2006 (9) TMI 52 - AT - Central Excise

Cenvat/Modvat - Inputs cleared after paying CED but some parts of it not used in manufacture - Credit taken thus reversed by paying duty - Conditions were satisfied - Demand and Penalties set aside

Summary

Issues:
1. Eligibility of Modvat credit for parts not used in manufacture
2. Denial of credit and imposition of penalty based on show cause notice

Analysis:
The judgment by the Appellate Tribunal CESTAT, New Delhi involved a case where the appellants manufactured automobile steering systems and supplied them to car companies. The parts for manufacture were procured, and Modvat credit was taken. However, during certain periods, some of the parts for which credit was taken were not utilized in the manufacturing process but were cleared after repacking by paying Central Excise duty. A show cause notice was issued alleging that the parts not used in manufacturing were not eligible inputs for Modvat credit, proposing to deny the credit and impose penalties.

The appellants contended that since they paid duty at the time of removing those parts, the credit taken had already been reversed. They also argued that even if the items were not used as inputs, they could have received them as a trader. However, these explanations were not accepted, leading to the denial of credit and imposition of penalties, which were challenged in the present appeal.

The learned Counsel cited precedent cases before the Tribunal where similar issues were addressed, emphasizing that demands for denying credit were not justified as the credits taken had been returned in some form. On the other hand, the learned SDR argued that the appellants knowingly took credit for items that were not used as inputs, alleging a deliberate misuse of Modvat credit provisions.

The Tribunal ruled in favor of the appellants, stating that the demand did not arise as the credit taken was already returned by paying duty at the time of clearance of the items. It was noted that the items not being inputs did not significantly impact the case, as the appellants could have treated them as traders, in line with Modvat provisions. Additionally, since the equal or higher amounts had been returned at the time of part clearance, the legal requirement of reversing credit at the time of input clearance was satisfied. As there was no duty demand, penalties were deemed not applicable. Consequently, the demand and penalties were set aside, and the appeal was allowed with any consequential relief to the appellants.