Clearing Inputs as Such Is Not Trading: CESTAT Sets Aside ₹1 Crore CENVAT Demand on Exide Industries [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Bench at Mumbai has set aside a demand of over ₹1 crore against Exide Industries Ltd., ruling that the company’s clearance of Polypropylene Co-Polymer (PPCP) as such to mould manufacturers cannot be treated as “trading”, and therefore Rule 6(3) of the CENVAT Credit Rules, 2004 is not attracted.

Exide, a manufacturer of electric storage batteries, procured PPCP as an input used to make battery containers and lids. Since the company did not have in-house moulding facilities, it supplied PPCP to moulders who manufactured the parts and sold them back to Exide on payment of duty. The company had reversed the credit on such PPCP under Rule 3(5), which allows removal of inputs as such on reversal of corresponding credit.

However, following an EA-2000 audit, the Department treated this arrangement as a “trading activity”, alleging that Exide was engaged in an exempted service and was therefore required to reverse 6% of the value under Rule 6(3). The Commissioner accepted this view and confirmed the demand, interest, and penalties.

Rule 6(3) of the CENVAT Credit Rules, 2004 reads as:

“Obligation of a manufacturer or producer of final products and a provider of output service –

(a) A manufacturer who manufactures two classes of goods, namely :-

(i) non-exempted goods removed;

(ii) exempted goods removed; or

(b) a provider of output service who provides two classes of services, namely :-

(i) non-exempted services;

(ii) exempted services,

shall follow any one of the following options applicable to him, namely :-

[(i) pay an amount equal to six per cent. of value of the exempted goods and seven per cent of value of the exempted services subject to a maximum of the sum total of opening balance of the credit of input and input services available at the beginning of the period to which the payment relates and the credit of input and input services taken during that period; or

(ii) pay an amount as determined under sub-rule (3A) :

Provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i) :

Provided further that if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be seven per cent. of the value so exempted :

Provided also that in case of transportation of goods or passengers by rail, the amount required to be paid under clause (i) shall be an amount equal to two per cent. of value of the exempted services.”

The Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) rejected the Department’s reasoning, holding that PPCP was an input for battery manufacture and had always been treated as such, including in past adjudication orders accepted by the Revenue. Since the entire PPCP was used for moulding containers and lids exclusively for Exide, and the moulders sold back the finished parts on payment of duty, the Tribunal held that the transaction was a standard removal of inputs as such, not a commercial trading activity.

Referring to its earlier order in Exide’s own case, and to a similar ruling of CESTAT Chennai in 2025, the Tribunal noted that the Department had produced no evidence that Exide sold PPCP to any third party or engaged in trading with a profit motive. It emphasised that the reversal under Rule 3(5) exhausts the credit liability, and Rule 6(3) cannot be invoked for the very same transaction.

The Tribunal observed that the show cause notice was built purely on assumption, without demonstrating that Exide was known in the market as a trader of PPCP. It also found the Commissioner’s approach contradictory: having accepted that PPCP was an input cleared as such with proper reversal, the authority could not then re-characterise the same activity as trading.

Holding that the issue was settled by multiple decisions, including in Exide’s own cases, the Tribunal concluded that the demand, interest and penalty were unsustainable. It accordingly set aside the order-in-original and allowed the appeal in full.

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