2025 (7) TMI 925 - AT - Central Excise

Denial of CENVAT Credit - activity undertaken by the appellant did not amount to manufacture as set out in section 2(f)(ii) of Central Excise Act 1944 - HELD THAT - It is on record that the appellant is a manufacture of both dutiable and non-dutiable goods and furthermore that duty liability arose only from the deeming provision in the relevant notes to the chapter in First Schedule to Customs Tariff Act 1975. There is no dispute that all the final products had been burdened with duties of central excise. The inappropriateness of denial of CENVAT credit from exemption of final products from duty that nonetheless one way or another discharged duty liability was settled by several decisions of the Tribunal. In Asian Colour Coated Ispat Ltd v. Commissioner of Central Excise Delhi III 2014 (9) TMI 974 - CESTAT NEW DELHI the Tribunal held that Since the amount paid on the clearance of pickled H.R. sheets is more than the Cenvat credit availed the Cenvat credit availed stands more than reversed and there is no need to recover the same again. There are no reason to sustain the impugned order which is set aside - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

- Whether the activity of re-packing and labelling undertaken by the appellant amounts to 'manufacture' under section 2(f)(ii) of the Central Excise Act, 1944;

- Whether denial of CENVAT credit on the ground that the final products were not liable to duty is justified when duty has been discharged by the appellant;

- The applicability of chapter notes in the First Schedule to the Customs Tariff Act, 1975, which deem certain activities as manufacture for specific chapters;

- Whether the appellant can retain CENVAT credit on inputs when the final products are exempted from duty but duty liability was discharged nonetheless;

- The legal consequences of payment of duty exceeding the CENVAT credit availed, including the question of imposition of penalty and interest under the CENVAT Credit Rules, 2004 and 2014.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the activity of re-packing and labelling amounts to 'manufacture' under section 2(f)(ii) of the Central Excise Act, 1944

The appellant's primary contention was that their activity of re-packing chemicals covered 14 different tariff headings, with chapter notes in nine chapters deeming such activity as manufacture, while five chapters lacked such deeming provisions. The appellant argued that they discharged duty liability on all goods without discrimination, and denial of CENVAT credit solely because the final products were not dutiable was erroneous.

The Tribunal examined the statutory definition of manufacture under section 2(f)(ii), which includes processes resulting in a change in the nature or character of goods. The Tribunal referred to precedents where similar activities were held to constitute manufacture when the chapter notes specifically deem so, and where the absence of such deeming provisions complicates the classification.

In the present case, it was undisputed that the appellant manufactured both dutiable and non-dutiable goods, and duty liability arose only due to the deeming provisions in the relevant chapter notes of the Customs Tariff Act. The Tribunal noted that the appellant discharged duty on all final products, indicating acceptance of manufacture status for those products.

Issue 2: Whether denial of CENVAT credit is justified when duty has been discharged on final products, even if the final products are exempted from duty

The Tribunal relied heavily on established precedents to address this issue. In particular, the Tribunal cited the decision in Asian Colour Coated Ispat Ltd v. Commissioner of Central Excise, Delhi - III, which held that if the process does not amount to manufacture, the appellant effectively removes inputs as such and pays an amount equal to the CENVAT credit availed under an invoice issued under Rule 9 of the Central Excise Rules, 2002. The Tribunal emphasized that the amount paid by the appellant exceeded the CENVAT credit availed, thus negating the need for recovery of credit or imposition of penalty.

The Tribunal also referred to the decision of the Hon'ble Gujarat High Court in Commissioner of Central Excise & Customs, Surat - II v. Creative Enterprises, which affirmed that if the activity does not amount to manufacture, no duty can be levied, and denial of credit on that basis is impermissible.

Similarly, the Tribunal cited A One Laminators Pvt Ltd v. Commissioner of Central Excise, which underscored that if the process is not manufacturing, no excise duty is payable, and since the appellant had paid excise duty exceeding the CENVAT credit availed, no liability should be fastened on the appellant.

The Tribunal concluded that discharge of duty liability-whether leviable or not-effectively extinguishes proceedings for denial of CENVAT credit.

Issue 3: Applicability of chapter notes deeming re-packing as manufacture and its impact on duty liability and credit

The appellant argued that the chapter notes in nine chapters of the Customs Tariff Act, 1975, deem re-packing as manufacture, while in five chapters there was no such provision. The Tribunal acknowledged this distinction but observed that the appellant had discharged duty on all goods irrespective of the presence or absence of deeming provisions, thereby accepting duty liability.

The Tribunal did not find merit in the argument that CENVAT credit should be denied solely on the ground that final products were exempted from duty. The presence of deeming provisions in certain chapters supported the appellant's position that their activity amounted to manufacture for those goods, while for others, the payment of duty sufficed to preserve credit rights.

Issue 4: Consequences of payment of duty exceeding CENVAT credit availed, including penalty and interest under CENVAT Credit Rules

The appellant's payment of duty exceeded the CENVAT credit availed, and the demand for recovery of credit along with interest and penalty was challenged. The Tribunal referred to the principle that where duty paid exceeds the credit availed, there is no justification for penalizing the appellant or recovering credit again.

It was noted that Rule 3(5) of the CENVAT Credit Rules, 2004, requires that removal of CENVAT credit inputs as such should be accompanied by payment of an amount equal to the credit availed, under an invoice issued under Rule 9 of the Central Excise Rules, 2002. The Tribunal found that the appellant complied with these requirements, and consequently, the imposition of penalty and interest was unwarranted.

The Tribunal emphasized that the appellant's customers could also avail credit on the basis of the appellant's invoices, reinforcing the legitimacy of the credit chain and negating any illegality.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"When the Department's case is that the process undertaken by the appellant does not amount to manufacture, it amounts to saying that the appellant have cleared the Cenvat credit availed inputs as such and this is something which is not prohibited, if at the time of removal of Cenvat credit availed inputs, in terms of the provisions of Rule 3(5) of the Cenvat Credit Rules, 2004, an amount equal to the Cenvat credit availed is paid under an invoice issued under Rule 9 of the Central Excise Rules, 2002. There is no dispute that the amount paid by the appellant is more than the Cenvat credit availed. In my view, therefore, the assessee should not be penalized for paying more amount than their actual duty liability."

The Tribunal reaffirmed the principle that discharge of duty liability, whether leviable or not, extinguishes proceedings for denial of CENVAT credit. It held that denial of credit solely on the ground that the final products were exempt from duty is inappropriate where duty has been paid on such products.

The Tribunal set aside the impugned order denying CENVAT credit and imposed penalty and interest, allowing the appeal.