Denial of CENVAT Credit for Non-Manufacture Activity: CESTAT Sets Aside Order as Duty Was Paid on All Goods [Read Order]

The Mumbai Bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT) set aside the denial of CENVAT credit to the assessee observing that duty had been paid on all goods, including those not deemed manufactured under Section 2(f)(ii) of the Central Excise Act, 1944.

Sai Swaroop Enterprises Pvt Ltd, appellant-assessee, had repacked and labelled goods for a principal manufacturer and paid duty on the finished products. It also claimed CENVAT credit on input goods used for this activity.

However, the department denied the credit of ₹15,87,927 for the period from November 2007 to September 2012, stating that the activity did not amount to ‘manufacture’ under Section 2(f)(ii) of the Central Excise Act, 1944. The demand was confirmed along with interest, and a penalty of equal amount was imposed under the CENVAT Credit Rules.

The assessee counsel submitted that the repacking activity covered 14 tariff headings, out of which nine treated it as deemed manufacture under the chapter notes. For the remaining five, there was no such provision.

It was argued that the assessee had mistakenly paid duty on all goods without distinction. The issue arose when the department denied credit solely on the ground that the final products were not dutiable.

The two member bench comprising Ajay Sharma (Judicial Member) and C J Mathew (Technical Member) noted that the assessee was engaged in manufacturing both dutiable and non-dutiable goods and had paid central excise duty based on deeming provisions under the Customs Tariff Act, 1975. It observed that there was no dispute regarding the payment of duty on all final products.

The appellate tribunal found that denial of CENVAT credit on the ground that the goods were exempt, despite duty having been paid, was contrary to settled law.

Relying on decisions including Asian Colour Coated Ispat Ltd, Creative Enterprises, and A One Laminators Pvt Ltd, the bench held that once duty was paid whether or not legally required credit could not be denied. It stated that if the assessee had paid more duty than the credit availed, the credit stood effectively reversed.

The CESTAT concluded that there was no justification to deny credit or impose penalties and, accordingly, set aside the impugned order and allowed the appeal.

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