In a recent judgement, the Chennai in the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) held that reverse proportionate credit as per Rule 6(3) of Cenvat Credit Rules ( CCR ), 2004 are allowable on manufacturers of processed milk and set aside the demand against the Lotte India Corporation Ltd.
Mr. M.N. Bharathi appeared for the Appellant and Mr. M. Selvakumar, Assistant Commissioner appeared for the Respondent.
The appellants are engaged in the manufacture of sugar confectionaries not containing cocoa and bubble gum falling under Chapter Heading 17 of the First Schedule of CETA 1975. The appellants are availing the facility of cenvat credit of duty paid on inputs, capital goods and input services in terms of Cenvat Credit Rules, 2004.
During the manufacture of final products, they also manufactured processed milk, which is an exempted product. The said product viz. processed milk is either consumed captively for the manufacture of sugar-boiled confectionery or sent outside to their sub-contractor units for use in the manufacture of finished products. The Department was of the view that as the appellant is clearing both dutiable finished products as well as exempted products ( processed milk ) they are liable to maintain separate accounts as required under sub-rule (2) of Rule 6 of CCR 2004.
The appellant had reversed the credit of Rs.2,38,839/- being the credit attributable to the input services used for the manufacture of intermediate exempted product viz. processed milk as per Rule 6 (3A) of CCR 2004. The Department was of the view that the said payment made by the appellant is not under law and the appellant has to pay an amount equal to 5% / 6% of the value of exempted goods cleared by them during the disputed period as under Rule 6 (3) (i) of CCR 2004.
A show cause notice was issued for the period January 2010 to February 2013 proposing to demand the irregularly availed credit on exempted goods, along with interest and also for imposing penalties. After due process of law, the original authority confirmed the demand, and interest and imposed penalties.
Counsel Sri M.N. Bharathi appeared and argued for the appellant. It was submitted by the Counsel that though the appellant is clearing processed milk to their sub-contractors they are not required to maintain separate accounts as the sub-contractor is discharging duty on the finished products manufactured by them using the processed milk. The appellant thereafter reimbursed this excise duty to the sub-contractor.
It was argued that even if it is assumed that the appellant has to comply with sub-rule (2) of Rule 6, the appellant having reversed the proportionate credit attributable to input services used in the manufacture of exempted goods ( processed milk ), the department cannot demand 5% / 6% of the value of exempted goods as under Rule 6 (3) (i). Admittedly, the appellant has not used any inputs for the manufacture of processed milk and has used only input services.
On the other hand, the respondent argued that the appellant has cleared exempted goods as well as dutiable finished products. The processed milk is manufactured by them by using the input services. Therefore, the appellant having manufactured and cleared both exempted as well as dutiable finished products is required to maintain separate accounts for the common input services availed by them for the manufacture of exempted goods and dutiable products. The appellant having not maintained a separate account is required to pay an amount equal to 5% / 6% of the value of exempted goods as per Rule 6 (3) (i) of CCR 2004. It is submitted that the demand confirmed is therefore legal and proper.
The reimbursement of the excise duty by the appellant is an agreement between the appellant and the sub-contractor and it has nothing to do with the requirement to maintain a separate account by the appellant. We find that as the appellant is clearing dutiable goods and exempted goods like processed milk ( excisable goods ) which is exempted under Notification No.3/2006-CE dt. 1.3.2006, they are bound to maintain separate accounts for the common input services used by them.
It was evident that the appellants have not maintained separate accounts for the common input services used for the manufacture of exempted goods and the dutiable finished goods. A two-member bench comprising Ms Sulekha Beevi C S, Member ( Judicial ) and Mr Vasa Seshagiri Rao, Member ( Technical ) observed that the appellant is liable to either reverse the proportionate credit under Rule 6 (3) (ii) or pay an amount equal to 5% / 6% of the value of exempted goods as per Rule 6 (3) (i) of CCR 2004. I
The CESTAT set aside the demand, interest under Rule 6 (3) (i) of CCR 2004 and consequent penalties. The appellant is liable to reverse proportionate credit as per Rule 6 (3) (ii) read with Rule 6 (3A) of CCR 2004. The appeal is partly allowed and partly remanded to the adjudicating authority.
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