2025 (6) TMI 1958 - AT - Central Excise

CENVAT Credit - activity amounting to manufacture or not - processed/finished goods made out of Cenvated inputs are cleared on payment of duty or not - HELD THAT - Undoubtedly in the present case the Appellant was paying the duty on the processed goods arising out of the cenvated inputs at the time of the clearance of the same. Revenue has sought to deny the Cenvat Credit by alleging that the activities/processes undertaken by the Appellant do not amount to manufacture as per Section 2 (f) of the Central Excise Act 1944. As the processes undertaken do not amount to manufacture credit is not admissible. However it is found that undisputedly for determining the admissibility of Cenvat Credit the issue that needs to be examined is whether the processed/finished goods made out of Cenvated inputs are cleared on payment of duty or not. In terms of the Section 5B of the Central Excise Act 1944 Central Government has been empowered to issue notification allowing the Cenvat Credit on inputs in cases where finished goods have been cleared by the Assessee on payment of Central Excise duty even though the process undertaken did not amount to manufacture. The principle contained in this Section 5B is that principle laid down by the Hon ble High Court in the case of Ajinkya Enterprises 2013 (6) TMI 610 - CESTAT MUMBAI . Undisputedly it is found that not all the imported goods against which the appellant had availed the CENVAT credit were processed and cleared on payment of the central excise duty. A part of the said goods were traded as such. The CENVAT credit in respect of such traded goods would not be admissible. A detailed calculation needs to be made by the lower authorities to determine how much of the credit amounting to Rs.3, 08, 58, 313/- pertained to the inputs which were used by the Appellants for manufacture and clearance of the dutiable goods. To that extent the amount reversed needs to be restored to the Appellants. For the purpose of this computation the matter needs to be remanded back to the original authority. The appeal filed by the Appellant 1 is partly allowed and the matter remanded back to the original authority.

Summary

The core legal questions considered in this judgment include:

1. Whether the activities carried out by the appellant constituted "manufacturing activity" within the meaning of Section 2(f) of the Central Excise Act, 1944.

2. Whether the appellant was entitled to avail Cenvat credit on inputs used in the processes undertaken, given the nature of the activities.

3. The applicability of the principle that if the finished goods are cleared on payment of excise duty, denial of Cenvat credit on inputs used cannot be sustained even if the process does not amount to manufacture.

4. The correctness of the demand for recovery of wrongly availed Cenvat credit along with interest and penalty under the relevant provisions of the Central Excise Act and Cenvat Credit Rules.

5. The liability of the Executive Director for penalty under Rule 15(1) of the Cenvat Credit Rules, 2004.

6. The proper approach to refund claims under Section 142(3) of the Central Goods and Services Tax Act, 2017, in relation to Cenvat credit wrongly denied or reversed.

Issue-wise Detailed Analysis

Issue 1: Whether the activities carried out by the appellant amounted to "manufacture" under Section 2(f) of the Central Excise Act, 1944

The relevant legal framework involves the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944, which requires that the process must bring into existence a new and different commercial product. The Supreme Court and various High Courts have laid down tests to determine whether a process amounts to manufacture, focusing on whether the process results in transformation of the goods into a new product.

The impugned order held that the processes undertaken by the appellant-cutting, rewinding, branding, testing, and repacking of imported wires-did not bring a new commercial product into existence. The wires before and after processing remained essentially the same, and therefore, the activity did not amount to manufacture as per the statutory definition. The court relied on the fact that rewinding and spooling are incidental or ancillary processes and do not satisfy the criteria of manufacture.

The appellant contended that they were paying excise duty on the finished products and thus should be entitled to Cenvat credit on inputs. They relied heavily on the decision of the Bombay High Court in Ajinkya Enterprises, which recognized that even if the process does not amount to manufacture, Cenvat credit may be allowed if duty is paid on the finished goods.

The Tribunal noted that the issue of manufacture was the prime question remanded by the High Court for reconsideration. However, it emphasized that the definition of manufacture must be applied strictly, and in this case, the processes did not change the commercial identity of the goods.

The competing arguments were treated by examining the nature of the processes and the statutory definition, as well as the judicial precedents. The Tribunal found that the activities did not amount to manufacture under the Central Excise Act.

Issue 2: Entitlement to Cenvat credit despite non-manufacturing activity if finished goods are cleared on payment of duty

The Tribunal referred extensively to the decision in Ajinkya Enterprises, upheld by the Bombay High Court, which held that if the finished goods are cleared on payment of excise duty, denial of Cenvat credit on inputs cannot be sustained even if the process does not amount to manufacture. The rationale is that the duty has been paid on the final product, and therefore, the credit of duty paid on inputs should not be denied.

The Tribunal observed that the appellant undisputedly paid duty on the finished goods cleared from their factory. The Revenue had not reversed or held that the duty paid on the finished goods was refundable. Therefore, the denial of Cenvat credit was not justified.

Section 5B of the Central Excise Act, 1944 was also cited, which empowers the Central Government to allow non-reversal of Cenvat credit where duty has been paid on the final product, even if the process does not amount to manufacture. This statutory provision supports the principle laid down in Ajinkya Enterprises.

In applying the law to facts, the Tribunal concluded that the demand for recovery of Cenvat credit availed on inputs used in the manufacture of goods cleared on payment of duty was unsustainable.

Issue 3: Recovery of wrongly availed Cenvat credit, interest, and penalty

The impugned order confirmed the demand of Rs. 4.02 crores as wrongly availed Cenvat credit, along with interest and penalty under Rule 15(2) of the Cenvat Credit Rules and Sections 11AB and 11AC of the Central Excise Act. The Commissioner held that since the appellant was not a manufacturer for the processed goods, they were not entitled to Cenvat credit. The penalty was imposed on the company and the Executive Director for deliberate wrongful availing of credit.

The appellant argued that the demand was unjustified as they paid duty on finished goods and reversed credit on traded goods. They further contended that the credit reversed should be refunded in cash under Section 142(3) of the CGST Act.

The Tribunal rejected the Revenue's contention that payment of duty using wrong credit amounts to reversal, holding that such payment does not validate the credit or equate to reversal, especially where the credit was wrongly availed ab initio. The Tribunal relied on Supreme Court precedent that wrongful credit once availed is recoverable and cannot be set off by payments made from such credit.

However, following the principle in Ajinkya Enterprises, the Tribunal set aside the demand relating to inputs used in manufacture and clearance of dutiable goods, but upheld the demand relating to inputs traded as such, where credit was inadmissible.

The Tribunal remanded the matter for detailed computation by the original authority to segregate the credit relating to manufactured goods and traded goods and to grant refund of any excess reversed credit in cash as per Section 142(3) of the CGST Act.

Regarding penalty, the Tribunal held that since the demand was set aside for the appellant company, penalty imposed on the Executive Director was also not sustainable and was accordingly set aside.

Issue 4: Liability of Executive Director for penalty

The Commissioner imposed penalty on the Executive Director under Rule 15(1) of the Cenvat Credit Rules, 2004, alleging deliberate wrongful availment of credit and conscious evasion of duty. The Executive Director contended absence of mens rea and bona fide belief in entitlement to credit.

The impugned order observed that the Executive Director was responsible for day-to-day operations, including procurement, production, clearance, and maintenance of Central Excise records, and was aware of the law. His statement confirmed knowledge of the processes and credit availment. The Tribunal found that the Executive Director's acts amounted to deliberate and conscious evasion and upheld the penalty.

However, since the demand on the company was set aside in part, the penalty on the Executive Director was also set aside as it was contingent on the demand.

Issue 5: Refund of reversed Cenvat credit under Section 142(3) of the CGST Act, 2017

The appellant claimed refund of the amount reversed as Cenvat credit on inputs used in manufacture and clearance of dutiable goods, which they were unable to utilize during the continuance of the Central Excise Act.

The Tribunal referred to Section 142(3) of the CGST Act, which mandates disposal of refund claims made before or after the appointed day under the existing law and payment of any amount accruing in cash.

The Tribunal directed the original authority to consider refund claims strictly under this provision and grant cash refund of any due amount arising from the reversal of credit.

Significant Holdings

"The process carried out by M/s GEE Ltd. is certainly not covered by any Chapter Note or Section Note of the Central Excise Tariff Act, 1985... the activity does not bring any new different commercial product into existence... Rewinding can hardly be considered as any processes incidental or ancillary to the completion of the manufactured product... Therefore, the processes carried out by M/s GEE Ltd. are not covered under Section 2(f) (ii) & (iii) of the Central Excise Act, 1944 and therefore, it does not amount to 'manufacture'."

"Once the duty on final products has been accepted by the department, CENVAT credit availed need not be reversed even if the activity does not amount to manufacture."

"The payment made from wrongly availed credit cannot be equated to reversal of such credit. The credit availed by their customers will continue to stand if payment is treated as reversal, defeating the purpose of Central Excise duty."

"Section 5B of the Central Excise Act, 1944 empowers the Central Government to allow non-reversal of credit where duty has been paid on the final product, even if the process does not amount to manufacture."

"The Executive Director, being responsible for production and maintenance of Central Excise records, and aware of the law, deliberately availed wrongful credit and is liable to penalty under Rule 15(1) of the Cenvat Credit Rules, 2004."

"Section 142(3) of the CGST Act, 2017 mandates that refund claims filed under the existing law shall be disposed of in accordance with the provisions of the existing law and any amount accruing shall be paid in cash."

Core Principles Established

- The definition of manufacture under Section 2(f) of the Central Excise Act is to be strictly applied, requiring transformation into a new commercial product.

- Even if the process does not amount to manufacture, Cenvat credit on inputs is not to be denied if the finished goods are cleared on payment of duty, following judicial precedents and Section 5B of the Central Excise Act.

- Wrongly availed Cenvat credit is recoverable and cannot be set off by payments made from such credit.

- Liability for penalty extends to individuals responsible for wrongful availment and evasion, subject to proof of knowledge and control.

- Refund claims under the CGST Act for amounts reversed under previous law must be adjudicated and paid in cash.

Final Determinations

- The demand for recovery of Cenvat credit relating to inputs used in manufacture and clearance of dutiable goods was set aside.

- The demand relating to Cenvat credit on inputs traded as such was upheld.

- The penalty imposed on the Executive Director was set aside in view of the partial allowance of the appeal.

- The matter was remanded to the original authority for detailed computation of admissible credit and refund of excess reversed credit in cash.

- The original authority was directed to dispose of the matter within three months from receipt of the order.