TMI Blog2012 (5) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... d (STL for short) are companies, engaged in the business of manufacture and clearance of Polyurethylene Insulated Jelly Filled Cables (PIJFC), ADSL 2 + Modems etc. Bids submitted by these two companies for supply of four varieties of ADSL 2+ modems in response to a tender floated by Bharat Sanchar Nigam Limited (BSNL for-short) for its 'Dataone' scheme, were accepted and orders were placed on the two companies for supply. The appellant companies imported modems from M/s. Huawei Technologies Limited (HTL for short) and availed cenvat credit of additional duty or customs and SAD paid at the time of import and cleared the same to BSNL, paid the excise duty thereby claiming that they had undertaken manufacturing activity on the modems imported by them before supply of the same to BSNL. After search, seizure and investigation in the form of recording of statements, issue of show cause notice and adjudication process, it has been held that the process undertaken by the two companies on the modems cannot be said to amount to manufacture and therefore, the cenvat credit availed by these two companies was not admissible. Accordingly, the cenvat credit reversed by the appellant companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be said that there was an intention to evade the duty. This is because, what cenvat credit was availed was utilized for payment of duty on the modems when they were cleared. In support of their contention several decisions of the Tribunal and Hon'ble Supreme Court were cited by the learned advocate for the appellants. It was also submitted that penalty on the employees of the companies were not at all warranted. On the other hand learned DR submitted that process did not amount to manufacture and relied upon various decisions of the Tribunal support of his contention that merely because the situation is Revenue neutral, it cannot be said that extended period cannot be invoked. Further, it was also submitted that officers and the employees of the companies have Played a very active role in relation to maintaining the records to show that there was manufacture and also gave statements contrary to the facts. Therefore, he submitted that penalties imposed on the appellant officers and employees of the Companies should be sustained. 3. We have considered the submissions made by both the sides and have gone through the records carefully. 4. First of all, we have to conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfactorily, hence BSNL requested the Appellants to load the software patches on the products in all future supplies. 11. Once the appellants understood that the products were operating satisfactorily with the software patches and considering the urgency of delivery of the products, the appellants uploaded the software patches at its facility by downloading the same from Huawei's website and / or from a compact disc containing the same which have been sent to the appellants. A copy of the software had also been sent on mail by Huawei to Mr. N.R. Patil, Chief Manager (Business Development). 12. In accordance with Clause 9.2 of the above contract the appellants after consultation with BSNL formulated a detailed testing and software installation module for different models of the product, which was issued by them to their personnel who were to carry out the testing of the products as well as the software installation thereon. Hereto annexed and marked as Annexure 4 is a specimen copy of document titled "Work instruction for ADSL-2 Plus software installation Type -1" along with the "ADSL Modem Software Processing Instructions". As is clear from the above document the same gives de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, testing of product was not complete and was to be performed by the appellants in their premises. After completion of tests, the product was once again required to be checked and only than the same could be supplied to the BSNL. Therefore, the process of testing itself is an activity incidental and ancillary to manufacture and required for completion of the manufacture of the product. The appellants always harboured a bonafide belief that the process of loading software patch onto the product and testing of modems as well as its final packing-were activities-incidental and ancillary to the completion of the manufacture of the same. Without these process the same would not be accepted by BSNL thereby rendering the same non marketable. They relied upon several decisions of the Hon'ble Supreme Court in support of their claim that to pass the test of manufacture the product needs to be marketable. The purchase order issued by the BSNL had an annexure with Technical Specifications for the product in Section-VI of the Technical Specifications, it was provided that the equipment shall conform to the Electromagnetic Compatibility (EMC) requirements as per the standards given therein. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port for getting the validation tests and also to provide factory based reports of various products performance parameters, as per the tender requirements. This clause in the agreement between HTL and the appellant companies clearly show that the product when shipped from China had already undergone all the tests that are required. Therefore, the claim of the appellants that the goods were not marketable before the tests were conducted by the appellants is not emerging from the records. 7. From the submissions made by the appellants discussed above, one gets an impression that loading of software/software patches on ADSL modems would be applicable to all the modems imported by the appellants and supplied to the BSNL. However, admittedly during validation trials, only one type of modem was found to hang. From the technical specifications and the agreement and the purchase order of the BSNL, it is seen that the tender contained all the technical Para meters which are required and the modems were to be released from the factory in ready to use condition. The training of the engineers was for trouble shooting of modem and also to train the BSNL personnel. Moreover it is to be noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than process is required. The product with distinct character, name and quality, which is different from the inputs, has to emerge. In this case, the input is modem and the output is also modem and what has been done is only inspection and testing. If the appellants' contention was to accepted than there is no need for the Government to introduce the concept of deemed manufacture define the same and provide specific definition of manufacture that if repacking and labeling is only to render the goods marketable amounts to manufacture. In our opinion, in view of the fact that the input is also modem and output is also modem, the appellant's claim that they had manufactured modems by conducting tests and uploading software itself is not acceptable. 8. Further, Shri C. Srinivas Kali, Commercial Manager has also stated that HTL had not objected to, any modification done on the imported Modems by STL as both STL and HTL had mutual business interests as the said software was available and accessible in the website of Huawei; that the basic software was developed by HTL only. However, technical persons from STL did further modifications as per the requirement of BSNL. But this assertion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i in their respective statements have stated that Shri Sagar Patil and Rakesh Kumar Tripathi were involved in the unpacking and packing of the modems from their packages and preparation of production slips during the course of so-called software loading process. However, Shri Sagar Patil and Tripathi have in their statements dated 07.3.2006 and 19.4.2006 respectively have stated that they had neither seen any activity being carried out on the imported modems in STL nor were they involved in any such activity. They prepared the requisition and production slips on the instructions of Ms. Deepika Arora (sitting at Rakholi Unit of SOTL) and Shri Baburaman. They used to come from Rakholi Unit of SOTL to STL, Dadra for handing over the requisition slips to Shri Debashish, the Store in charge for preparation of production slips and dispatch of modems. But they had never seen Mr. N R Patil in STL even once. They also claimed that Shri Shankar Ganesh Tata was never seen involved in any activity on Modems. (v) Shri Rakesh Kumar Birendar Kumar Tripathi, Loading-unloading contract worker continuously from morning till night said he had not seen any one opening the boxes containing Modems or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not have been invoked and penal liability is not arise. 12. Taking the example of SOTL, the total cenvat credit availed by them was Rs.8,32,71,289/- comprising of Rs.1,85,13,700/-, being the credit of SAD paid and the balance consisting of CVD and education cess. By the time investigation was taken up, the supplies to BSNL was over and appellants had paid a duty of Rs.6,54,27,474/- only. Leaving the surplus credit of Rs.1,78,43,800/-. Obviously the surplus credit has arisen because there was no value addition whatsoever. In fact the price adopted on the goods sold to BSNL seems to be less than the imported price inclusive of all taxes. During the hearing also, learned advocate was specifically asked as to how the surplus credit has arisen and he could not explain the same. He was trying to explain stating that number of modems sold was less than the total number of modems imported but fairly admitted that number was too small. Definitely if could not have been equal to 30% surplus credit remaining in the accounts of the appellant companies. As submitted by the appellant Companies in their appeal memo, both the companies in their unit are engaged in the manufacture of PIJFC and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants." (b) In the case of Jamshedpur Beverages - 2007 (214) ELT 321 (SC) , the Hon'ble Supreme Court taking note of the submissions of the Counsel of the assessee that excise duty and the modvat credit availed were identical and therefore consequence of payment of excise duty after availing modvat credit was Revenue neutral situation, dismissed the appeal. However, the Hon'ble Supreme Court stated that the appeal is dismissed leaving the question of law open. Therefore, this decision cannot be applied to the present facts of the case. (c) In the case of Vinayak Industries - 2003 (159) ELT 456 (Tri. Mumbai.) , the assessee was availing credit of duty paid on flywheels received for carrying out certain finishing process. Appeal in that case was against the order of Commissioner (Appeals) that the credit taken can be adjusted towards duty on the finished flywheels and in future receipt of flywheels should be regulated under Rule 173H of the Central Excise Act. This is not the case of return of goods for repair or finishing process. In any case, in that case it was held that for future the assessee should follow procedure in terms of Rule 173H, thereby holding that proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price at which the products were going to be sold and the costs could have been estimated even before the tender was quoted. Thereafter, even before the modems were received in India and supplied to BSNL, as per the tender, appellant companies and the management were clearly aware that ultimate price adopted for modems sold to BSNL was less than the landed price and for this reason surplus credit and that too more than about 30% of the excise duty actually paid on the modems has arisen. Obviously if they were not to adopt the process of manufacture and subsequent payment of duty, the excess amount of credit would have been lost. By devising the process of manufacture and paying excise duty on modems, the appellants could have availed excess amount of cenvat credit and utilized the same for payment of duty for other products. Obviously this analysis shows that rather than having a bonafide belief that process amounted to manufacture it was a well planned strategy to show this a manufacture process. The investigation conducted of the security register and comparison of the same with the statement of the employees clearly shows that there was no manufacturing activities undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants namely officers and employees of the Companies, it has been submitted that penalty has been imposed under Rule 15 of Central Excise Rules, 2004. According to the appellants, Rule 15 cannot be applied for imposition of penalty on them, Rule 15 of Cenvat Credit Rules, 2004 reads as under :- "Rule 15. Confiscation and penalty. - (1) If any person, takes CENVAT credit in respect of input or capital goods, wrongly or [in contravention of] any of the provision of these rules in respect of any input or capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or [two thousand rupees,] whichever is greater" It is seen from the above that penalty under sub Rule 1 is imposable on the persons who take credit wrongly. Sub Rule 2 provides for penalty in terms of provisions of Section 11AC of Central Excise Act. Sub Rule 3 and 4 are not relevant since these relate to provisions of Finance Act. Penalty under sub Rule 1 provide penalty only on who takes the cenvat credit in respect of inputs or capital goods or in contraventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payment of duty stands accepted by the Commissioner as reversal of credit. The said appellant's factory was visited on 13.7.2006 and an opinion was formed that the appellant was not entitled to avail credit. On the said date the balance credit of Rs.1,85,13,700/- was available with the said appellants. The same was immediately debited by the appellants vide RG 23A Part-II entry No. 280 dated 14.7.2006. 22. Similarly in the case of M/s. STL, it is seen that total credit availed by the said appellant during the period June to December 2005 was to the extent of Rs. 3,63,13,547/-, out of which an amount of Rs. 2,78,67,395/- was reversed as payment of Central Excise duty while clearing the modems. The remaining amount of Rs. 80,17,782/- was reversed by the said appellant vide RG23A Part-II entry No. 58 dated 23.5.2006 and entry Nos. 171, 172 of dated 30.6.2006. Only the remaining amount of Rs. 4,27,870/- is pending reversal. 23. The question which now stands before us is as to whether availment of such credit and utilization of the same towards payment of duty on the final products by the appellants was with any malafide intention or not, so as to invoke the penal action against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t availed of Rs.1,85,13,700/- has been reversed by the appellants prior to the issuance of show cause notice and not utilized. Hence, it is submitted that the demand is Revenue Neutral. 25. As is clear from the above that all the modems imported by the appellant were not supplied to BSNL and there were remaining number of modems still lying with the appellants. It was in these circumstances that the balance amount of credit was still available with the appellants. In this situation, it cannot be said that the credit of duty involved on the modems was more than the requirement of duty payment in case of supplied modems to BSNL and as such, no malafide can be attributed to the appellants so as to arrive at the findings that the modus operandi of manufacture of modems was adopted by the appellants with an ulterior motive to save the excess credit so that the same can be utilized for payment of duty in respect of other manufactured goods. It is seen in the case of SOTL that the credit was availed during the period May 2005 to December 2005 whereas, the appellant's factory was visited on 13.7.2006. There is nothing on record to indicate or establish that the excess credit availed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellants at the time of clearance of said modems. The balance credit in both the cases was lying in their records. As per the decision of the Hon'ble Punjab Haryana High Court in the case of Maruti Udyog Limited - 2007 (214) ELT 173 (P H) it was held that credit lying unutilized in the account books, no interest is required to be paid by the assessee. The confirmation of interest by the impugned order is also not justified. For the same reason imposition of penalty to the extent of 100% of the credit availed, when admittedly a major part of the credit was reversed at the time of clearance of modems and the remaining was lying unutilized, is neither justified nor called for. 27. In view of the above discussion I am of the opinion that penalty is not required to be imposed on the said appellants. As the appellants have not disputed the confirmation of demand of duty, (a part paid by way of excise duty on the cleared modems and balance reversed by them) I do not interfere in the order of confirmation. The remaining credit of Rs.4,27,870/-, in case of STL, is required to be debited (if not already reversed). 28. As I agree with the learned Member (Technical) in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruti Udyog Limited, as observed by Member (Judicial) B S V Murthy, Member (T) Archana Wadhwa, Member (J) Opinion of 3rd Member on difference of Opinion between the Bench in the case of Sterlite Telelinks Others Vs CCE Vapi Appeal No.E/970, 980 to 982, 629 to 633, 1022 1086/2008 Per: M V Ravindran: This Difference of Opinion is listed before me as per orders of Hon'ble President for deciding the points of difference arose between the Bench while deciding the appeals No.E/970, 980 to 982, 629 to 633, 1022 1086/2008. 2. The Difference of Opinion, which has been referred to me are as follows: a) Whether balance surplus credit available with both the units i.e. M/s Sterlite Optical Technologies Ltd. and M/s Sterlite Telelinks Ltd. is on account of the price difference between the imported modems and the supplied modems to BSNL or the same is on account of the fact that all the imported modems, on which credit was availed were not cleared and supplied to BSNL. b) Whether the surplus credit was meant for utilizing for payment of duty in respect of other products manufactured by them, had Tribunal he Revenue not taken up the investigation, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified the mistakes in those modems. It is his submission that the appellants, at the time of testing, were also curing the problem by providing patch work of software, done by trained staff and engineers. It is his submission that after modems were loaded with software and satisfactorily operated, they used to dispatch the same to BSNL without payment of duty under a belief that said activity was amounting to manufacture. It is his submission that the software patch was not loaded on each and every modem, but on test only on situation where the modems were not functioning. It is his submission that without functional and technical test if was not possible for the appellants to supply the product to BSNL and that the process of testing itself is incidental and ancillary process necessary for completion of the manufactured product. It is his submission that under this bonafide belief that the process carried out by them was amounting to manufacture, they availed CENVAT Credit of CVD paid on the modems imported by them and supplied to BSNL as a manufactured product. It is his submission that violation of law, if any, by the appellant was not intentional, but on account of bonafide be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants have a bonafide belief and without any intention to evade payment of duty. 5. Ld.A.R. on behalf of the Revenue, would submit that the appellant's claim of various operations done on the modems were false and on the basis of scrutiny of documents as well as enquiry from the employees and the purchasers as well as the suppliers of modems. It is his submission that this fact has been contraverted and recorded Difference of Opinion. It is his submission that the claim of the assessee that they have reversed the amount of duty on the modems as manufactured goods, will not stand scrutiny of law as the amount which has been reversed is less than the amount of credit taken. Hence, the question of revenue neutrality will not arise as has been held by Hon'ble Apex Court in the case of CCE Vadodara Vs Narmada Chematur Pharmaceuticals Ltd. 2005 (179) ELT 276 (SC) , Punjab Tractors Ltd Vs CCE Chandigarh 2008 (181) ELT 380 (SC) . It is his submission that in the case in hand, it is undisputed that substantial amount of credit was available for the amount of the assessee which was reversed only after the investigation by the Department. It is his further submission that revenue neutralit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n further perusal of said contract, I find that without functional and technical specifications and further validation of moderns, supply by a contractor after importing the same, has to be done before supplies are effected to BSNL. It is undisputed that the appellant had a contract with outstation supplier M/s Huawei and the appellant's engineers were trained by the said M/s Huawei in respect of testing plant/procedure/items and configuration of modem and validation thereafter. It is very clear from the contract entered into by the appellant with M/s Huawei. It is undisputed that tender was for 4 types of products manufactured by M/s Huawei and it is also undisputed, that at least one type of product, the appellant had to upload the software in patches on the product when on test the product was found defective before supply to BSNL. In short, it was a contractual obligation on the appellant to supply the modems to BSNL after confirming that they adhere to the specifications given by BSNL. 8. Under these circumstances, to my mind that the argument as to appellant bonafidely believed that they were undertaking some kind of manufacturing activities cannot be brushed aside summarar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re imported. 11. There can be an element of doubt as to whether the action of the appellant as to opening and testing the parts of modem, inspection of the same and testing the same with laptop to see whether they are functioning or not and could be an arguable point as to whether it would amount to manufacture, but this itself cannot be attributed any intention to the appellant's bonafide belief that they are in the line of manufacturing modem and it is borne out from the record that the appellant had paid Central Excise duty on the said modems as manufactured product. To my mind, the belief entertained by the appellant regarding activity undertaken by them would amount to manufacture, cannot be faulted and hence I hold that there was no suppression of facts or mis-declaration regarding activity undertaken by them, when they were discharging Central Excise duty liability after availing CENVAT Credit . Since I have held that there was a bonafide belief on the part of appellant that they were manufacturing this product which requires clearance on payment of Central Excise duty, the Show Cause Notice dt.9.1.08 in demanding the duty liability by extending the period of limitation i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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