2025 (5) TMI 1365 - AT - Central Excise

CENVAT credit on capital goods used for job-work - non-submission of undertaking - benefit of Notification No.214/86-CE - allegation of diversion of raw materials/inputs namely Housings imported duty free - demand of interest and imposition of penalties on UKB and personal penalties on its Director - quantum of penalty under Section 114A of the Customs Act 1962 - HELD THAT - So far as the first issue regarding demand of CENVAT credit of Rs.36, 13, 490/- on capital goods is concerned we find from the records that the demand has been confirmed on the ground that the capital goods were not used for manufacture of dutiable final product by UKB but were used by UKN for job-work for the principal manufacturer in terms of Notification No.214/86-CE dated 25.03.1986 and the principal manufacturer has failed to submit undertaking as required under the said notification. In view of the dicta of law laid down by Hon ble High Courts in Commissioner of Central Excise Chennai-IV vs. Kyungshin Industrial Motherson Ltd. 2015 (11) TMI 899 - MADRAS HIGH COURT we conclude that the goods manufactured on job- work basis and cleared by availing benefit of Notification No.214/86 as amended are not exempted goods and therefore Rule 6(4) of the CENVAT Credit Rules 2004 restricting CENVAT credit on capital goods is not applicable. Non-submission of undertaking in terms of Notification No.214/86 by the principal manufacturer is concerned We find that ER-1 return of the principal manufacturer was submitted before the adjudicating authority showing payment of duty on final product and the same has not been disputed in the impugned order. The finding in the impugned order that UKB has not put forth the evidences to show taxability of goods manufactured under job-work is therefore perverse and incorrect. Even if we assume for a moment that benefit of Notification No.214/86 as amended can be denied to UKB on account of non-submission of undertaking by the principal manufacturer then also in such a case the revenue can demand duty on job-worked goods and cannot deny the CENVAT credit on capital goods. Having not demanded duty on job-worked goods the revenue cannot deny CENVAT credit on capital goods and therefore we find that the demand of CENVAT credit of Rs.36, 13, 490/- along with appropriation of the amount of credit reversed by UKB cannot be sustained. Demand of customs duty of Rs.49, 60, 092/- is concerned In this regard we have perused the letter dated 07.09.2011 issued by the Deputy Commissioner Pune Commissionerate intimating the facts found during enquiry and statements of Shri Pankaj Bhardwaj. However we fail to gather as to how the said letter or its enclosures point out diversion of Housings from UKB to its Pune unit. We also find that a certificate dated 27.03.2018 issued by M/s East West Automation Technologies Pvt. Ltd. clarifying that the purchase order placed by UKB was for housings and terminals only and the same goods were supplied to UKB. Despite this certificate on record before the adjudicating authority neither any enquiry has been made from M/s East West Automation Technologies Pvt. Ltd. nor the contents of the certificate has been disputed by the adjudicating authority. In these facts we cannot draw any adverse inference on the two invoices in question. We also find that apart from the two invoices issued by UKB there is absolutely no material on record to sustain the case of diversion of imported goods. Merely because UKB failed to give details of utilisation of imported Housings in beginning the same could entail imposition of penalty under appropriate provision but the same cannot form the basis for alleging diversion of goods and demand of duty. Therefore we conclude that the demand of customs duty of Rs.49, 60, 092/- cannot be upheld. Accordingly the duty liability is worked out to Rs.3, 98, 149/- only by reducing the duty involved on these machines from the total duty liability of Rs.9, 04, 380/-. The appropriation of amount over and above the said amount of Rs.3, 98, 149/- is also therefore set-aside. So far as demand of duty of Rs.32, 761/- is concerned we fail to understand that when UKB paid certain amounts in excess than why the said excess amount can be adjusted towards the short-paid amount of duty. The reasoning given in the impugned order is therefore not tenable. So far as imposition of penalties on UKB and demand of interest is concerned since removal of machineries may be prior to 08.04.2011 but determination of duty postulated under Section 114A was made only on 10.09.2020 that too under Section 28(2)/Section 28(10) and not under Section 28(8) and therefore we find that UKB is not the person liable for penalty under Section 114A in respect of demand of duty of Rs.3, 88, 149/-. In so far as demand of personal penalties on director is concerned since we have set-aside the majority of demand of duty hence personal penalties on the director are also set-aside. This takes us to the appeals filed by the revenue. The revenue has challenged the impugned order to the extent it imposes penalty equivalent to the amount of duty and not the amount equivalent to duty and interest on the basis of Circular No.61/2002-Cus dated 20.09.2022. The ground raised in the appeals filed by the revenue is squarely covered by the decision of the Tribunal in Commissioner of Customs Noida v. Unnati Fortune Industries Pvt. Ltd. 2024 (1) TMI 532 - CESTAT ALLAHABAD and therefore the appeals filed by revenue cannot succeed. Thus we partly allow the appeal filed by UKB by setting aside the entire demand of duty interest and penalties except demand of Customs duty CVD Addl. Duty (Imports) of Rs.3, 98, 149/-. Since we are confirming demand of duty of Rs.3, 98, 149/- only hence appropriation of amounts made in the impugned order over and above of Rs.3, 98, 149/- is set-aside. The appeal filed by Director of UKB is allowed in toto and the appeals filed by revenue are rejected.

Summary

The core legal questions considered in this judgment are:

1. Whether the demand of CENVAT credit of Rs. 36,13,490/- on capital goods used for job-work under Notification No. 214/86-CE is sustainable, particularly in light of the principal manufacturer's failure to submit the required undertaking.

2. Whether the demand of Customs duty, CVD, and Additional Duty (Imports) amounting to Rs. 49,60,092/- on alleged diversion of imported "Housings" to another unit is justified.

3. Whether the demand of Customs duty, CVD, and Additional Duty (Imports) of Rs. 9,04,380/- on transfer of capital goods imported for use in a 100% EOU unit to other units is valid.

4. Whether the demand of CENVAT credit short paid/reversed amounting to Rs. 32,761/- on "Sleeves" transferred/sold to another unit is sustainable.

5. Whether the imposition of penalties on the company and its director under various provisions of the Central Excise Act, Customs Act, and CENVAT Credit Rules is justified.

6. Whether the quantum of penalty under Section 114A of the Customs Act should be equivalent to duty alone or duty plus interest.

Issue-wise Detailed Analysis

1. Demand of CENVAT Credit on Capital Goods Used for Job-Work

Legal Framework and Precedents: The demand was premised on the contention that capital goods were not used for manufacture of dutiable final products but for job-work under Notification No. 214/86-CE dated 25.03.1986. The principal manufacturer had not submitted the required undertaking under this notification. The relevant provisions include Rule 6(4) of the CENVAT Credit Rules, 2004, which restricts credit on inputs used in manufacture of exempted final products.

Key precedents include the Madras High Court decision in Commissioner of Central Excise, Chennai-IV vs. Kyungshin Industrial Motherson Ltd., which held that goods manufactured on job-work basis are not exempted goods and Rule 6(4) does not apply. The Supreme Court in Escorts Ltd. v. Commissioner of Central Excise clarified that credit is admissible on inputs used in manufacture of intermediate products cleared without payment of duty, provided duty is paid on the final product. The Larger Bench of the Tribunal in Sterlite Industries Ltd. v. Commissioner of Central Excise further elaborated that denial of credit on inputs used in job-work would frustrate the intent of the law and lead to discriminatory treatment.

The Madras High Court in Commissioner of Central Excise, Chennai-II v. SRF Ltd. reaffirmed these principles, and the Telangana High Court in Commissioner of Customs and Central Excise v. Lokesh Machines Ltd. (2024) also upheld the entitlement to credit on job-worked goods under Notification No. 214/86-CE.

Court's Interpretation and Reasoning: The Court found that the goods manufactured on job-work basis and cleared without payment of duty under Notification No. 214/86-CE are not exempted goods. Therefore, Rule 6(4) of the CENVAT Credit Rules, which restricts credit on exempted goods, does not apply. The failure of the principal manufacturer to submit an undertaking does not disentitle the job worker to credit, especially when the payment of duty by the principal manufacturer is not disputed. The Court relied on the submission of ER-1 returns and certificates showing duty paid on final products.

Application of Law to Facts: The appellant had reversed credit initially but contested the demand on merits. The principal manufacturer's ER-1 returns and certificate from the supplier supported the claim that duty was paid on final products. The Court found the adjudicating authority's adverse finding on this issue to be perverse and incorrect.

Treatment of Competing Arguments: The Revenue argued that non-submission of undertaking by the principal manufacturer disentitles the appellant from credit. The Court rejected this, relying on judicial precedents that benefit under Notification No. 214/86-CE cannot be denied solely on this ground. The appellant's argument that duty on job-worked goods was never demanded was also accepted, negating the basis for denying credit.

Conclusion: The demand of CENVAT credit of Rs. 36,13,490/- and appropriation of reversed credit was set aside.

2. Demand of Customs Duty on Alleged Diversion of Imported "Housings" to Pune Unit

Legal Framework: The demand was based on alleged diversion of imported duty-free "Housings" imported under Customs (Imports of goods at concessional rate of duty for manufacture of excisable goods) Rules, 1966. Section 28(2) and (10) of the Customs Act, 1962 were invoked for recovery of differential duty and interest.

Court's Reasoning and Findings: The Court examined the documentary evidence, including invoices showing transfer of "Housings" to the Pune unit and a certificate from the supplier confirming the goods supplied were "Housings." The Revenue's letter and statements did not conclusively establish diversion. The Court noted that initial failure to provide details could attract penalties but not sustain a duty demand. The absence of enquiry or dispute over the supplier's certificate was significant.

Application of Law to Facts: The Court held that mere failure to provide utilization details cannot be equated with diversion. The invoices and supplier's certificate were accepted as valid evidence. No adverse inference could be drawn against the appellant.

Conclusion: The demand of Rs. 49,60,092/- on account of diversion was not upheld.

3. Demand of Customs Duty on Transfer of Capital Goods Imported for 100% EOU Unit

Legal Framework: Section 28(2) and (10) of the Customs Act, 1962 were invoked for recovery of duty on capital goods imported for use in a 100% EOU unit but allegedly transferred to other units without payment of duty.

Evidence and Findings: The Panchnama drawn during the officers' visit recorded that certain machines were found uninstalled in the 100% EOU premises, including vertical injection moulding machines, plug testers, and a DG set installed on the roof. The Director's statement admitting transfer was rejected as being contrary to the Panchnama, which was contemporaneous evidence.

Application of Law to Facts: The Court reduced the demand from Rs. 9,04,380/- to Rs. 3,98,149/- by excluding duty on machines found uninstalled or installed in the EOU unit. The Court disallowed the Revenue's reliance on the Director's statement over the Panchnama.

Conclusion: Demand was partially confirmed to the extent of Rs. 3,98,149/-; the rest was set aside.

4. Demand of CENVAT Credit Short Paid/Reversed on "Sleeves" Transferred to Pune Unit

Findings: The appellant had paid certain amounts in excess and sought to adjust the short-paid duty against the excess. The Court found no justification for such adjustment and held the reasoning in the impugned order untenable.

Conclusion: The demand of Rs. 32,761/- was not sustained.

5. Imposition of Penalties and Demand of Interest

Legal Provisions: Penalties were imposed under Rule 15 of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944, Sections 114A and 117 of the Customs Act, 1962, and Rule 26 of the Central Excise Rules, 2002.

Reasoning: Since the majority of duty demands were set aside, the Court held that interest and penalties related to those demands could not be sustained. Regarding penalty under Section 114A of the Customs Act, the Court noted that the liable person for penalty must be identified as per sub-section (8) of Section 28, which was not done correctly in the impugned order.

Conclusion: Penalties on the company and personal penalties on the Director were set aside except for those related to the confirmed duty demand of Rs. 3,98,149/- which were also found not sustainable under Section 114A due to procedural defects.

6. Quantum of Penalty under Section 114A of the Customs Act

Contention: The Revenue contended that penalty should be imposed on duty plus interest as per Circular No. 61/2002-Cus dated 20.09.2002.

Judicial Interpretation: The Tribunal in a recent decision held that penalty under Section 114A cannot exceed the amount of duty payable and cannot include interest. The Supreme Court in U.K. Enterprises also supported this interpretation.

Conclusion: The Court rejected the Revenue's appeals on this ground.

Significant Holdings

"Goods manufactured on job-work basis and cleared by availing benefit of Notification No.214/86, as amended, are not exempted goods and therefore Rule 6(4) of the CENVAT Credit Rules, 2004 restricting CENVAT credit on capital goods is not applicable."

"Benefit of Notification No.214/86, as amended, cannot be denied only because the principal manufacturer has not submitted undertaking in terms of the notification, particularly when the payment of duty by the supplier is not in dispute."

"Mere failure to provide details of utilization of imported goods cannot form the basis for alleging diversion and demand of duty."

"Penalty under Section 114A of the Customs Act, 1962 cannot exceed the amount of duty payable and does not include interest."

"The burden of proof regarding diversion of imported goods lies on the Revenue, and in absence of conclusive evidence, demand cannot be sustained."

"Statements of officers recorded in Panchnama have primacy over contradictory statements made later by the accused or their representatives."

"Where demand of duty is not sustainable, corresponding demand of interest and imposition of penalty cannot be upheld."

The Court partly allowed the appeal filed by the company by setting aside the entire demand of duty, interest, and penalties except for a reduced demand of Customs duty, CVD, and Additional Duty (Imports) of Rs. 3,98,149/-. The appeal filed by the Director was allowed in toto, and the Revenue's appeals were rejected.