thermax Ltd., R.P. Pargaonkar and Vs. Commissioner of Central Excise - Court Judgment

Excerpt:
1. thermax limited was, at the relevant time, engaged inter alia in the manufacture of boilers. the boilers that the appellant manufactured were either liable to duty or exempted form duty in terms of notification 205/88. depending upon the capacity, the boilers are manufactured in one of the two divisions of the appellant's factory, the energy system division manufactured boilers with the capacity of more than 10 tons, the process heat division manufactured boilers of smaller capacity. the appellant took modvat credit of the duty paid on the inputs used in the manufacture of boilers. rule 57cc provided that where a manufacturer takes credit of the duty paid on the inputs other than fuel used in or in relation to the manufacture of both exempted and dutiable final product, he shall pay.....

Judgment:
1. Thermax Limited was, at the relevant time, engaged inter alia in the manufacture of boilers. The boilers that the appellant manufactured were either liable to duty or exempted form duty in terms of notification 205/88. Depending upon the capacity, the boilers are manufactured in one of the two divisions of the appellant's factory, the Energy System Division manufactured boilers with the capacity of more than 10 tons, the Process Heat Division manufactured boilers of smaller capacity. The appellant took modvat credit of the duty paid on the inputs used in the manufacture of boilers. Rule 57CC provided that where a manufacturer takes credit of the duty paid on the inputs other than fuel used in or in relation to the manufacture of both exempted and dutiable final product, he shall pay the amount equal to eight per cent of the price of the exempted final product, unless he maintains separate accounts of the inputs used in the manufacture of the exempted final product. With this provision in mind, the appellant from April 1997 onwards, while taking modvat credit of the duty paid on all the inputs that it received, transferred to a separate store inputs which intended to be used in the manufacture of exempted boilers, after reversing the credit that had been taken of the duty paid on these goods, and utilised the inputs in the manufacture of the exempted product.

2. By notice issued to the appellant, the department alleged that this process did not result in compliance with the provisions of Sub-rule (9) of Rule 57CC. The notice pointed out that the appellant had taken modvat credit of the duty paid on the inputs when it received and that the reversal subsequently of the credit so taken could not be equated with the situation in which credit could not be taken at all. It also pointed out that credit taken on the inputs used in the manufacture of exempted product to the extent of Rs. 50131/- had not been reversed, and that the credit had also not been reversed on the inputs used in the manufacture of fans which were in turn formed component of the exempted boilers. The notice demanded a total duty of Rs. 2.89 crores on this account, proposed penalty on the manufacturer as well as on R.P. Pargaonkar, divisional manager and G.B. Khade, manager (excise) of the assessee.

3. In its reply, the assessee contended that no credit in fact had been taken and he relies upon for this purpose the judgment of the Supreme Court in Chandrapur Magnet Wires Pvt. Ltd. v. CCE 1996 (81) ELT 3. It is contended in the alternative that in any event there being no machinery which can be pressed into service in case of implementation of the provisions, contravention of the provisions of Sub-rule (1) of Rule 57CC, the demand is unsustainable. It admitted its liability on account of the smallness of amount. It also made the submission as to the imposition of penalty. The Commissioner did not accept any of these contentions. He said that there was no half way house in this matter and that, once the credit was taken initially of the duty paid on the inputs, the provisions of Sub-rule (9) of Rule 57CC would not apply.

Therefore, application of Sub-rule (1) of Rule 57CC, 8% of the amount is required to be paid. He was of the view that the amount payable cold be based upon the provisions of Rule 57I. He therefore proceeded to confirm the entire demand and impose a penalty equal to duty on the assessee and penalties of Rs. 35,000/- and Rs. 25,000/- on R.P.Pargaonkar, Divisional Manager (Material) and on Shri G.D. Khade, Manager (Excise) of the assessee under Rule 209A of the Rules. Hence these appeals.

4. The counsel for the appellants accepts before us that a sum of Rs. 3.50 lakhs relating to inputs used in the exempted boilers had been wrongly taken. A sum of Rs. 4.04 lakhs is required to be paid. The counsel for the appellant accepts that the following amounts are payable by the assessee: (i) Rs. 3.05 lakhs being 8% of the sale price of the finished goods in the manufacture of which inputs were utilised on which credit has been taken; (ii) Rs. 50131/- represents credit taken on other inputs used in the manufacture of exempted product. He contends that duty had been paid on the quantity of the fans in which the inputs form part of the components of the exempted boilers, in the manufacture of which (fans) these inputs had been used on which credit had not been taken and utilised. Since the duty has been paid, the assessee was entitled to take modvat credit and the question of reversal would not arise. This accounts for reversal of credit of Rs. 11 lakhs.

5. As to the remaining amount, he contends that, even if it is held that the act of reversal of the credit does not arise, taking of credit initially, all that is required to be done by the appellant is to reverse the amount of credit that had been taken. This is what has been provided in the circular of the Board No. 591/28/2001-CX dated 16.10.2001. This circular was no doubt issued after the Commissioner passed this order but it is still applied in support of the later proposition and he cites the decision of the Tribunal in CCE v. Nirma Ltd. (Appeal E/1378/00) and the judgment of the Supreme Court in Ranade Micronutrients v. CCE 1996 (86) ELT 19. He contends that even applying the provisions of Rule 57CC, penalty in any case should not exceed Rs. 4 lakhs, and the penalties imposed on the employees are required to be set aside in view of the vastly reduced amount for the contravention.

6. The departmental representative reiterates the findings of the Commissioner and states that in any case penalty is imposable. He contends that the appellant had in fact reversed the credit only after the visit by the departmental officers.

7. Since the assessee's contention with regard to taking of credit is limited to the contends of the Board's circular, and no arguments have been raised as to the applicability of the provisions of Sub-rule (9) of Rule 57CC, in the circumstances of the type that we are concerned with, we do not propose to examine that aspect. So far as the requirement is concerned, the circular in question, which provides clarification with regard to Rule 6 of the CENVAT and Rule 57CC of the Central Excise Rules, 1944, both of which are identically worded, provides that if the manufacturer does not fulfil the requirement of maintaining separate account of obtaining 8% of the total price of the exempted goods, "the availing of corresponding credit on inputs is incorrect. The recovery of such credit taken incorrectly is squarely covered by the provisions of Rule 12) erstwhile Rule 57I). The circular has been communicated to the trade. By application of Rule 57I, an assessee, who is dealing with the situation that we are concerned with would have reversed the credit that was wrongly taken. This is in fact what the appellant has done. It transferred the inputs intended to be used in the exempted goods for being separately stored, it reversed the credit that it already took (except for the small amount which are not in dispute before us), the action that has been contemplated by rule therefore has already been taken by the appellant. The circular was not issued when the Commissioner passed this order. However, we have held in our decision in CCE v. Nirma ltd. that the circular would cover the earlier cases, as it relies upon the provisions of Rule 57C and Rule 57I. In its judgment in Ranadey Micronutrients v. CCE 1997 (87) ELT 19, the Supreme Court recorded in paragraph 8 the contention in the affidavit fo the department, that the circular relating to classification relied upon by the appellant should not be given effect to clearances made earlier, dealing with this contention in paragraph 15. It said "The argument that the later circular has only prospective operation and that it cannot apply to these appeals, because the Tribunal had already decided them must also be rejected. It is not open to the revenue to raise a contention that is contrary to a binding circular issued by the Board. It cannot but urge the point of view made binding by the later circular." Although the credit was wrongly taken of the duty paid on the inputs used in the manufacture of fans which were to form components of the exempted boilers, the appellant subsequently paid duty on these fans. Once this has been done, it cannot be said credit was wrongly taken because the fans themselves had discharged duty and such duty has not been taken subsequently as credit. The demand therefore must be limited to Rs. 4.03 lakhs.

8. We do not find it possible to accept the contention of the departmental representative that the credit was reversed by the assessee only after the department pointed out to its errors. Paragraph in the Commissioner's order that we have referred to payment of duty on the fans intermediate product on 15.1.1999 and subsequent dates, after the visit of the officers from the personal ledger account. It does not refer to any reversal of the credit. On the other hand, the Commissioner records in Clause (e) of paragraph 17, in which he summarised "the issues before us that the assessee also transferred inputs worth Rs. 4.70 lakhs without reversing modvat credit. These inputs were used in the manufacture of exempted boilers. The assessee also transferred inputs worth Rs. 3.97 crores from other stores. It is therefore not correct to say the credit was reversed only at the intervention of the departmental officers. The credit has been reversed long before the officers entered the premises. The liability therefore must be limited to the contravention admitted by the appellant. We therefore reduce the penalty to Rs. 4.04 lakhs.

9. The penalties imposed on the employees also has to be scaled down and while doing so, we think it proper to set aside the penalties.