2025 (5) TMI 2094 - AT - Central Excise

Scope of SCN - Original Authority exceeded the scope of the Show Cause Notice (SCN) by raising new grounds not originally proposed in the SCN - Process amounting to manufacture or not - activity of fitting fuel adaptors to diesel cars - HELD THAT - Apparently the Original Authority has made out a new case in the Order-in-Original No.05/2014 dated 04.02.2014 wherein he has confirmed the demands as proposed in the Show Cause Notice though the proposals in the Show Cause Notice were totally different. There was no proposal in the Show Cause Notice to the effect that the process undertook by the appellant was incidental or ancillary to the completion of the final product; had the same been put across in the SCN the appellant would have explained the nature of work carried on by it and hence the resultant finding in the Order-in-Original is not what was originally proposed in the Show Cause Notice. Further it is also found that the fuel adaptors are used not in all the cars but specifically in diesel cars. In the Order-in-Appeal the Commissioner has very conveniently ignored the above contention of the appellant but however has only addressed the issue of the Show Cause Notice has held that the requirements under Section 11A(1) of the Central Excise Act 1944 stood satisfied and has thus justified the same without getting into the merits of the proposal in the Show Cause Notice. Therefore the findings in the Order-in-Original are clearly beyond the scope of Show Cause Notice. Further the Commissioner though has confirmed the demand of differential duty and interest but the fact remains that the assessee had paid the duty along with interest much before the issuance of Show Cause Notice. For this reason the First Appellate Authority has deleted the penalty under section 11 AC of the Central Excise Act 1944 which means that the fact of issuance of show cause notice was in essence for appropriation of the duty remitted. Even on merits firstly there is no supporting evidence to justify that the fuel adaptors were the essential part of the cars; we have to set aside this finding since as even recorded in both Order-in-Original and Order-in-Appeal Fuel Adaptors are fixed only to the diesel version of the cars. It is not at all the case of the Revenue that the appellant manufactured only diesel version of cars. There is also no denial by the Revenue as to the payment of service tax for the service since the activity carried on by the VDC was claimed to be a service in good faith by the appellant. Hence an activity of fixing an accessory to the specific cars could not amount to manufacture inviting the levy under Central Excise Act 1944. Conclusion - i) The Original Authority s adjudication was invalid as it exceeded the SCN s scope. ii) The activity of fitting fuel adaptors did not constitute manufacture under the Central Excise Act. Insofar as the demand of differential duty and interest are concerned cannot sustain and the same is therefore set aside - appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Original Authority exceeded the scope of the Show Cause Notice (SCN) by raising new grounds not originally proposed in the SCN, specifically regarding the activity of fitting fuel adaptors to diesel cars as incidental to manufacture.

- Whether the activity of fitting fuel adaptors to diesel cars constitutes manufacture under the Central Excise Act, 1944, thereby attracting differential duty and interest.

- Whether the demand for differential duty and interest is sustainable given that the appellant had already paid the duty and interest prior to issuance of the SCN.

- Whether penalty under Section 11AC of the Central Excise Act, 1944, was rightly imposed and sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Scope and Validity of the Show Cause Notice

Relevant legal framework and precedents: The principle that a Show Cause Notice must clearly specify the allegations and grounds upon which the demand or penalty is proposed is well-established. The authorities cannot travel beyond the scope of the SCN in the adjudication process.

Court's interpretation and reasoning: The Tribunal observed that the Original Authority, in the Order-in-Original, introduced a new case regarding the activity of fitting fuel adaptors as incidental or ancillary to manufacture, which was not part of the original SCN. The SCN did not raise any specific allegation on this point, and hence the appellant was deprived of an opportunity to adequately respond.

Key evidence and findings: The SCN focused on the duty liability on fuel adaptors as not being part of the CKD kit and demanded differential duty accordingly. The Original Authority's findings on the incidental nature of the adaptor fitting process were new and beyond the SCN.

Application of law to facts: Since the Original Authority's findings exceeded the SCN, the Tribunal held that the adjudication was flawed and violated principles of natural justice.

Treatment of competing arguments: The appellant contended that the SCN did not cover the incidental manufacture argument and thus the Original Authority erred. The Revenue did not effectively counter this point.

Conclusion: The Tribunal agreed with the appellant that the Original Authority traveled beyond the SCN, rendering the adjudication unsustainable on this ground.

Issue 2: Nature of Activity - Whether Fitting Fuel Adaptors Constitutes Manufacture

Relevant legal framework and precedents: Under the Central Excise Act, 1944, 'manufacture' involves a process resulting in a new product or article. Ancillary or incidental activities may or may not amount to manufacture depending on their nature and impact on the final product.

Court's interpretation and reasoning: The Tribunal noted that fuel adaptors were fitted only to diesel cars, not all cars manufactured by the appellant. The Revenue did not contend that only diesel cars were manufactured. The activity of fitting fuel adaptors was carried out at the Vehicle Distribution Centre (VDC), not as part of the CKD kit supplied at the factory gate.

Key evidence and findings: Both the Order-in-Original and Order-in-Appeal acknowledged that fuel adaptors were specific to diesel cars and not part of the original manufacture. The appellant had also paid service tax on the activity, treating it as a service rather than manufacture.

Application of law to facts: Since the activity was limited to fitting an accessory to specific cars post-manufacture and was not integral to the manufacture itself, it did not amount to manufacture under the Central Excise Act.

Treatment of competing arguments: The Revenue argued that the requirements under Section 11A(1) of the Central Excise Act were satisfied and justified the demand. However, the Tribunal found that the Revenue failed to substantiate that the adaptor fitting was part of manufacture.

Conclusion: The Tribunal concluded that the activity of fitting fuel adaptors was not manufacture and thus not liable to differential excise duty under the Central Excise Act.

Issue 3: Payment of Duty and Interest Prior to Show Cause Notice and Penalty Imposition

Relevant legal framework and precedents: The payment of duty and interest before issuance of SCN can affect the imposition and sustenance of penalty under Section 11AC of the Central Excise Act.

Court's interpretation and reasoning: The appellant had paid the duty and interest amounting to Rs.14,97,536 along with interest on 24.02.2011, well before the SCN dated 22.04.2013. The First Appellate Authority deleted the penalty under Section 11AC, implying that the only issue was appropriation of the amount already paid.

Key evidence and findings: The penalty was deleted by the Commissioner (Appeals), and the Revenue did not file any appeal against this deletion, effectively accepting the deletion.

Application of law to facts: Since the penalty was deleted and the duty and interest were already paid, the SCN lacked sanctity and the demand was essentially for appropriation of amounts already remitted.

Treatment of competing arguments: The Revenue justified the demand on the basis of Section 11A(1), but did not challenge the penalty deletion or payment of duty and interest.

Conclusion: The Tribunal held that the demand for differential duty and interest was unsustainable given prior payment and deletion of penalty, and that the SCN was therefore without basis.

3. SIGNIFICANT HOLDINGS

"The Original Authority has travelled beyond the SCN since the Show Cause Notice did not raise any specific allegation as to the activity of fixing the fuel adaptor to the manufactured motor vehicles as an activity incidental to the manufacture."

"The findings in the Order-in-Original are clearly beyond the scope of Show Cause Notice."

"There is no supporting evidence to justify that the fuel adaptors were the essential part of the cars; as even recorded in both Order-in-Original and Order-in-Appeal, Fuel Adaptors are fixed only to the diesel version of the cars."

"An activity of fixing an accessory to the specific cars could not amount to 'manufacture', inviting the levy under Central Excise Act, 1944."

"The impugned order insofar as the demand of differential duty and interest are concerned, cannot sustain and the same is therefore set aside."

Core principles established include the necessity for the SCN to specify the exact grounds of demand, the distinction between manufacture and post-manufacture activities, and the impact of prior payment of duty and deletion of penalty on the validity of subsequent demands.

Final determinations:

- The Original Authority's adjudication was invalid as it exceeded the SCN's scope.

- The activity of fitting fuel adaptors did not constitute manufacture under the Central Excise Act.

- The demand for differential duty and interest was unsustainable as the appellant had already paid the amounts and the penalty was deleted.

- The appeal was allowed and the impugned order set aside with consequential benefits to the appellant.