2016 (6) TMI 866 - AT - Central Excise

Cenvat Credit - Scope of Rule 6 - pay an amount @8% (6% w.e.f. 07/07/2009) or to reversal proportionate credit - failure to exercise the option under Rule 6(3A) - Supply of tower and tower parts to M/s. RRB Energy Ltd. Which are used as parts of Wind Operated Electricity Generator (WOEG) - Exemption under Sl.No.84 of the Notification No.6/2006-CE dt. 01/03/2006 - Held that - The contention of the department is that when the appellant has not intimated his option in writing then the appellant is bound to pay the duty amount calculated under the first option. I am afraid I cannot endorse this contention. The said rule does not say that on failure to intimate the manufacturer / service provider would lose his choice to avail second option of reversing the proportionate credit. Rule 6(3A) as seen expressly stated is nothing but a procedure contemplated for application of Rule 6(3). Therefore the argument of the Revenue that the requirement to intimate the department about the option exercised is mandatory and that on failure the appellant has no other option but to accept and comply Rule 6(3)(i) and make payment of 5% / 10% of sale price of exempted goods / value of exempted services is not acceptable or convincing. - The Rule does not lay down any such restriction. The procedure and conditions laid in Rule 6(3A) is intended to make Rule 6(3) workable and not to take away the option available to the assessee. In any case at no stretch of imagination can it be said that on failure to intimate the department Rule 6(3)(i) would automatically come into application. The demand raised is not legal and proper - Decided in favor of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(a) Whether the appellants, manufacturers of M.S. galvanized towers and tower parts supplied as components of Wind Operated Electricity Generators (WOEG), were rightly denied exemption under Notification No.6/2006-CE dated 01/03/2006 by the department.

(b) Whether the appellants were liable to pay duty under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 for failing to maintain separate accounts for inputs and input services used in manufacture of exempted and dutiable goods.

(c) Whether the appellants validly exercised the option under Rule 6(3)(ii) of the CENVAT Credit Rules, 2004 by reversing proportionate credit on inputs and input services, despite not intimating the department in writing as required under Rule 6(3A).

(d) Whether failure to intimate the option exercised under Rule 6(3A) is a mandatory condition attracting the application of Rule 6(3)(i) and consequent duty demand, interest, and penalty.

(e) Whether the demand of interest and penalty is sustainable considering the appellants' contention that they did not utilize the CENVAT credit availed during the relevant period.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Exemption under Notification No.6/2006-CE for supply of towers and tower parts as parts of WOEG

The department initially took the view that the towers and tower parts cleared by the appellants to M/s. RRB Energy Ltd. were not parts or components of WOEG and issued a show-cause notice proposing denial of exemption under the relevant notification. However, after adjudication, the original order dated 27/01/2011 dropped the proceedings, effectively allowing the exemption claim.

The judgment does not further contest this issue, indicating that the exemption claim was accepted or at least not pursued in the appeal. Thus, the exemption under Notification No.6/2006-CE was not denied finally.

Issue (b): Liability to pay duty under Rule 6(3)(i) for failure to maintain separate accounts

Rule 6 of the CENVAT Credit Rules, 2004, governs the credit on inputs and input services used in manufacture of dutiable and exempted goods. Sub-rule (2) mandates maintenance of separate accounts for inputs/input services used for exempted goods. Sub-rule (3) provides two alternatives if separate accounts are not maintained: (i) payment of duty at prescribed rates (10%/5%) on sale price of exempted goods, or (ii) reversal of proportionate credit on inputs and input services as per Rule 6(3A).

The department issued a show-cause notice alleging failure to maintain separate accounts and demanded duty under Rule 6(3)(i) along with interest and penalty. The adjudicating authority and Commissioner (Appeals) upheld this demand.

The appellants contended that due to the nature of their manufacturing process (galvanizing towers in large molten zinc tanks), maintaining separate accounts was practically impossible. They argued that input services such as telephone, security, and transportation were commonly used and could not be segregated. Hence, they chose the option under Rule 6(3)(ii) and reversed proportionate credit accordingly.

Issue (c): Validity of exercising option under Rule 6(3)(ii) without intimation under Rule 6(3A)

Rule 6(3A) prescribes the procedure for exercising the option under Rule 6(3)(ii), including mandatory written intimation to the Superintendent of Central Excise specifying details such as name, address, registration number, date of option exercise, description of dutiable and exempted goods, and CENVAT credit balance.

In the present case, the appellants did not provide such written intimation. The department argued that the use of the word "shall" in Rule 6(3A) makes the intimation mandatory and failure to comply results in automatic application of Rule 6(3)(i) and consequent duty liability.

The appellants countered that failure to intimate is only a procedural lapse and does not extinguish the substantive right to avail the second option of reversal of proportionate credit. They contended that since they reversed the proportionate credit, it implied exercise of the option, and the non-intimation should not attract the higher duty demand.

The Court examined the language of Rule 6(3A) and held that it is a procedural requirement intended to operationalize Rule 6(3) and not a condition that deprives the manufacturer of the option to reverse credit. The Court stated, "The Rule does not lay down any such restriction" and "At no stretch of imagination can it be said that on failure to intimate the department, Rule 6(3)(i) would automatically come into application."

Precedents were relied upon, including judgments by co-ordinate benches and other tribunals, which held that the intimation requirement is procedural and failure to comply should not result in denial of substantive rights or imposition of higher duty.

Issue (d): Whether failure to intimate option under Rule 6(3A) mandates application of Rule 6(3)(i)

The department's contention that failure to intimate the option in writing mandates payment under Rule 6(3)(i) was rejected by the Court. The Court emphasized that the procedural lapse of non-intimation does not automatically trigger the higher duty liability under Rule 6(3)(i). The procedural requirement is to facilitate administration but cannot override the substantive right of the assessee to choose the option of credit reversal.

This reasoning is supported by the Court's observation that the purpose of Rule 6(3A) is to make Rule 6(3) workable and not to take away the option available to the assessee.

Issue (e): Sustainability of demand of interest and penalty considering non-utilization of reversed credit

The appellants submitted that they did not utilize the CENVAT credit availed during the relevant period and furnished statements showing credit balances. They argued that non-utilization of credit equates to non-availment, making the demand of interest and penalty unsustainable.

The Court noted that the appellants had reversed proportionate credit amounting to Rs. 3,70,612/- and paid interest on delayed reversal. The Revenue did not dispute these figures. Since the department's primary contention was denial of the option due to non-intimation, which was rejected, and the quantum of reversal was not challenged, the Court found no ground to remand the matter for quantification.

Consequently, the demand of interest and penalty was also held unsustainable.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal findings and principles:

"The Rule does not lay down any such restriction. The procedure and conditions laid in Rule 6(3A) is intended to make Rule 6(3) workable and not to take away the option available to the assessee. In any case, at no stretch of imagination can it be said that on failure to intimate the department, Rule 6(3)(i) would automatically come into application."

This establishes that the procedural requirement of intimation under Rule 6(3A) is directory and not mandatory in the sense of forfeiting the option to reverse proportionate credit.

The Court further held that procedural lapses in intimation should not result in denial of substantive rights or imposition of higher duty, interest, or penalty, particularly where the assessee has reversed the proportionate credit and paid interest on delayed reversal.

The Court also declined the Revenue's request to remand the matter for quantification of proportionate credit reversal, as the figures were undisputed and the department's sole contention was procedural non-compliance.

Accordingly, the Court set aside the impugned order confirming the demand and allowed the appeal with consequential reliefs.