise audit is undergoing radical changes. The old system of

internal audit now being stands replaced by a new system called Excise Audit

2000 (EA 2000). The said system at present is introduced to certain category of

industries and slowly will be implemented to all manufacturing units. The said

system not only insures a complete transparency but also encourages voluntary

compliance. The departmental audit parties are expected to visit the organization

with advance intimation. The higher officers of the rank of Additional

Commissioner are expected to personally supervise the audit and he may

14

discuss the audit observation with the senior management staff of the

organization.

The very change in approach also expects transparency in the records

maintained by the organization. It is therefore advisable to verify the records on

the basis of EA - 2000 periodically. The said verification will insure all the

procedural compliance on one hand and also can suggest a corrective action if

any which shall help the organization to make the voluntary compliance. Such

voluntary compliance will also be appreciated by the department and the audit it

self will be smooth. We extend our expertise in this field also.

SOFTWARE TECHNOLOGY PARK UNITS/ EOU S

In this area we provide services like obtainment of Customs license under

Section 56 of the Customs Act, 1962 for in bond manufacturing, execution of

Bond, obtainment of CT-3 certificates/ Procurement Certificates for duty free

procurement. Re-warehousing certificates, permission for material to be send for

job work etc. De-bonding of goods, shifting from one premises to another

premises (i.e. in bond movement).

Audit & verification of compliance with Bond Register & B-17 Bond Register

verification & guidance.

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ON-LINE HELP DESK

Updation is a key word to avoid litigations. It has been seen that many number

oftimes while taking crucial decisions help is required before the decision is

finalized. We provide such through e-mail system. The company officials at any

time can contact us through e-mail; we shall provide our expert advice as fast as

possible as but not later than 24 hours for the quarries raised. This on-line

service may help the employee to finalize his decision quickly and also on-time.

We undertake to help, guide & develop Excise, Service Tax related programs in

Oracle Apps, SAP or any ERP System To give road map for customization, bolt-

in systems which will take care for legal requirements & data management

System Development

We undertake to help, guide & develop Excise, Service Tax related programs in

Oracle Apps, SAP or any ERP System To give road map for customization, bolt-

in systems which will take care for legal requirements & data management.

Our valued clients:

Our list of clients includes more than 75 manufacturing industries, taxable service

providers and infrastructure providers. Few illustrious of them are

1. Cummins India Limited

2. Cummins Diesel Sales & Service (India) Limited

3. Nelson Engine Systems India Limited

4. Lucas TVS Limited

5. HSBC Software Development India

6. Praj Industries Limited

7. Honeywell Turbo Atomization India Limited

8. Honeywell Turbo India

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9. Husco Hydraulics Pvt. Limited

10. Spicer India Limited

11. Gabriel India Limited

12. Coro Colour India Limited

13. Siro Plast Limited

14. Mahindra Automotive Steels Limited

15. Mojj Engineering Systems Limited

16. V Cube Forge India Limited

17. Disha Technologies India Limited

18. Die-Aluminum India Limited

19. Durabuild Techniques India Limited

20. Ghatge Patil Transports Limited

21. Reinshaw Metallurgy Techniques India Limited

22. Magarpatta Township Development Co. Limited

23. Vascon Engineers Limited

24. Paranjpee Schemes Limited

25. KTR Couplings Limited

26. Mahle Filtration Systems India Limited

27. PMT Machines Limited

28. Precision Automation and Robotics India Limited

29. Seinumero Engineering India Limited

30. Seinumero Machine Tools Limited

31. Soma Textiles & Industries Limited

32. Spintex Industries Limited

33. Starion India Limited

34. Fleetguard Filters Pvt. Limited

35. Abhi Natural Products Pvt. Limited

36. Anand Technology Resource Parts {Anand Group]

37. Accurate gauges & Tools Pvt. Limited

38. Ambika Waste Management Pvt. Limited

39. Arklite Specialty Lamps Limited

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40. Accurate Sales & Services

41. Alfa Industries & Batteries

42. Am-tech Engineering

43. Aura Electronics Pvt. Limited

44. Autobat Battries Pvt. Limited

45. SpaceSaver Exports Pvt. Limited

46. Armar Industries

47. Amruta Enterprises

48. Atul Enterprises

49. Chatham Thermostat Pvt. Limited

50. Classic Strips India Pvt. Limited

51. Dhruvi Flexipack Pvt. Limited

52. Dispotronics

53. Enginetech Systems Pvt. Limited

54. Filtrum Tools Pvt. Limited

55. Filtrum Paper Products Limited

56. Glotech Mold India Pvt. Limited

57. Gadre Marine Exports Pvt. Limited

58. Hodak Engineering Pvt. Limited

59. Hardik Founders & Engineers Pvt. Limited

60. ID Technologies

61. JD Panse & Co

62. JIS Tools Company

63. Magarpatta Resort & motels Pvt. Limited

64. Magarpatta Property Management Co. Limited

65. Microversa Automisation Pvt. Limited

66. Marigold Premises Pvt. Limited

67. Pawas Canning

68. Prasanna Tours & Travels Pvt. Limited

69. Premier Engineering Company

70. Power Control Systems Pvt. Limited

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71. Prabhat Dyes & chemicals Pvt. Limited

72. Pruthvi Consultants

73. Pusalkar Michel Pvt. Limited

74. Rawat Brothers Furniture s Pvt. Limited

75. Rajmal Lakhichand Jewelers

76. RICO

77. M & G Engineers

78. Sathe & Co

79. Sanes

80. Sharad Industries

81. Sarod Engineering Pvt. Limited

82. Space N Style Pvt. Limited

83. Sardesai Auto Parts Pvt. Limited

84. Seinumero Nirman Pvt. Ltd

85. Shree Systems Pvt. Limited

86. Shonk Engineering Pvt. Limited

87. Surya Engineering

88. Surya Chem India

89. Specific alloys Pvt. Limited

90. Spectra Chemicals Limited

91. System Engineers Pvt. Limited

92. Star Krupa

93. Systems consultants Pvt. Limited

94. Transcetic Cores Pvt. Limited

95. Tushar Autoparts Pvt. Limited

96. Ultimate Engineering

97. Ultra Laboratories

98. Marigold Properties Limited

99. Vikvin Consultants Pvt. Limited

100. Whirlpool of India Limited, Pune

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THEORETICAL BACKGROUND

The show cause notice directed towards the organization was due to the violation

of Rule 3, Cenvat Credit Rules, 2004 regarding wrong availment and utilization of

Cenvat credit on H.R. Coils meant for trading. So it is absolutely important and

relevant to understand the concept of CENVAT CREDIT AND RULE 3 OF

CENVAT CREDIT RULES, 2004

CENVAT CREDIT-: The basic scheme concept of the scheme is to give instant

credit of the Central Excise Duty paid (including additional duty, special excise

duty and counter vailing duty on input) on goods used in the process of

manufacture of Final product. Such instant credit can be utilized towards the

payment of excise duty on the final product. In short, the manufacturer is

reimbursed the amount of duty paid on the components and raw materials used

in production process. The assessee is eligible to take 100% credit of the duty

paid on inputs. The manufacturer can avail the benefits of CENVAT scheme

provided that inputs and finished products are excisable commodities and within

the range of product so notified under this scheme. A manufacturer who is

availing the benefits under CENVAT scheme cannot avail benefit of proforma

credit scheme during the same financial year.

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Illustration

Final Product: A

1) Inputs used in Final Product and amount of duty paid

PARTICULARS AMOUNT

Steel 240

Aluminum 210

Components And Consumables

250

Packing Material 100

Total Duty Paid On Inputs 800

Add: Education cess at 2% on duty

16

TOTAL 816

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2) Final product A per unit

3) In this example total cost of Rs. 20,000 includes the amount of duty +

education cess at 2% on E.D. paid Rs. 816 on the inputs on which further excise

duty @ 16% i.e. Rs. 130.56 is levied in the cost of final product. Thus , this

amounts to duty on duty or the CASCADING EFFECT . CENVAT scheme gives

the relief to the manufacturer in respect of Duty on Duty.

4) Now lets study the effect on prices of the final product before and after

CENVAT Scheme resulted in lowering the price level, which in favor of

consumers

PARTICULARS DETAILS

AMOUNT

Total Cost 20,000

Add: Profit 10% on cost 2,000

Assessable Value 22,000

Excise Duty (@ 16% ad valorem) 3520.00

Add: Education Cess @ 2% on E.D. 70.40 3590.40

25590.40

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Particulars Position before

CENVAT RS. Position after CENVAT

Rs.

Total Cost Credit for duty on Inputs

20,000 NIL

20,000 (-) 816

Net Cost Profit @ 10% of cost of Assessable Value

20,000

(+) 2000 22,000

1,9184 (+)1,918 21,102

3520 (+) 70.40

3376.32 (+) 67.53

Duty at 16% (Ad valorem) Education Cess CUM DUTY PRICE

25590.40 24545.85

. IMPORTANT DEFINITIONS

1) INPUTS- Inputs covers the following:

i) All goods, except high speed diesel oil and motor spirit, commonly known as

petrol, used in or in relation to manufacture of final product whether directly or

indirectly and whether contained in the final product or not.

ii) Input includes accessories of final product cleared along with final product,

goods used as paint, or as packing material or as fuel, or for generation of

electricity or steam used for manufacture of final products or for any other

purposes, within the factory of production.

iii) Input also includes lubricating oils, greases, cutting oils, coolants.

Explanation 1 : The high speed diesel oil or motor spirit, commonly known as

petrol, shall not be treated as input for any purpose whatsoever.

Explanation 2 : Input also include goods used in the manufacture of capital goods

which are further used in the factory of the manufacturer.

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2) CAPITAL GOODS- Capital Goods means

i) All goods falling under Chapter 82,84,85,90, heading No. 68.02 and sub-

heading No. 6801.10 of the First Schedule of the Tariff Act ;

ii) Components, spares and accessories of the goods specified at (i) above;

iii) Moulds and dies;

iv) Refractories and refractory materials;

v) Tubes, pipes and fitting thereof used in factory;

vi) Pollution control equipments; and

vii) Storage tank used

Used in the factory of the manufacturers of the final products.

Equipments or appliances used in office are excluded from the definition

of capital goods and hence NO CENVAT credit can be availed on these

items. E.g. Xerox machine, computer.

To get the benefit of CENVAT credit in respect of capital goods, the only

condition is that the capital goods should be used in the factory of

manufacturer.

CENVAT credit on capital goods is not available if it is used in another

company, even if it is subsidiary company. SUMANGALA SHIPPING

MILLS Vs. C.C.E. 1999.

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3) EXEMPTED GOODS- Exempted goods means goods which are exempt from

the whole of the duty of excise leviable thereon and includes goods which are

chargeable to NIL rate of duty.

4) FIRST STAGE DEALER- First stage dealer means dealer who purchases the

goods directly from-

a) The manufacturer under the cover of an invoice issued in terms

of the

Provisions of the Central Excise Rules, 2002 or from the depot of

the said manufacturer or from premises of the consignment

agent of the said manufacturer or from any other premises from

where goods are sold by or on behalf of the said manufacturer,

under the cover of an invoice. Or

b) An importer or from the depot of an importer or from the

consignment agent of the importer

5) SECOND STAGE DEALER- Second stage dealer means a dealer who

purchases goods directly from the first stage dealer.

APPLICABILITY OF CENVAT CREDIT / SALIENT FEATURES OF CENVAT

SCHEME

1) CREDIT ON DUTY PAID TO MANUFACTURER OF EXCISABLE GOODS-

The provisions of CENVAT scheme shall apply to the manufacturer of notified

excisable goods who uses the notified inputs in the manufacture or in relation to

the manufacture of final product

2) CREDIT ON DUTY PAID ON INPUTS- The CENVAT scheme is principally

based on system of granting credit of duty paid on inputs. Under CENVAT

scheme, the manufacturer while making the payment of duty on final product can

25

avail and utilize the instant credit of duty paid on inputs. This will result in

considerable result in cost of Final product. This also avoids duty on duty.

3) INPUTS MAY BE USED DIRECTLY OR INDIRECTLY- The inputs in respect

of credit of duty paid is claimed, must be directly or indirectly used in relation to

the manufacture of the final product. The input need not be present in the final

product.

4) NO CREDIT ON HSD AND PETROL- Duty paid on high speed diesel and

motor spirit (petrol) is not available as CENVAT credit, even if these are used as

raw materials.

5) NO CREDIT IF THE FINAL PRODUCT IS EXEMPT FROM DUTY- No

CENVAT credit is available if the final product is exempt from duty [Rule No. 6(1)]

6) SPECIFIED DOCUMENTS AND RECORDS- CENVAT credit can be availed

on the basis of specific documents as a proof of payment of duty on Inputs. The

manufacturer should maintain proper records for receipt, disposal, consumption

and inventory of the inputs and capital goods containing details such as value,

duty paid, person from whom inputs are purchased.

7) CENVAT SCHEME COVERS BOTH INPUTS AND CAPITAL GOODS

8) INSTANT CREDIT- Credit of duty paid on inputs can be taken instantly i.e. as

soon as the inputs reach the factory. In case of capital goods 50% credit is

available in the current year and balance 50% in subsequent financial year.

9) PROCESSES LOSSES- CENVAT credit is available on all inputs even if some

of inputs go as process loss.

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MANNER OF AVAILMENT OF CENVAT CREDIT

1) TO WHOM THE CENVAT CREDIT IS ALLOWED? - Rule 3(1) of CENVAT

credit rule states that a manufacturer or producer of final products shall be

allowed to take credit of specified duties paid on inputs or capital goods received

in the factory. CENVAT scheme has been extended to all manufactured final

products.

2) DUTIES ELIGIBLE FOR CREDIT [RULE 3(1)] - Following duties paid on

inputs are eligible for CENVAT credit.

i) Basic excise duty paid on goods specified in first schedule to C.E.T.A.

ii) Special excise duty paid on goods specified in second schedule to

C.E.T.A.

iii) Additional duty paid (CVD) paid on imported inputs.

iv) If the inputs are obtained from a 100% EOU units, units in SEZ, STP

or EHTP, the credit will be as per prescribed formula which is 50% of

(Multiplied by + (1+BCD)/ 100 x (CVD)/100.

v) Additional excise duty paid under additional duties of excise (Goods of

Special Importance Act and corresponding CVD on imported goods.

vi) Additional Excise duty paid on textiles and textile articles. If these are

imported, corresponding CVD is also eligible.

vii) National calamity contingent duty leviable u/s 136 of thee Finance Act

2001. This credit can be used for payment of NCD on inputs only and

not for any other duty. Credit of AED (GSI) and special excise duty

27

can be utilized for payment of excise duty on final products and vice-

versa.

3) CENVAT CREDIT ON INPUTS LYING IN STOCK- Not withstanding any thing

contained in sub rule 1 above the manufacturer or producer of final product shall

be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in

process of inputs contained in the final products lying in stock on the date on

which any goods become excisable.

4) UTILIZATION OF CENVAT CREDIT [RULE 3(3)]- The CENVAT credit may

be utilized for the payment of any duty of excise on

a) Final product

b) Inputs

c) Capital goods

If such inputs are removed as such or after being partially processed or such

capital goods are removed. The CENVAT credit shall be utilized only to the

extent such credit is available on the 15th day of month for payment of duty

relating to first fortnight of the month and the last day of the month for payment

of duty relating to second fortnight of the month.

5) DUTY TO BE PAID IF INPUTS OR CAPITAL GOODS ARE

REMOVED[RULE 3(4)]- If the inputs or capital goods on which CENVAT credit

has been taken, are removed from the factory, the manufacturer of the final

product shall pay an amount equal to the duty of excise which is leviable on

such goods at the rate applicable to such goods on date of such removal and on

the value determined for such goods on the date of such removal and on the

value determined for such goods under this act and such removal shall be made

under the cover of an invoice.

6) CENVAT CREDIT IN RESPECT OF FTZ/ SEZ/ EOU UNITS [RULE 3(5) a]-

CENVAT credit in respect of inputs or capital goods produced or manufactured-

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i) In a Free Trade Zone or SEZ or by 100% EOU or by EHTP or STP and

used in manufactured of final product in any place in India, shall be admissible

equivalent to the following amount-

= 50% of (Assessment Value x 1 + BCD* CVD /100

where BCD

Ad valorem rate in percentage of basic custom duty and additional

duty of customs on inputs and

CVD- Ad valorem rate in % of basic custom duty and additional duty of customs

on capital goods

7) UTILIZATION OF CENVAT CREDIT IN RESPECT OF ADDITIONAL DUTY

[RULE 3(5) b]-

CENVAT credit in respect of the additional duties of excise on Textiles and textile

articles, goods of special importance, shall be utilized only towards the payment

of duty of excise leviable under the said Additional Duties of Excise Act (Textile

and Textiles Articles act or Additional Duties of Excise (goods of special

importance)

8) CENVAT IN RESPECT OF ADDOTIONAL DUTY PAID ON MARBLES OR

TILES SHALL BE ALLOWED TO THE EXTENT OF Rs. 30 PER SQ MTR

[RULE 3(b)(c)]

9) CENVAT CREDIT IN RESPECT TEXTURISED YARN NOT ALLOWED

29

THE ACTUAL CASE

The Company was issued a show cause notice in which the following allegations

were made:

1) The first issue is regarding whether can the company claim setoff against

Cenvat credit amounting to Rs 200000 which was already paid by the

party as duty on inputs.

2) The second point is an extension of the first accusation, where in the party

is already accused for wrong availment of Cenvat credit, so as per the

provision of Rule 14 (CENVAT CREDIT WRONGLYTAKEN OR

ERRORNEOUSLY REFUNDED) , has been ask to pay interest on it.

Thus for which we had to put up the following points about the company profile.

BUT THIS DATA WAS MADE AVAILABLE TO ME ON THE CONDITION THAT

THE COMPANY S NAME SHOULD NT FIGURES OUT ANYWHERE.

The company is leading manufacturer of MS / SS Channels, Cable

Trays, Cable Rollers, Cantilever Arms, Fittings and Accessories falling under

chapter 72 and 73 of the first schedule to C.E.T.A, 1985. The company makes

clearances to customers on contracted price and the said clearance are made

through document as specified under rule 11 of the credit rules, 2004.

The case was pressed after the following flow of events

In the month of march 2004 M/s ATS Co. KUWAIT had raised an order on

the party for supply of M.S slitted coils. For manufacture of said product the main

raw material used is jumbo HR coils of wider length .This is a COMMON input for

goods, which the party manufacture and clear for home consumption namely,

cable tray support system. For execution of this order various operations were

carried out. The goods were send directly from the party s raw material supplier

30

to job worker & then slitted an d re-coiled goods brought in the factory and then

after notching, testing, packing and boxing the said goods are exported. In the

month of July the said coils are exported from the premises of job worker after

following the procedure as specified under rule (4)(6) of the credit rules and

obtaining the permission of the commissioner of central excise Pune III

Commissionarate.

31

ISSUES INVOLVED IN THIS CASE

Issue 1: The first issue is about wrong availment of Cenvat credit

Issue 2: The second issue is questioning the very basic functioning of the party

by doubting whether the process undertaken by the party is manufacture or not.

32

DATA COLLECTION AND FINDINGS

(1) Wrong availment of Cenvat credit?

1) The party is accused of wrongly availing Cenvat credit on HR coils used

for manufacture of slitted coils. Thus it was imperative to explain the

process of manufacture.

2) It is very important to know the process of manufacture before dealing

with the Cenvat Credit Rules, 2004.

3) The party undertakes the manufacture various products such as Cable

tray support system, Piping structure, AC ducting etc. These products are

falling under Heading 72 & 73 to the first schedule to the Central Excise

Tariff Act, 1985.

4 The main raw material for manufacture final product is jumbo HR coils of

wider length.

5) Since it is a common input, which is used for manufacture of Exported

final product as well as the goods cleared for home consumption, the party

follows a procedure, which is followed for intermediate goods in

connection with manufacture of various products which is manufactured

by the party. It is essential to know the process of manufacture the product

exported as well as the other final products, which are manufactured by

the party.

6) Thus the exported goods that are manufactured by the party are the

intermediate goods which they manufacture and it is important activity for

manufacture of listed final products.

33

7) The party undertakes the purchase of various raw materials from a

dealer registered with central excise.

8) The party utilizes the said raw-material is used for manufacture of the

above exported product as well as intermediate goods required for

manufacture of products cleared for home consumption.

9) The coils which are purchased are delivered to job worker who is located

near the dealer from whom the raw material is acquired and the same job

worker carries the activity of slitting and re-rolling for the party.

10) Since the job-worker is located near to the supplier [dealer] of raw-material,

the party delivers the goods directly from the supplier to the job worker,

after fuifiling the conditions prescribed under Rule (4)(5)(a) read with Rule

(4)(6) .

11) The party has received orders for same slitted coils made from the HR

coils , having higher width. At such HR coils are sent directly from the

dealer to job worker. Moreover the activities of slitting, re-rolling, packing

and boxing are carried as per specifications to render the product in an

exportable condition.

12) Thus once the party undertakes the activities as per specifications they

send the goods (export consignment) through a container to docks for

further shipment to foreign countries.

13) Similarly the party in the month of March and May 2004 had undertaken

the same procedure of delivering the coils to their job worker for slitting

and re-rolling activity while various other activities like notching, punching,

re-rolling, packing and boxing were also done at their own factory to make

34

the product exportable.. The party also obtained proper permission from

the commissioner of Central Excise, Pune III, following the procedure

mentioned under Rule (4)(6) and delivered the goods directly to job worker.

14) And hence the export consignment for which the notice was issued are

cleared under rule 19 Central Excise Rules, 2002 only after submitting the

declaration under form UT 1 to the Assistant Commissioner of Central

Excise, Pune VI division, Pune.

15) The party has carried out various activites as De-coiling of the larger

width coil, slitting the same as per specifications, re-coiling, notching,

packing, boxing and then shipping the same for export.

16) The Board had also clarified the said activity is an activity amounting to

manufacture vide Circular No. 584/21/2001-CX dated 07.09.2001.

.

17) The party also forwarded that the larger width

of coils which are slitted etc. are common inputs for manufacture of final

product which the party undertakes and clear for home consumption. The

party emphasized that the slitted, notched coils are in fact an intermediate

product for manufacture of cable trays and ducting. Thus the party tried to

clarify by stating that there are some instances where it has partially

exported the consignment and partially used the intermediate product ie.

Slitted notched coils for manufacture of cable trays for home consumption.

It also submitted the following.

That the party had purchased _10000______ No. of large width coils of

____50000____Kgs. Which in turn was sent to job-worker directly from

supplier of raw material and out of which__2000____ No. of slitted coils

having weight of ___10000_____Kgs have been used for the production

of cable trays for home consumption.

35

This definitely helps in removing the ambiguity , as the party clearly stated

that the larger width coils are their inputs and slitted coils are an

immediate product for manufacture of cable trays, ductings which is

further notched and worked , coiled , tested, packed and boxed for export.

The study of the definition of manufacture as defined under Section 2 (f)

of Central Excise Act, 1944 which states manufacture means

Manufacture includes any process: -

1) Incidental or ancillary to the completion of a manufactured product;

2) Which is specified in relation to any goods in Section or Chapter notes of

the Schedule to the Central Excise Tariff Act, 1985 as amounting to

manufacture?

3) which, in relation to the goods specified in the Third schedule involves

packing or re- packing of such goods in a unit container or labeling or re-

labeling of containers including the declaration or alteration of retail sale

price on it or adoption of any other treatment on the goods to render the

product marketable to the consumer .

The first aspect of the definition is to find out whether any process which is

incidental and in isolation may not amount to manufacture but in totality it may

be required for completion of manufacture of final product also will be treated as

manufacture. For example bending, painting or plating is a process which may

not bring a new article in to existence and thus in ordinarily manner it may not be

treated as amounting to manufacture but if the said process is incidental for the

completion of the manufacture of final product the same stands included in the

definition of manufacture . One needs to check and verify the processes carried

out and then form an opinion whether an article is amounting to manufacture or

not.

36

The second aspect that Sub clause (ii) of section 2 f specifies that if section

notes or chapter notes of Schedule to Central Excise Tariff Act, 1985 states in

relation to any goods as amounting to manufacture, the said shall be taken as

manufacture. For example Notes to Chapter 29 and 38 which deals with in

organic chemicals clarifies under section notes that labeling or re labeling of a

containers and re packing from bulk packs to retail packs or the adoption of any

other treatment to render the product marketable to the consumer shall amount

to manufacture.

Third aspect, the goods in relation to goods specified in Third schedule involves

packing or re packing of such goods in a unit container or labeling or re labeling

of the containers including the declaration or alteration of retail price on it or

adopting of any other treatment on the goods to render the product marketable to

the consumer will also amount to manufacture as per the third schedule to

Central Excise Tariff Act, 1985 are therefore will be considered as amounting to

manufacture when the activity as defined is carried out by manufacture.

Sub clause (ii) and (iii) of the new definition brings in the concept of deemed

manufacture . It stipulates that if a section or chapter note or chapter heading

incorporated in schedule 8 describes any process as manufacture, it will amount

to manufacture. That means factually there may not be a manufacture but

because of special provision in the notes of the tariff act, can treat the same as

manufacture. In short the effect of this definition is that the excise duty can be

levied on activities which do not result in manufacture of new commodity or

where the raw material does not undergo transformation.

Hon ble Apex Court in the case of Metal Forgings Private limited Vs.

Commissioner Central Excise has held that mare process is not manufacture

where there is no change in the original commodity from its original identity, there

is no manufacture [1998(102) ELT A224-SC}

37

In the case of DCM relying upon decision of Union of India Vs Parle Products

limited [1994(74) ELT 492(SC)] and Union of India Vs Ujagar Prints

[1988(38)ELT 535(SC)] has led down that the activity or process in order to

manufacture must lead to emergence of a new commercial product, different

from the one with which the process started. It therefore applies that it should be

an article with different name, character, name and use. In other words the

process which merely changes the form or size of the same article would not be

called ordinarily as manufacture

We can take the example of assembly of ceiling fan .If manufacturer procures

various parts such as Motor, Blades, Grills, Wires, Covers, Hardware, switches

and assembles ceiling fan. Whether this activity can be called as manufacture?

No doubt, yes .As from various parts a new commodity named fan came to

existence and it is having different name, use and character.

If a example of pencil which is use everyday, is sharpened .Can this activity be

treated as activity of manufacture? Obviously, No .As no new commodity came

into existence having different name.

In case of Empire Industries Limited Vs Union of India [1985 (20) ELT (SC)],

Apex Court has held that Every type of variation of the commodity or the

finishing of the goods would not amount to manufacture unless it results in

emerging of a new commercial commodity.

In case of Gramophone Company of India Vs Union of India [1999 (114) ELT 770

(SC)] the Supreme Court has held that Transformation of a substance into a

new commercial commodity known as distinct and separate commodity having its

own character , use and name.

38

The activity of repair and re conditioning ordinarily does not amount to

manufacture because no new goods comes in to existence. In the case of Enfield

India Limited Vs Commissioner of Central Excise [1996 (88) ELT 773- tribunal]

the CESTAT has held that process of up gradation, rework does not amount to

manufacture.

The activity of repairs and re conditioning of heat exchangers by replacement of

new tubes does not amount to manufacture. Tribunal has held in case of Suresh

Engineering Works Vs Commissioner Of Central Excise [2003 (55) RLT 083

(CESTAT)]

In case of Shriram Vinyl & Chemicals [2001 (096) ECR 0001 (SC] Commissioner

of Central Excise, Apex court had ruled that assembly of some new parts and

some old parts cannot be equated with expression Manufacture.

The Repairing and reconditioning of old and used bearing does not amount to

manufacture

CESTAT has decided in case of Timken India Limited Vs

Commissioner of Central Excise [2004 (063) RLT ) 540 CESTAT]

The manufacture , the definition of same is sensitive in Central Excise. Number

of cases are decided in tribunals, high courts and even apex courts but still it is a

gray area and one needs to carefully study the activity what he isgoing to carry

and then decide whether the same is an activity of mau\nfacture as per the

definition of Section 2 f

Supreme court has held that

1) Mare process is not manufacture where there is no change in the

Original identity, there is no manufacture

1998 (102) ELT a 224 (SC)

Cestat decision 1987 (32) ELT 0015 del

39

2) Manufacture distinct from production every change does not

amount to manufacture but only new & distinct commodity with a

distinct name, character emerges.1997 (96) ELT 0507 (SC)

3) A new product has come into existence because of some activity

undertaken by the assessee without such a finding in cant be held

manufacture

Thus landmark Supreme Court decision emphasize on the following

Particulars Manufacture Not Amounting

to Manufacture

Breaking,scrapping,re-rubbing, printing

Coating & lining

Cutting, drilling, welding

Heat treatment

Cleaning, washing, mixing, dilution

Kitting, packing

Polishing, slitting, sharpening

Straightening

Testing, inspection

Emptying of drums/ packing material

Putting together duty paid components

Repair, re-work etc.

Electro plating

The definition of manufacture clarifies two points

40

The activity must be incidental or ancillary to the completion of a manufactured

product, and

The any process, which is, specified in Section or Chapter notes of the Schedule

to the Central Excise Tariff Act, 1985 as amounting to manufacture.

From this definition it is crystal clear that the activity which is an incidental or

ancillary to manufacture of our final product will be treated as activity of

manufacture. Thus from the point of view of the party it can be seen as the

process of manufacture includes decoiling, slitting, notching which as an

immediate stage of manufacture of cable trays and hence there is no doubt

whatsoever that these processes are necessarily manufacture and the product

thus manufactured is an intermediate product in each stage.

Thus the further processing of the intermediate product is undertaken by testing

oiling, notching, packing and boxing for export. The party also states that the

export of intermediate product is undertaken.

As per Cenvat Credit Rules, 2004, the Input means,

Rule 2 (k) input means-

(i) all goods, except light diesel oil, high speed diesel oil and motor spirit,

commonly known as petrol, used in or in relation to the manufacture of final

products whether directly or indirectly and whether contained in the final product

or not and includes lubricating oils, greases, cutting oils, coolants, accessories of

the final products cleared along with the final product, goods used as paint, or as

packing material, or as fuel, or for generation of electricity or steam used in or in

41

relation to manufacture of final products or for any other purpose, within the

factory of production;

From the said Rule it is very clear that the coil which was purchased by us is an

input for manufacture of final product and thus credit is allowed on same.

The party also stated that considering Rule 5 of Cenvat credit rules , 2004 was

necessary

5. Refund of CENVAT credit.-

Where any input or input service is used in the final products which is

cleared for export under bond or letter of undertaking, as the case may be,

or used in the intermediate products cleared for export,

or used in providing

output service which is exported, the CENVAT credit in respect of the input or

input service so used shall be allowed to be utilized by the manufacturer or

provider of output service towards payment of,

(i) Duty of excise on any final products cleared for home consumption or for

and where for any reason such adjustment is not possible, the

manufacturer shall be allowed refund of such amount subject to such

safeguards, conditions and limitations, as may be specified, by the Central

Government, by notification:

From the said definition it is very clear one can avail the credit on inputs and if he

clear the intermediate product for export he can utilize the credit so availed on

inputs used for manufacture of such intermediate products for payment of Excise

duty on final products cleared for Home Consumption. Not only this the definition

goes beyond this and it allows CASH REFUND if such adjustment is not possible.

42

Thus it presented itself by utilizing the benefit of above section , so that it can

be absolved from those allegations.

(iii) The party also provided the reference of the following case: Hon ble

CESTAT-Delhi in the case of CCE Vs. Hindustan Everest Tools Limited

reported in 2004 (176) ELT 209, in this case it was held that Screw driver

in semi-finished condition purchased from outside parties and various

processors viz. dipping of handle in acetone solution, magnetizing the

blade and treating screw driver with rust preventing oil, etc. undertaken -

Modvat credit sought to be rejected on the ground that such processes not

amount to manufacture - Respondents clearing goods on payment of duty

- Once Revenue is levying duty and collecting the same, it is not open to

them to claim that processes undertaken by respondents do not amount to

manufacture - Further, respondents submission that Rule 57F(4) of

erstwhile Central Excise Rules, 1944 provides for removal of inputs as

such on reversal of Modvat credit accepted - Credit not deniable - Rules

57A and 57AB ibid - Rule 3 of Cenvat Credit Rules, 2004. [para 4]

The party also stated that even if the process undertaken by it is not treated as

manufacture , however from the above stated case but taking relevance from the

above mentioned case the credit availed by the part cannot be denied

Thus it was imperative on the part of the party to explain whether the slitting of

jumbo coils of wider length into required smaller pieces amounts to manufacture

or not?

(A) The very objective of the party is to make the product marketable and is

not only restricted to slitting the jumbo coil into smaller ones. Thus

numerous activities other than slitting are carried out by the party which

are:

43

(1) Slitting of wider coil into required smaller width

(2) This activity is important as in this case the slitting is carried as per

customer specifications.

(3) After slitting coil is deburred & notched.

(4) The activity of winding has been carried out after the deburring &

notching of the coils

(5) The winded coils are then inspected & packed as per customers

requirements.

After packing the coils are dispatched to the customer.

(B) Thus from the above procedure the party made an attempt to state that it

doesn t indulge itself in the activity of slitting alone but undertakes it as per

customer specifications to make it marketable. And the activity of making

a product marketable is nothing but manufacture. As the very activity

carried out by the party result in a new product known in market as slitted

coils. It also illustrated the reference of the case of TISCO Vs Union of

India , wherein it is claimed by TISCO that manufacture is not complete

until the process of slitting and cutting is carried. TISCO also paid duty on

strips after sharing & slitting & claimed no refund for the same. No proof of

marketability of cold rolled strips which is an essential item of

manufacture [2004 (164) ELT 372 (SC) ]

(C) Thus this is what the party stated, that it undertakes the activity of making

marketable product which is nothing but manufacture, so thereby making

a plea that the proceeding undertaken against it should be dropped

44

(D) It also took the reference of the following cases to make its position more

clear: where in it was held that Process of Cutting / Slitting of Jumbo Rolls

of Aluminum Foils to shape and size, packed and cleared for home

consumption held to have a distinct identity and amounts to manufacture.

Black Diamond Breveres Ltd. Vs CCE Calcutta 1994 (69) ELT 572 (T)

Gramophone Co. of India Ltd. Vs CC Calcutta 1999 (114) ELT 770 (T)

(E) Hon ble Apex Court in the case of Kores India Ltd vs Govt. of India

reported in 2004 (174) ELT 007 has held that slitting of jumbo coils/rolls

into smaller quantity to make the product marketable amounting to

manufacture. Thus by stating the above points the party stated that the

process undertaken by it amounts to manufacture and Cenvat credit

availed by it on the coils is correct as per the provisions of the Cenvat

credit rules.

(2)DOES THE ACTIVITY UNDERTAKEN BY THE PARTY AMOUNTS TO

MANUFACTURE AND IF YES THEN CAN THE DEPARTMENT STILL ISSUE

NOTICE QUESTIONING THE PROCESS?

The party put forth the following points.

(1) The Central Board of Excise & Customs vide its circular no. 584/21/2001

CX dtd. 07.09.2001., Clarified the matter in connection with the activity of

slitting & rolling whether amounting to manufacture or not. The Board had

clearly issued the clarifications that the said activity is amounting to

manufacture.

45

(2) Since Board had clarify the issue in the year 2001 itself the activity of

slitting of coils in to sheets or lesser width strips amounting to manufacture

and the activity carried out by us in accordance with the Circular issued by

Board and thus the same is amounting to manufacture and thus the credit

availed by us on the inputs used is legal and as per the provisions of law.

(3) As the said activity is stated above is manufacture, can Excise Authorities

issue the Notice to Show Cause when the Circular issued by Board is in

force at relevant time?

(a) The party stated that it was important to concentrate upon

the settled legal position that the circulars and clarifications

issued by Central Board of Excise and Customs ( CBEC) is

binding on departmental officers and they cannot take any

contrary view or stand .

(b) The party also put forward a land mark decision of Hon ble

Supreme Court larger bench in the case of Dhiren Chemical

Industries Vs. CCE, Vadodara [2002 (143) ELT 019 (SC)

wherein it was held that regardless of the interpretation

placed by it on that phrase, if there were circulars which had

been issued by the Central Board of Excise and Customs

which placed a different interpretation upon that phrase, that

interpretation would be binding on the Revenue .

It also

annexed the copy of the same decision

(c) The Hon ble Apex Court again in the case of Dabar India

Limited Vs. CCE, Meerut [2003 (157) ELT 129 (SC) ] has

46

relying upon the its own decision in the case of Dhiren

Chemical Industries held that Whichever way we look at it

the reasoning of the Tribunal cannot be sustained. That the

circular is binding on the Revenue Authorities cannot be

disputed in view of the well established law summarized in

Collector of central Excise, Vadodara v. Dhiren chemical

industries reported in [2002 (139) ELT 3 (SC) ]

(d) The Apex Court in the case of Mahavir Aluminium Limited

V/s. CCE, Jaipur has held that Department is bound by its

Circulars issued by the Central Board of Excise and

Customs [1999 (114) ELT 371 (SC)

(e) In the case of Sharma Chemical Works Vs. CCE Calcutta,

Hon ble Supreme Court had again made it clear that the

Revenue bound by its own circular [2003 (56) RLT 123

(SC)]

The copy of the said decision was also attached

(f) In the case of Kalyani Packaging Industries Vs. Government

of India, Hon ble Apex court had again held that Circulars

would be binding upon department . [ 2004 (062) RLT 821

(SC]

Hon ble Tribunals had also has held the same pronouncements that the

Departmental Circulars/Instructions are binding on Departmental officers. We

also rely on following decisions of Hon ble Tribunals.

2004 (60) RLT 456 (CESTAT-Mum) : India Fibre Bag Mfg Co Vs. CCE, Mumbai

47

2003 (56) RLT 314 (CESTAT Che) : Suvarna Florex Ltd. Vs. CC, Chennai

2005 (56) RLT 331 (CESTAT- Kol) : Bengal Tools Ltd. Vs. CC, Calcutta

The part also stated that the Circulars/Instructions issued by Board are effective

from the date of its publication in the official gazette & the circular which was

issued by department on 07.09.2001 stating that the slitting activity is amounting

to manufacture was effective from this date and the same was withdrawn by the

Board only on 2nd of March,2005 as this circular was withdrawn by Board on that

date vide Circular No. 811/08/2005 CX dated 02.03.2005 and the Notice issued

by the department is without authority of law and it needs to struck down.

It is a settled legal position that Circulars issued by C.B.E. & C. are binding on

the departmental authorities and they cannot take a contrary stand. It is also

settled law that Change in stand of the Department by amendments/fresh

Circulars - Period prior to change to be governed by the earlier circular which

was in force at the relevant point of time.

The party took the reference of the following case

In the case of Paper Products Limited Vs. CCE [1999 (112) ELT 765 (SC)]

Circulars issued by C.B.E. & C. are binding on the departmental authorities and

they cannot take a contrary stand - Department cannot repudiate a Circular

issued by the Board on the basis that it was inconsistent with a statutory

provision - However assessee can contest the validity or legality of such

Departmental Circulars or Instructions - Department do not have a right to file an

appeal against the correctness or binding nature of a Circular - Department s

actions have to be consistent with the Circulars - Consistency and discipline are

of far greater importance than winning or losing Court proceedings - Section 37B

of the Central Excise Act, 1944. [para 4 & 5]

48

Circulars by Board - Change in stand of the Department by amendments/fresh

Circulars - Period prior to change to be governed by the earlier circular which

was in force at the relevant point of time (para 6)

Appeal by departmental contrary to Board s Circulars - Department do not have a

right to file an appeal against the correctness of binding nature of the Circular

issued by the Board - All actions of the revenue department have to be

consistent with the Circular which was in force at the relevant point of time -

Sections 35, 35B, 35L and 37B of the Central Excise Act, 1944.

Demand contrary to Board s Circulars - Show cause notice or consequential

demand are ab initio bad if they are contrary to the existing Circulars of the Board

- Sections 11A and 37B of the Central Excise Act, 1944. [para 6]

1997 (94) ELT 003 H. M. Bags Manufacturer Vs. CCE

Any action under Section 37B of the Central Excise Act is effective from the date

of its notification or publication, therefore the Board s circular dated 24-9-1992

issued under Section 37B, re-classifying the goods, is effective from 5-11-1992

when the Trade Notice for the same was issued, consequently any demand in

the present case cannot be raised for any date prior to 5-11-1992 and the time

limit as provided under Section 11A is not available to the department. This

conclusion is reinforced by use of the word henceforth by the Board. [para 2]

Departmental Clarification - Circulars issued by Central Board of Excise &

Customs under Section 37B of Central Excise Act effective from the date of their

notification or publication - Any demand for duty cannot be raised for a period

prior to the date of the publication of the such circular/ instructions - Section 11A

of the Central Excise Act, 1944. [para 2]

49

Hon ble CESTAT also in the following decisions had held that the Circulars

issued by C.B.E. & C. are binding on the departmental authorities and they

cannot take a contrary stand and Change in stand of the Department by

amendments/fresh Circulars - Period prior to change to be governed by the

earlier circular which was in force at the relevant point of time.

2004 (063) RLT 0754 : Premier Polysacks (P) Ltd Vs. CCE

2003 (57) RLT 183 : Southern Switch Gear Limited Vs. CCE

2004 (163) ELT 121 : Arvind Chemi Synthetics Pvt. Limited Vs. CCE

2004 (60) RLT 456 : India Fibre Bag Mfg. Company Vs. CCE

The party also took the aid of the Circular which clarifies the slitting amounts to

manufacture was in force from 07.09.2001 to 02.03.2005 and the same is binding

on departmental officers, if any stand taken by the departmental officers and any

demand raised prior to issuance of new circular withdrawing the earlier circular is

not legal and not legal.

Whether can department recovered interest under Section 11AB and impose

penalty under Section 11AC of the Act?

The very base of this notice was whether the activity carried by the party

amounts to manufacture or not. The party was rightly following the instructions of

Board circular and the various decisions along with decision of Hon ble Apex

Court in the case of Tata Iron & steel Co. Limited held that the slitting, re rolling

of coil to make it marketable amounts to manufacture. Thus emphasizing upon

the fact that the payment of penalty imposed on the party should be dropped.

The party also put forward the reference the board dated 07.09.2001 which

states that that the activity of slitting & re-rolling amounts to manufacture was

withdrawn by board only on 02.03.2005. As it is well settled legal position that the

50

circular is only prospective and not retrospective considering all these situation

where there is problem of interpretation of statue. It is well settled position that

penalty should not be imposed if Assessee acted on bona fide belief.

The part also provided the reference of decision in Tribunal Larger Bench in the

case of ITEL INDUSTRIES PVT. LTD. Versus Commissioner of Central Excise

Calicut in this case it was held that Penalty - Imposition of - Question of

Interpretation of law*penalty not imposable under Section 11AC of Central Excise

Act, 1944 - No reasons given for imposition of penalty under Rules 173Q and

210 of erstwhile Central Excise Rules, 1944 - Penalty set aside. [para 7(g)] -

2004 (163) E.L.T. 219 (Tri. Bang - LB.)

The following reference were also forwarded by the party wherein In case of

bona fide dispute of law viz. Availability of exemption under Notification etc.,

imposition of penalty is not called for

2002 (146) ELT 118 (CEGAT

EZB) : Bharat Wagon & Engineering Co. Limited

V/s. Commissioner of central Excise, Patna

2002 (51) RLT 145 (CEGAT

ND) : Swaraj Mazda Limited V/s. Commissioner of

Central Excise, Chandigarh

2002 (49) RLT 349 (CEGAT

WZB) : Virlon Textile Mills V/s. Commissioner of

Central Excise, Mumbai

Thus stating that the penalty imposed should be reconsidered

It is also a well settled legal position that penalty under Section 11AC & Interest

under 11AA & 11AB is not imposed when non-payment is not due to

suppression of the facts and that too with a reason of fraud, mis-statement,

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collusion etc. The party insisted that the following decisions be referred wherein it

was held that penalty should not be imposed where there is no malafide intention

to evade duty.

2003 (151) ELT 198 Flex Industries Limited

2003 (54) RLT 496 Kamla Dials & Devices Limited

2002 (52) RLT 943 Aurobindo Pharma Limited

2002 (50) RLT 012 G. S. Enterprises

2002 (50) RLT 292 S. B. Packing Limited

2002 (50) RLT 873 (SC) Nagpur Alloys Castings Limited

2002 (48) RLT 431 Titan Industries Limited

2002 (143) RLT 543 Asha Pavro Electronics Pvt. Limited

2002 (134) ELT 504 Stellar Chemical Labs. Pvt. Limited

2002 (139) ELT 562 Sober Plastics Pvt. Limited

2001 (130) ELT 181 Jamna auto Industries.

2002 (140) ELT 227 Eicher Demm

2001 (45) RLT 895 Sub Zero Ice Cream

2000 (121) ELT 400 Nahar Spinning

2000 (121) ELT 738 Seth Computers

2000 (91) ECR 569 Bhallai Conductors

2000 (117) ELT 320 TTK Pharma.

2001 (134) ELT 679 Apollo Tyres Limited

The reference of the decision in the case of Siemens Limited vs. CCE, Mumbai

VI. In this case it was held that

Penalty - Mandatory Penalty - Cenvat/Modvat - Clearance of inputs as such -

Credit having not been taken wrongly by reason of fraud, wilful misstatement,

collusion or suppression of facts or contravention of any of the provisions of the

Act or Rules made there under with intent to evade payment of duty - Further,

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duty having been paid even before issue of any written demand, provisions of

Rule 57-I(2) of erstwhile Central Excise Rules, 1944 not attracted - Rule 57-I(4)

ibid - Rule 15 of Cenvat Credit Rules, 2004. [para 2(a)]

[2004 (176) E.L.T. 299 (Tri. - Mumbai)]

Thus by presenting these points the party requested that by considering the

above points the charges should be dropped

The party once again emphasized that the said activities are cleared by them are

amounting to manufacture on the basis of the Circular issued by the Board which

were in force in relevant period. The Board had withdrawal the said circular only

on 02.03.2005 and till the time the circular which states that the activity of slitting,

amounts to manufacture was in force. The Notice issued by department when the

circular was in force and as per the Decision of Hon ble Apex Court in the case of

Paper Products Limited & H. M. Bags Manufacturer, the department cannot raise

a demand before the withdrawal of the circular and if any demand is raised, it will

be without any support of law and need to be struck down. We request your

honor to consider our case in the light of the said decisions and drop the

proceedings initiated against us.

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Thus the aggrieved party submitted the following

The activity carried out by party is not an activity of trading but an activity of

manufacture as per the said legal position

No amount of Rs. 2, 00,000/- availed by party as Cenvat Credit should be

recovered from us

No penalty should be imposed on party under Rule (13) (1) of the Cenvat Credit

Rules, 2002 and Rule 15 of Cenvat Credit Rules, 2004.

No Interest should be recovered from party under the provisions of Rule 12 of

Cenvat Credit Rules, 2002 & Rule 14 of Cenvat Credit Rules, 2004 read with

Section 11AB of the Act

Thus insisting that the above allegations be re considered.

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CONCLUSION

1) The accusation about wrong availment of Cenvat credit made on the party

is basically wrong because the according to the definition of manufacture

stated above an activity incidental or ancillary to manufacture of final

product will be treated as activity of manufacture. In this case process of

manufacture again can be seen as a process of de coiling, slitting,

notching etc are intermediate stages of manufacture of cable trays,

ducting etc. and thus no doubt these activities are as per the said

definition,.

2) Thus on further processing the intermediate product by testing the same,

oiling, notching, packing and boxing to make it suitable for export.

Moreover the exported article is the one which came into existence in the

intermediate stage.

3) In addition to this the reason that Cenvat credit is legally claimed is

because the coil which is purchased is an input for manufacture of final

product and thus credit is allowed on it.

4) Moreover whenever any input or service is used in final products which

are cleared for undertaking as the case may be or used in the

intermediate products cleared for export or used in providing output

service which is exported the Cenvat credit in respect of these input or

services so used shall be allowed to be utilized by the manufacturer or

provider of output service towards payment of excise duty on any final

product cleared for home consumption or for export on payment of duty :

or service tax on output service. And where such adjustment is not

possible the manufacturer shall be allowed refund of such amount subject

to such safeguards, conditions and limitations as may be specified by the

central government notification. Thus from this it is very clear that one can

avail credit on inputs and if he clears the intermediate product for export

he can utilize the credit so availed on inputs used for manufacture of such

intermediate products for payment of excise duty on final products cleared

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for home consumption . not only this the definition goes beyond this and it

allows cash refund if such adjustment is not possible

5) Thus justifying that the party was correct in availing Cenvat credit and

hence payment of interest and penalty was out of question as the party

will be liable to pay it only when it had wrongly availed Cenvat credit.

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Bibliography

1. Indirect Taxes Law & Practice V S Datey

2. Indirect Taxes ----- L P Vakale

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