The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that manufacturers are entitled to claim CENVAT Credit on capital goods used in the production of exempt intermediate products when those products are ultimately used in the manufacture of dutiable final goods.
Fritzmeier Motherson Cabin Engineering Pvt. Ltd., the appellant, is engaged in the manufacture of motor vehicle cabins and cabin parts. The appellant received advances from customers for the manufacture of tools such as welding fixtures and tools.
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These tools were sold without payment of Central Excise duty but retained in the appellant’s factory for manufacturing cabins while claiming exemption under Notification No. 67/1995-CE.
The department conducted an audit and issued a show cause notice alleging that the appellant failed to pay excise duty of Rs. 62,81,958 on tooling advances and did not reverse CENVAT Credit of Rs. 39,03,724 under Rule 6(3)(i) of CCR for non-maintenance of separate records for dutiable and exempted goods.
The adjudicating authority confirmed the demand of Rs. 39,03,724 along with interest and a 50% penalty and dropped other demands. Aggrieved, the appellant filed an appeal before CESTAT.
The appellant’s counsel argued that the goods were not unconditionally exempted and the extended period of demand could not be invoked as previous audits had not raised these issues.
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The apellant’s counsel relied on CBEC Circular No. 665/56/2002-CX and judgments such as Needle Industries (India) Pvt. Ltd. v. CCE and Sterlite Industries (India) Ltd. v. CCE to support their eligibility for Cenvat Credit.
The revenue’s counsel countered that the appellant failed to maintain separate accounts for dutiable and exempted goods, suppressed material facts, and was liable to reverse Cenvat Credit under Rule 6(3)(i) of CCR. The revenue also argued that the exemption claimed under Notification No. 67/1995-CE made the goods exempted for the purposes of Rule 6 of CCR.
The two-member bench comprising Vasa Seshagiri Rao (Technical Member) and Ajayan T.V. (Judicial Member) found that the appellant was eligible for Cenvat Credit on inputs and input services used in manufacturing tools.
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The bench observed that similar issues had been decided in favor of assessees in cases like Needle Industries (India) Pvt. Ltd. v. CCE and others. The Tribunal observed that the appellant is eligible to avail CENVAT Credit as per CBEC Circular No. 665/56/2002-CX dated 25.09.2002.
The tribunal observed that circular clarified that CENVAT Credit cannot be denied on capital goods utilized in the manufacturing of intermediate goods that are exempt from duty, provided those intermediate goods are used captively in the production of finished goods that are subject to excise duty.
The tribunal ruled that the demand for reversal of Cenvat Credit was unsustainable and set aside the impugned order. The extended period of limitation and the imposition of penalties were also deemed unsustainable. The appellant’s appeal was allowed with consequential relief as per the law.
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