Cutting/Slitting Of HR-CR Coils Not ‘Manufacture’; Duty Paid On Non-Excisable Activity Cannot Validate CENVAT Credit Or Avoid Section 11D: CESTAT Chennai
Pranav B Prem
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the activity of cutting and slitting HR/CR coils does not amount to “manufacture” under the Central Excise law and that mere payment of duty on such non-excisable activity cannot create a legal fiction to treat it as excisable. The Tribunal further ruled that CENVAT credit availed in relation to such activity is inadmissible ab initio, even if duty was paid on clearance of the processed goods.
A Bench comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao observed that in the absence of any manufacturing activity, the very foundation for availing CENVAT credit fails. The Bench categorically held that “if there is no manufacturing activity, the question of availment of input credit does not arise,” and that payment of duty on non-manufactured goods cannot legitimise the credit.
The assessee was engaged in the manufacture of MS bars, ingots and similar products. During the relevant period, the assessee received duty-paid imported HR/CR coils from dealers and availed CENVAT credit on the basis of dealer invoices. These coils were sent to job workers for de-coiling, cutting and slitting. After processing, the sheets were cleared back to the same dealers on payment of excise duty, which was discharged by utilising the available CENVAT credit as well as by adjusting credit on subsequent receipts.
During audit, the Department took the view that the activity of cutting and slitting of HR/CR coils did not amount to manufacture. On this basis, two show cause notices were issued proposing reversal of CENVAT credit amounting to ₹2,81,51,168 along with interest, imposition of equal penalty under Rule 15(2) of the CENVAT Credit Rules read with Section 11AC of the Central Excise Act, 1944, and recovery of amounts collected as “duty” under Section 11D of the Act.
The assessee contended that once goods were cleared on payment of duty, the CENVAT credit availed could not be denied. It was argued that even if the process did not amount to manufacture, credit could not be disallowed when duty was admittedly paid on the clearances.
The Department, however, submitted that after 01.04.2011, Rule 2(k) of the CENVAT Credit Rules specifically excluded goods having no relationship whatsoever with manufacture. It was pointed out that the assessee’s factory had remained shut since 04.05.2010, and therefore, the HR/CR coils could not qualify as “inputs.” It was further contended that Rule 3(5) of the CENVAT Credit Rules applies only to valid inputs, and since the credit itself was illegally taken at the threshold, utilisation of such credit was impermissible.
Agreeing with the Revenue, the Tribunal held that cutting and slitting of HR/CR coils does not amount to manufacture and that payment of duty on a non-excisable activity cannot convert it into an excisable one. The Bench held that the goods in question did not qualify as “inputs” and that CENVAT credit was inadmissible from the very inception. Consequently, Rule 3(5) of the CENVAT Credit Rules was held to be inapplicable, and utilisation of such credit for payment of duty was declared illegal.
The Tribunal further held that Section 11D(1A) of the Central Excise Act squarely applied to the facts of the case. Since the assessee had collected amounts representing “duty of excise” on goods that were not manufactured, such amounts were required to be deposited with the Government. The Bench observed that once it is established that no manufacture took place, Section 11D is automatically triggered.
On the issue of limitation and penalty, the Tribunal found that the assessee had suppressed material facts, acted contrary to settled legal principles, adopted a mala fide mechanism to utilise lapsed credit, and cleared goods at highly inflated values without proper disclosure. It held that all ingredients necessary for invoking the extended period under Section 11A(4) were satisfied and accordingly upheld the penalty imposed under Section 11AC of the Act. In view of these findings, the Tribunal dismissed the appeal in its entirety, confirming the demand of credit reversal, interest, penalty and recovery under Section 11D.
Appearance
Counsel for Appellant/ Assessee: S. Murugappan
Counsel for Respondent/ Department: O.M. Reena
Cause Title: M/s. Shree Ganesh Steel Rolling Mills Ltd. v. Commissioner of GST and Central Excise
Case No: Excise Appeal No. 42240 of 2016
Coram: Judicial Member P. Dinesha, Technical Member Vasa Seshagiri Rao
