Removal of PPCP to Moulders for Making Battery Parts Not Trading: CESTAT Rules Rule 6 Cenvat Credit Reversal Inapplicable [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the removal of Polypropylene Co-Polymer (PPCP) to moulders for making battery parts under reversal of credit is not “trading” and does not attract reversal under Rule 6 of the Cenvat Credit Rules (CCR).

Exide Industries Ltd, the appellant, is a manufacturer of electric storage batteries, using PPCP as an input to produce battery containers and lids. Due to infrastructure constraints, the appellant cleared PPCP to moulders who converted it into containers and lids, which were then returned and used in battery manufacturing. Exide reversed the credit on PPCP under Rule 3(5) of CCR at the time of removal to moulders.

The department argued that the removal of PPCP was “trading” and treated it as an exempted service under Rule 6 of CCR, demanding Rs. 2.25 crore in credit reversal with interest and equivalent penalties under extended period on the grounds that the appellant did not maintain separate accounts for common input services used for exempted and dutiable activities.

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The appellant’s counsel argued that PPCP is an input under Rule 2(k) of CCR, and clearing it to moulders for conversion into battery parts is part of the manufacturing process, not trading. It was argued that the transaction was for operational convenience and the entire PPCP was used in battery production, supported by moulder certificates.

The counsel cited the Supreme Court and CESTAT decisions, including their own case before CESTAT Mumbai, which held that removal of inputs on reversal under Rule 3(5) is not trading and does not require reversal under Rule 6. The counsel argued that the appellant’s practice was transparent, declared in ER-1 returns, and based on departmental acceptance in previous periods, negating suppression for extended period invocation.

The revenue’s counsel argued that the appellant sold PPCP at a higher price, paid VAT, and the sale was thus trading, triggering Rule 6 reversal on common input services used in trading and manufacturing activities.

The two-member bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that PPCP was cleared to moulders for manufacturing battery parts exclusively for Exide and returned for further use, making it an integral part of the manufacturing process. It was further observed that prior orders, including one by the same adjudicating authority, had accepted PPCP as input under Rule 2(k) and its clearance under Rule 3(5) as valid.

The tribunal observed that the department did not provide evidence that Exide was engaged in trading PPCP in the market or earning profit on it, and that the show cause notice lacked clear allegations of trading.

The tribunal explained that the department’s approach of treating the same transaction as the removal of input for manufacturing and as trading was contradictory. It held that Rule 3(5) governed the transaction, and Rule 6 was inapplicable. The tribunal also held that since Exide disclosed the removals in its returns, the extended period of limitation could not be invoked.

The tribunal set aside the demand of Rs. 2.25 crore along with interest and penalties, and allowed the appeal with consequential relief to Exide Industries Ltd.

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