By TIOL News Service

MUMBAI, MAR 16, 2013: THE appellants manufacture goods falling under Chapter 27. Raw materials used for the production are natural gas and crude oil procured from the Oil Field of Mumbai Offshore. The appellants availed the CENVAT Credit of Central Excise duty on the inputs and capital goods directly received by the appellant at Uran Plant and Service Tax paid on input services and distributed by the Input Service Distributors.

The appellants also have multi-locational units for the manufacture of excisable goods and one such unit of appellants is registered with Central Excise, Mumbai-I Commissionerate. This unit manufactures/produces the exempted excisable goods such as natural gas and crude oil for which M/s ONGC Ltd. held Central Excise registration issued by Mumbai-I Commissionerate.

The crude oil and natural gas produced from the Oilfield of Mumbai Offshore were supplied to the refineries situated at different locations. Oilfields of Mumbai Offshore of the appellants are discharging the Oil Cess leviable under the Oil Industry (Development) Act, 1974 and also discharging the National Calamity Contingent duty (NCCD), Primary Education Cess and Secondary & Higher Education Cess for the crude oil manufactured/produced by the appellants at Mumbai Offshore.

On the basis of intelligence, an inquiry was conducted by the department and the principal allegation made was that the appellants had availed and utilized inadmissible CENVAT Credit of Service Tax distributed by the various above mentioned input service distributors situated in Mumbai. It was alleged that such CENVAT Credit of Service Tax in fact related to various input services availed and used exclusively at the Oilfield of Mumbai Offshore and not in Uran Unit.

It was also alleged that the crude oil falling under Chapter Heading 2709 00 00 and natural gas falling under sub-heading 2711 21 00 used by the appellants from the Oilfield of Mumbai Offshore although were excisable goods under Section 2(d) of the Central Excise Act, 1944, but the tariff rate for the crude oil was Nil and for the natural gas the rate of 16% was exempted vide Sr. No. 30 of the Notification No. 4/2006-CE dated 1.3.2006.

It is the contention of the department that since both these products were exempted as far as the duty of excise is concerned, the CENVAT Credit availed and utilized by the appellants was not admissible to them.

There is also another allegation. As per Notf. No. 27/05-Service Tax dated 7.6.2005, the input service distributor has to obtain the registration within a period of 30 days of commencement of business or 16 th day of June, 2005, whichever is later. The input service distributors of the appellants have obtained registration in the first quarter of 2009, hence the credit availed of the tax paid on services by the input service distributors for period prior to the date of registration as input service distributor is not admissible under Rule 3(i) of the CENVAT Credit Rules because both the Rules 3(2) and 3(3) of the CENVAT Credit Rules are applicable to only inputs lying in stock and not to the input services already availed and since the input service distributors have not followed the such statutory provisions, they are not entitled for CENVAT Credit of Rs. 27,79,30,282/- which is recoverable from them under Rule 14 of the CENVAT Credit Rules.

A SCN dated 8.4.2010 was issued to the appellants as well as six input service distributors demanding the CENVAT Credit of Service Tax amounting to Rs. 40,57,15,829/- u/r 14 of CCR, 2004 r/w s.11AC of CEA, 1944 plus interest plus penalties u/s 11AC r/w rule 15 of CCR.

The case was adjudicated by the CCE, Raigad disallowing the CENVAT Credit of Service Tax of Rs. 40,57,15,829/-; imposing interest and various penalties on the assessee and the ISDs.

All of them are before the CESTAT against this order and seek Stay.

Following are the submissions made –

++ raw crude oil obtained at process platform at Mumbai Offshore is not excisable commodity as such crude oil is in semi stabilized/un-stabilized form and such a Crude Oil cannot be marketed in semi stabilized/un-stabilized state. Semi stabilized Crude Oil is sent either through pipeline to Uran Plant or through oil tankers for completion of final stage of stabilization and only thereafter it becomes marketable and excisable. Therefore, he submitted that semi stabilized Crude Oil is not excisable goods under Section 15(1) of Oil (Industry Development) Act 1974 and Section 3 of the Central Excise Act, 1944 as only stabilized crude oil is excisable commodity.

++ Crude Oil is a dutiable product and, therefore, credit of Service Tax paid on services used in the manufacture of Crude Oil is admissible to them. Since the appellants are paying Cess, NCCD, Education Cess & SHE the Crude Oil cannot be treated as exempted goods under Rule 6 of the CCR, 2004 and, therefore, credit of Service Tax paid on input services is admissible to them.

++ Crude Oil and Natural gas are intermediate products as Mumbai Offshore is part of Uran Plant and, therefore, Rule 6(1) will not apply in this case; that Crude Oil and Natural Gas are necessary inputs for the final products manufactured at Uran Plant; that Mumbai Offshore is a captive mine and since all the Crude Oil and Natural gas produced at Mumbai Offshore (except minimal quantity of 6% from process platform which are sold to other refineries) is transferred to Uran plant, process platform is a part of Uran Plant and Crude Oil/ Natural gas is an intermediate product. Therefore, credit of Service Tax paid on input services used in process platform is admissible for the manufacture of final products at Uran Plant.

++ SCN alleges that since Uran Plant and Mumbai Offshore units are having different registration, credit is not admissible to them; that under CENVAT Credit Rules there is no restriction about use of input services outside the factory; restriction is only in respect of inputs which are to be used in the factory.

++ ISD registration was done in early 2009 and only after the registration was CENVAT credit of Service Tax availed by them. He submitted that there is no restriction in CENVAT Credit Rules, 2004 denying credit in respect of services used prior to date of registration.

++ Since credit was rightly availed by Uran Plant, there is no case of charging of interest and imposition of penalty. Applicants had no intention to wrongly avail and utilize the credit of input services therefore no penalty is imposable on Uran Plant. He pointed out that under Rule 15(1) and 15(2) prevailing during relevant time penalty can be imposed for wrong availment of credit of duty paid on input or capital goods and the Rule 15(1) and 15(2) do not apply to input services. Similarly Rule 15(4) is applicable to output service provider and maximum penalty imposable under Rule 15(3) on manufacturers for wrong availment of credit in respect of input services is Rs. 2000/-.

++ Similarly, no penalty is imposable on ISDs as show-cause notice has invoked Rule 25/26 of Central Excise Rules which are not applicable to input services and Commissioner has imposed the penalty under Rule 15(4) of CENVAT Credit Rules which does not apply to ISDs.

Following decisions in support of above submissions:-

(i) Vikram Cement Vs. CCE, Indore – 2006-TIOL-04-SC-CX-LB

(ii) Chowgule & CO. Pvt. Ltd. Vs. UOI – 1993 (67) ELT 34 (SC)

(iii) Brooke Bond India Ltd. Vs. Collector of Central Excise – 1991 (55) ELT 342

(iv) Lupin Laboratories Ltd. Vs. Collector of Central Excise – 1994 (71) ELT 914

The Revenue representative submitted thus –

Learned Commissioner (A.R.) appearing for the Revenue submitted that the products manufactured at Mumbai Offshore are crude oil and natural gas and these are exempted from the duty. Therefore, the CENVAT Credit of Service Tax distributed by the ISD to their Uran Plant on such services rendered in relation to the manufacture of the exempted goods manufactured in Mumbai Offshore is not admissible. He further submitted that under Rule 6(1) of the CENVAT Credit Rules, CENVAT Credit is not admissible on such quantity of input services which is used under the provisions of exempted services/ exempted goods except in the circumstances specified in sub-rule 2. Therefore, the credit availed by M/s ONGC on input services used by them cannot be passed on to Uran Plant as these services were used in the exempted crude oil/natural gas and there is no nexus between the services and the manufacturing activity carried out at Uran Plant. He further contended that under Rule 7 of the CENVAT Credit Rules, the input service distributors can distribute the Service Tax credit in respect of the Service Tax paid on the input services to its manufacturing unit subject to the condition that the credit of Service Tax attributed to services used in unit exclusively engaged in the manufacturing of exempted goods shall not be distributed. Since in the present case, the goods manufactured at Mumbai Offshore are exempted from the Excise duty, the Service Tax paid on the services used in the manufacture of these goods cannot be distributed by the ISD. He further pointed out that the part of crude oil is cleared by M/s ONGC to independent buyers and such buyers cannot avail any credit of CENVAT Credit on procurement of crude oil because the crude oil is an exempted product. If the CENVAT Credit on these input services is allowed to Uran Plant, this will lead to discrimination vis-a-vis the independent buyers. Thus, any interpretation allowing of CENVAT Credit to the Uran Plant and not to independent buyers is not permissible on principle of equity. He submitted that the Commissioner has passed a legal order denying the credit of Service Tax paid on the input services and therefore, appeal is liable to be dismissed.

The Bench inter alia observed thus -

"6.2 Appellants contend that what they produce at Mumbai Offshore is semi stabilized / un-stabilized state and had to be stabilized before its actual sale or use in the manufacture of value added product. We find that this submission of the appellants is not in conformity with the facts of the case inasmuch as the firstly Crude Oil manufactured at the Mumbai Offshore is being transported to Uran units through pipelines. Secondly Crude Oil produced at Mumbai Offshore is a saleable commodity and is being sold by M/s ONGC to its buyers. Thirdly before Uran Plant came into existence, entire Crude Oil manufactured at Mumbai Offshore was sold by M/s ONGC. We also find that Crude Oil is defined under the Oil Industry (Development) Act, 1974 as under:-

"Crude Oil means petroleum in its natural state before it is refined or otherwise treated but for which water and foreign substances have been extracted."

We also note that M/s ONGC are paying cess on the Crude Oil produced at Mumbai Offshore. Therefore, we are of the view that Crude Oil used in Uran Plants and other units to manufacture other value added final product cannot be termed as semi stabilized /semi finished goods.

6.3. This is one of the contentions of the appellants that Crude Oil manufactured by them at Mumbai Offshore is not exempted product as they are paying Cess leviable under Oil Industry (Development) Act, 1974. We find that the term ‘exempted goods' is defined under Rule 2(d) of CENVAT Credit Rules, 2004 according to which "exempted goods"means ‘excisable goods' which are exempt from the whole of duty of excise leviable thereon, and includes goods which are chargeable to "NIL"rate of duty. "Excisable goods"have been defined under Section 2(d) of the Central Excise Act, 1944 according to which "Excisable goods"are goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff, 1985 (5 of 1986) as being subject to a duty of excise and includes salt. The duty of excise mentioned herein above as per section 3 of the Central Excise Act, 1944 is (a) CENVAT (Central Value Added Tax) & (b) Special Duty of Excise (SED) in addition to CENVAT mentioned in (a).

6.4 The word ‘duty of excise' referred in the definition of Exempted goods and Excisable goods refer to duty of excise as specified in Section 3 of the Central Excise Salt Act. Therefore, the contention of the appellants that since cess is paid by them on the Crude Oil manufactured at Mumbai Offshore, Crude Oil is duty paid and not exempted is not acceptable.

6.5 Now we come to the argument of the appellants that Mumbai Offshore is an integral part of Uran Plant and Crude Oil / Natural gas being intermediate products, they are entitled to CENVAT credit of Service Tax paid on input services even if intermediate product is exempted. We find that contention of the appellants that Mumbai Offshore is an integral part of Uran Plant as Crude Oil is transferred to Uran Plant for the manufacture of valued added product is not acceptable as Crude Oil manufactured at Mumbai Offshore is a saleable commodity and in fact is being sold partly at Mumbai Offshore.

6.6 We find that Rule 3(l) of CENVAT credit Rules reads as under:-

"3(1) A manufacturer or producer of final product or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of duty paid on –

……………………………………………………………………………

……………………………………………………………………………

……………………………………………………………………………

(i) any input or capital goods received in the factory of manufacturer of final product or premises of the provider of output service on or after the 10th day of September, 2004 and

(ii) any input service received by the manufacturer of final product or by provider of output service on or after the 10th day of September, 2004

including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- CE dated the 25.03.1986, published in the Gazette of India vide no. GSR 547 (E) dated 25.03.1986 and received on or after 10th September, 2004."

Under Notification No.214/86-CE goods manufactured by the job worker are exempted. Under Rule 3(1) credit of Service Tax paid on input services used in manufacture of goods by job worker will be available to manufacture of final product. Since Mumbai Offshore unit is not a job worker under Notification No. 214/86, ONGC Uran unit is not entitled to CENVAT credit of Service Tax paid on input services used in Crude Oil manufactured by Mumbai Offshore.

6.7 We also note that under Rule 6(1) of the CENVAT Credit Rule CENVAT Credit shall not be allowed on much quantity of input services which is used in the exempted goods except in the circumstances specified in Rule 6(2). Under Rule 6(2) if a manufacturer manufactures both exempted goods and dutiable goods and he maintains separate records of input services gone into dutiable goods/exempted goods, the credit in respect of input services gone into dutiable goods will be admissible. In the present case input services are entirely being used in Crude Oil/Natural gas which are exempted from duty. Therefore, in this case credit is not admissible.

6.8 We also find that under Rule 7 of the CENVAT Credit Rules the input service distributor may distribute the CENVAT credit in respect of Service Tax paid on input service to its manufacturing units subject to condition that credit of Service Tax attributable to service used in a unit exclusively engaged in the manufacture of exempted goods shall not be available. Since Mumbai Offshore is exclusively engaged in the manufacture of exempted goods, credit of Service Tax paid on input services cannot be distributed."

After distinguishing all the decisions relied upon by the appellant, the Bench further observed –

"7. In view of the above, we hold that credit of service tax paid on input services used in manufacture of Crude Oil and Natural gas at Mumbai Offshore is not admissible to Uran Plant. Since credit is not admissible we do not go into second aspect of admissibility of credit only after date of registered as ISD. We therefore, uphold Commissioner's Order regarding confirmation of demand of Rs. 40,57,15,129/- under Rule 14 of CENVAT Credit Rule, 2004 read with Section 11A of the Central Excise Act. Since confirmation of demand is upheld, interest on the demand amount is also recoverable under Rule 14 of CENVAT Credit Rules read with Sec 11AB of Central Excise Act.

7.2 Coming to issue of imposition of penalty on Uran Plant, it is the contention of the appellants that demand pertains to period upto November, 2009 and in that period Rule 15(1) and Rule 15(2) of the CENVAT Credit Rule, 2004 did not cover wrong availment of input service credit. We find that Rule 15 has been amended with effect from 27.02.2010 incorporating input services in Rule 15(1) and 15(2) of CENVAT Credit Rule 2004. Therefore, penalty under Rule 15(1) and Rule 15(2) is not imposable. Similarly, under Rule 15(4) penalty is imposable on output service provider. Therefore, penalty is imposable only under Rule 15(3) of CENVAT Credit Rules and maximum penalty under Rule 15(3) is Rs. 2000/- only. We therefore, find considerable force in the submissions of the appellants and reduce the penalty imposed under Rule 15 of the CENVAT Credit Rules to Rs. 2000/- on the appellants.

7.3 As regards imposition of penalty on ISDs, we find that in show-cause notice penalty was proposed under Rule 25/26 of Central Excise Rule but in the Order-in-Original penalty is imposed under Rule 15 of CENVAT Credit Rules. Penalty needs to be set aside on this ground alone. Penalty has been imposed under Rule 15(4) of the CENVAT Credit Rule. Rule 15(4) as it existed during the relevant period pertains to imposition of penalty on output service provider. Accordingly, penalties imposed on ISDs are set aside.

8. In view of the above, appeal filed by ONGC Uran Plant is partly allowed. Appeals filed by ISDs are allowed."

More in passing : Probably this is not the end of the story… watch out tomorrow…

You can't let one bad moment spoil a bunch of good ones – Dale Earnhardt.

(See 2013-TIOL-451-CESTAT-MUM)