The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the activity of cutting and slitting HR/CR coils does not amount to “manufacture” under the Central Excise law and, therefore, payment of excise duty on such activity cannot create a legal fiction to treat it as excisable. As a consequence, CENVAT credit availed in relation to such non-manufacturing activity was held to be inadmissible, even if duty was actually paid.
The Bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that where there is no manufacturing activity at all, the very foundation for availing CENVAT credit fails. The Tribunal categorically stated that “if there is no manufacture, the question of availment of input credit does not arise.” In the present case, no manufacturing activity existed during the period 2010–2015, and therefore HR/CR coils did not satisfy the basic definition of “inputs” under Rule 2(k) of the CENVAT Credit Rules, 2004. Mere payment of duty on non-manufactured goods, the Bench held, cannot legitimise the credit.
The assessee was engaged in the manufacture of MS bars, ingots and similar products. It had received duty-paid imported HR/CR coils from dealers, availed CENVAT credit on the strength of dealer invoices, and sent the coils to job workers for de-coiling, cutting and slitting. After processing, the sheets were returned to the same dealers on payment of duty. The duty was discharged by utilising the available CENVAT credit and by adjusting credit on subsequent receipts.
During an audit, the Department took the view that cutting and slitting of coils does not constitute manufacture. Based on this, two show cause notices were issued proposing reversal of CENVAT credit amounting to ₹2.81 crore, along with interest, equal penalty under Rule 15(2) read with Section 11AC, and recovery of amounts collected as “duty” under Section 11D of the Central Excise Act, 1944.
The assessee contended that once the processed goods were cleared on payment of duty, the credit availed earlier could not be denied. It was argued that even if the activity was held to be non-manufacturing, payment of duty should protect the availment of CENVAT credit.
The Department, however, argued that after 1 April 2011, Rule 2(k) specifically excludes goods that have no nexus whatsoever with manufacture. Since the assessee’s factory had remained closed from 4 May 2010, the HR/CR coils could not qualify as “inputs.” It was further submitted that Rule 3(5) of the CENVAT Credit Rules applies only to valid inputs, and credit taken at the threshold itself was illegal.
Agreeing with the Revenue, the Tribunal held that cutting and slitting of HR/CR coils does not amount to manufacture. Payment of duty on a non-excisable activity, the Bench ruled, cannot convert it into an excisable one by legal fiction. Since the goods were not “inputs” to begin with, the CENVAT credit was inadmissible ab initio, rendering Rule 3(5) inapplicable. Consequently, utilisation of such credit for payment of duty was held to be illegal.
The Tribunal further held that Section 11D(1A) squarely applied to the facts of the case. As the assessee had collected amounts shown as “duty of excise” on goods that were not manufactured, such amounts were required to be deposited with the Government. The Bench noted that the activity did not amount to manufacture, yet the assessee collected duty through invoices, automatically triggering Section 11D.
Taking a serious view of the conduct of the assessee, the Tribunal observed that critical facts were suppressed, the assessee acted contrary to settled legal principles, and adopted a mala fide mechanism to utilise lapsed credit. It was also noted that inputs were removed without proper disclosure and at highly inflated values with intent to evade. In these circumstances, the Tribunal held that all the ingredients for invoking extended limitation under Section 11A(4) were satisfied, and accordingly upheld the penalty imposed under Section 11AC.
In view of these findings, the Chennai CESTAT dismissed the appeal filed by the assessee.