By TIOL News Service

NEW DELHI, OCT 28, 2014: THE appellant is engaged in the process of slitting and pickling of HR coils and sheets. They avail CENVAT credit of the duty paid on HR coils/sheets and discharge duty on the HR slitted and pickled coils.

It is the case of the CCE, Delhi that the activity undertaken does not amount to manufacture and hence the appellant was not entitled to avail CENVAT credit on the alleged inputs.

Accordingly, a demand of Rs.37.04 crores was confirmed along with imposition of an equivalent amount of penalty. The period involved is 01.02.2007 to 31.10.2009.

Before the CESTAT, the appellant submitted that the entire exercise is Revenue neutral; that whereas the credit availed is around Rs.37 crores, the duty paid by them is around 42 crores; that since by using the said credit for payment of duty on the goods cleared by them, the same already stands reversed, second time confirmation of the same is neither justified nor warranted. And in the alternative such clearances may be considered as removal of inputs as such and hence the credit taken and reversed is proper in law.

The Revenue representative adverted to the provisions of section 5B of the CEA, 1944 and submitted that since notification has not been issued in respect of the impugned activity, the CENVAT credit cannot be allowed. Reliance is placed on the Board Circulars 911/1/2010 -CX dt.14.1.2010& 940/1/2011 -CX dt.14.1.2011 to justify the Revenue stand.

The Member (Judicial) inter alia observed that there is no quarrel about the proposition that the Delhi High Court in the case of Faridabad Iron & Steel Traders Association 2003-TIOL-79-HC-DEL-CX has held that the activities of cutting or slitting of steel sheet in coil is a non-manufacturing activity. Adverting to the plethora of decisions wherein it is held that " By utilization of credit for payment of duty which was not required to be paid, credit was effectively reversed and Revenue cannot once again ask for reversal of credit .", the Member (J) set aside the order of the CCE, Delhi allowed the appeal with consequential relief.

The Circular 940/2011 was held to be of no applicability to the facts of the case as it pertained to exempted goods.In the matter of the reference made to section 5B and the Board Circular 911/2010 , the Member (J) observed that if the assessee does not approach the Central Government, the same cannot estop him from pursuing the legal remedy before the Court's.

The Member (Technical) had a differing view. He inter alia held that the Appellants cannot be allowed to circumvent the legal position and presume an activity as manufacture and avail CENVAT credit on inputs forcibly and pay duty on finished goods not required to be paid under the law and then pass the credit to the buyer. Holding that there is no question of granting input credit against such manufacture,the Member(T) upheld the order of the adjudicating authority but reduced the penalty to Rs.5 crore.

Consequently, the matter was referred to the third Member for a Majority view.

We reported this order as 2014-TIOL-575-CESTAT-DEL and made a passing remark - Had only the Bombay High Court decision in Ajinkya Enterprises 2012-TIOL-578-HC-MUM-CX been taken cognizance of the result could have been different .

The third Member on reference has passed an order recently.

The Member (Technical) inter alia observed –

++ Though according to the department, in view of Hon'ble Delhi High Court's judgement in case of Faridabad Iron & Steel Traders Association (supra), the process of slitting and pickling of H.R. coils by the appellant does not amount to manufacture, on going through this judgement, it is seen that what has been held in this judgement is that the process of cutting or slitting of steel coils to the required sizes does not amount to manufacture, as no new commodity and distinct article having distinct name, character and use has emerged. In this judgement, the excisability of pickling process has not been examined, as this was not the dispute in this case. The process of pickling involves treatment of the H.R. sheets/ coils by solution of acids and chemicals to remove surface defects and obtain a sheet with smooth surface. In Heading No.7208 of the Central Excise Tariff, there is separate sub-heading for H.R. Coils subjected to the process of pickling and probably because of this, the appellant were under impression that this process amounts to manufacture, and paid duty in respect of this process. Since there is no judgement of any High Court or Apex Court on the specific issue as to whether the H.R. Coils subjected to the process of slitting as well as pickling would amount to manufacture, in my view, the provisions of Section 5B are not attracted and as such, no notification was required to be issued by Government under Section 5B .

++ Moreover, when the Department's case is that the process undertaken by the appellant does not amount to manufacture, it amounts to saying that the appellant have cleared the cenvat credit availed inputs as such and this is something which is not prohibited, if at the time of removal of cenvat credit availed inputs, in terms of the provisions of Rule 3(5) of the Cenvat Credit Rules, 2004, an amount equal to the cenvat credit availed is paid under an invoice issued under Rule 9 of the Central Excise Rules, 2002. There is no dispute that the amount paid by the appellant is more than the cenvat credit availed. In my view, therefore the assessee should not be penalized for paying more amount than their actual duty liability. Since Rule 3(5) itself requires that removal of cenvated inputs as such on payment of an amount equal to the cenvat credit availed has to be under an invoice issued under Rule 9 of the Central Excise Rules, 2002 and since in terms of the Rule 9(1) of the Cenvat Credit Rules, 2004, an invoice issued by a manufacturer under Rule 9 even for removal of cenvated inputs/capital goods as such is a valid document for availing cenvat credit, the Appellant's customers could avail cenvat credit on the basis of the invoices for pickled sheets issued by the appellant and as such, there is no illegality in the appellant's passing on the cenvat credit. Since the amount paid on the clearance of pickled H.R. sheets is more than the cenvat credit availed, the cenvat credit availed stands more than reversed and there is no need to recover the same again. It is also seen that this issue stands decided in favour of the appellant by the Tribunal in the case of Ajinkya Enterprises (supra) and this judgement of the Tribunal has been upheld by the Bombay High Court vide judgement reported in 2012-TIOL-578-HC-MUM-CX .

The third Member on reference, thus, agreed with the decision of the Member (Judicial).

And so in view of the Majority view, the order of CCE, Delhi-III was set aside and the appeal was allowed with consequential relief.

In passing: Incidentally, while reporting the Bombay High Court decision in Ajinkya Enterprises, we had also mentioned thus –

Section 5B notification:-

The Delhi High Court in the case of Faridabad Iron & Steel Traders Association (2003-TIOL-79-HC-DEL-CX) has held that the process of cutting or slitting of steel sheet in coil form to specific sizes not amounts to 'manufacture', since no new, different and distinct article having distinct name, character and use having emerged from the process. The Special Leave Petition filed by the Union of India against this decision was dismissed by the Supreme Court on 13.07.2004. Further, the Tribunal has in the case of Resistance Alloys [1996 (84)ELT507 (T)] &Bothra Metal Industries [1998 (99) ELT120 (Tribunal)] held that the process of pickling being preparatory process to drawing of wire does not amount to manufacture. Strictly speaking, therefore, whether a notification could be issued under section 5B of the CEA, 1944 for the sum activity of slitting/cutting and pickling/oiling is a foregone conclusion!

(See 2014-TIOL-2111-CESTAT-DEL)