IN THE HIGH COURT OF KERALA AT ERNAKULAM
C.E.Appeal.No. 14 of 2010()
1. THE COMMISSIONER OF CENTRAL EXCISE
... Petitioner
Vs
1. M/S. APPOLLO TYRES LTD.
... Respondent
For Petitioner :SRI.JOHN VARGHESE,SC,CEN.BOARD OF EXCIS
For Respondent :SRI.JOSEPH KODIANTHARA (SR.)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice HARUN-UL-RASHID
Dated :17/08/2010
O R D E R
C.N.RAMACHANDRAN NAIR &
HARUN-UL-RASHID, JJ.
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C.E. Appeal Nos.14 and 15 of 2010
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Dated this the 17th day of August, 2010.
JUDGMENT
Ramachandran Nair, J.
The question raised in the two connected appeals filed by the
department against the very same assessee is one and the same and
therefore, we heard the cases together and proceed to dispose of the
appeals by this common judgment. We have heard Sri.John Varghese,
Senior Standing Counsel for the Central Board of Excise and Customs
for the appellant and Senior counsel Sri.Arshad Hidayathulla along
with Adv.Sri.Joseph Kodianthara for the respondent.
2. The respondent is a leading manufacturer of tyres. Though
tyres are manufactured and sold from the factories in Kerala,
respondent is buying tubes and flaps from other factories for sale along
with tyres. Besides selling tyres, tubes and flaps in the replacement
market, respondent is also engaged in sale of tyres, tubes and flaps to
Original Equipment Manufacturers (OEMs) namely, Automobile
manufacturers for fixing in new vehicles. For tubes and flaps
C.E.A. Nos.14&15/2010 2
purchased for sale in the replacement market along with tyres, the
respondent is not claiming any CENVAT credit for the duty paid on the
tubes and flaps purchased from other factories. Consequently they are
claiming exemption from payment of excise duty on sale of tubes and
flaps and duty is paid only on the tyres sold along with such tubes and
flaps. However, for the purchases of tubes and flaps for sale to
Original Equipment Manufactures along with tyres, the respondent
claimed CENVAT credit on the duty paid on tubes and flaps on the
ground that tubes and flaps are inputs in the form of accessories to tyre
sold by them. Even though Department did not object to the CENVAT
credit availed by the respondent, they found that the tubes and flaps
purchased by the respondent were sold by them at a lower value
thereby causing loss of revenue in as much as CENVAT credit taken at
the time of purchase of tubes and flaps is much more than the duty paid
on resale of tubes and flaps. The department also found that Rule 3(4)
of the CENVAT Credit Rules which was later substituted by Rule 3(5)
of the CENVAT Credit Rules, squarely applies because tubes and flaps
purchased and on which CENVAT credit is taken by the assessee were
C.E.A. Nos.14&15/2010 3
resold “as such” and, therefore, they are liable to pay the short-payment
of excise duty i.e. the difference between CENVAT credit availed at
the time of purchase of tubes and flaps and the duty paid on resale of
the very same tubes and flaps. The factual position and the finding of
the department is that the OE Manufacturers issued separate purchase
orders for tubes and flaps and respondent in terms of purchase orders,
issued separate invoices for tubes and and flaps and the sale is in the
form in which those items were purchased and so much so, Rule 3(4)
which is later numbered as Rule 3(5) squarely applies requiring the
respondent to pay the differential duty i.e. excess CENVAT credit
availed on tubes and flaps over the duty paid on resale. Even though
the adjudicating authority overruled the respondent’s objections and
sustained the demands for two periods i.e. from 1.3.2003 to 30.11.2006
and from 1.12.2006 to 31.10.2007 by separate orders, the Customs,
Excise and Service Tax Appellate Tribunal on appeals filed by the
respondent allowed the appeals cancelling the demands against which
these appeals are filed by the Department.
3. The only question involved in both the appeals is whether Rule
C.E.A. Nos.14&15/2010 4
3(4) (later Rule 3(5) of the CENVAT Credit Rules would apply to the
purchase and resale of tubes and flaps by the respondent-assessee. For
easy reference, we extract hereunder Rule 3(4) of the CENVAT Credit
Rules (which is later renumbered as Rule 3(5)) which was in force from
1.3.2003 onwards:
“Rule 3(4)When inputs or capital goods, on which
CENVAT credit has been taken, are removed as such from
the factory, or premises of the provider of output service, the
manufacturer of the final products or provider of output
service, as the case may be, shall pay an amount equal to the
credit availed in respect of such inputs or capital goods and
such removal shall be made under the cover of an invoice
referred to in rule 9”. (emphasis supplied)
4. The question of applicability of the Rule to the respondent will
depend on the sole question as to whether the flaps and tubes purchased
are removed “as such” from the factory on sale to the OE
Manufacturers. Senior Standing Counsel appearing for the appellant
contended that apart from packing the tube and flap inside the tyre, the
respondent is not doing anything with the tube or flap after purchase.
According to him, the goods namely, tubes and flaps after purchase are
transferred in the same form in which it is purchased. His contention is
C.E.A. Nos.14&15/2010 5
that at the maximum respondent is engaged in repacking of tubes and
flaps after purchase and the same does not involve any manufacture or
processing and so much so, the Rule is squarely attracted. Senior
counsel appearing for the respondent on the other hand explained to us
that the respondent after manufacture of tyre, puts the tube inside the
tyre and the flap is kept above the tube within tyre and the tube is partly
inflated and then a few round tapes are put around the tyre with tube
and flap inside. According to him, the method of packing is a process
adopted by the respondent so that the OE Manufacturer can readily fix
the tyre with tube and flap to the rims of the automobile manufactured
by them. Senior counsel for the respondent also relied on findings of
the Tribunal and the meaning assigned by them to the words “as such”.
However, we notice that neither the respondent has a case, nor the
Tribunal has noticed that assessee has done anything other than
packing of tubes and flaps within the tyre and selling the same along
with the tyre. There is no dispute that the tubes and flaps are
accessories to tyres for the end user that is, the purchaser. However,
the question is whether sale of tubes and flaps along with the tyres can
C.E.A. Nos.14&15/2010 6
be treated as sale in a form different from the form in which it is
purchased. It is pertinent to note that the OE Manufacturers have given
separate orders for purchase of tyres, tubes and flaps. The respondent-
assessee also invoiced tyres, tubes and flaps separately, though there is
single packing of one tube along with flap in each tyre manufactured
and sold by the respondent. The Tribunal has held that since tubes and
flaps have been cleared along with tyres as accessories, the tubes and
flaps are not cleared “as such”. We do not think the finding of the
Tribunal can be sustained because the packing of tube within the tyre
along with the flap and partly inflating the tube, does not make the
transaction anything other than a transfer or sale in the same form. In
order to justify an input tax credit, the respondent-assessee ought to
have used the item purchased as an input, whether it be accessory or
not. Even though tubes and flaps are admittedly accessories for use of
tyre, the purchase and resale of tubes and flaps along with the tyre does
not make the transaction anything different from trading. The
respondent-assessee is engaged in purchase and resale of tubes and
flaps along with tyres in the replacement market and rightly they don’t
C.E.A. Nos.14&15/2010 7
claim any CENVAT credit for the duty paid on tubes and flaps. We do
not find any difference in the trading engaged by the respondent i.e. in
purchase and resale of tubes and flaps, whether it be for replacement
market or whether the sale is to the OE Manufacturer. Admittedly the
assessee is paying duty on tyres, tubes and flaps sold under separate
invoices on the transaction value in terms of Section 4(1)(a) of the Act
and the same has led to short-payment of excise duty in as much as
CENVAT credit taken for goods purchased for resale is in excess of
duty payable on the transaction value. The tubes and flaps become
accessories only when tyre is put to use and not when tyre is sold along
with tubes and flaps. In other words, for the automobile manufacturer
who fixes the tyre on his vehicle with tube and flap inside, it becomes
accessories because without tube and flap tyre cannot be used for
running the automobile. However, so far as the manufacturer of tyre is
concerned, he may be helping the tyre user by supplying tube and flap
which suit the size of the tyre sold by them. However, purchase and
resale of tubes and flaps by the tyre manufacturer along with the tyres
manufactured and sold by them, does not entitle them to claim
C.E.A. Nos.14&15/2010 8
CENVAT credit at all. Therefore, in our view, there is no difference
between the two transactions of the respondent-assessee i.e. purchase
and resale of tubes and flaps along with tyres manufactured both in the
replacement market and to the OE Manufactures for fixing in new
vehicles. In both cases the respondent acts only as a trader in regard to
purchase and resale of tubes and flaps and, therefore, Rule 3(4) (Rule 3
(5) later) of the CENVAT Credit Rules squarely applies to the
transaction. The Tribunal’s finding to the contrary, in our view, is not
sustainable. Even though counsel for the assessee has relied on
decisions in COMMISSIONER OF C. EX., PUNE-1 VS. TETRA PAK
CONVERTING (I) LTD. reported in 2007 (218) E.L.T. 494 (Bom.),
MODERNOVA PLASTYLES PVT. LTD. VS. COMMISSIONER OF
C. EX., RAIGAD reported in 2008(232) E.L.T. 29 (Tri.-LB) and
BALKRISHNA INDUSTRIES LTD. VS. COMMISSIONER OF C.
EX., JAIPUR-1 reported in 2007(217) E.L.T. 228 (Tri.-Del.), we do
not find any of these judgments deal with the issue arising here
directly. We, therefore, do not find any justification to deviate from the
view taken as above.
C.E.A. Nos.14&15/2010 9
5. The next question raised pertains to limitation. Here again, the
Tribunal’s finding is challenged by the Department on the ground that
suppression was practised by the respondent. Extended period of
limitation is available under Section 11A(1)(a) to the Department only
if assessee has concealed information from the Department or
suppressed material facts leading to the short-levy. Department relied
on assessee’s letter dated 19.4.2004 wherein assessee against notice
specifically stated that the purchase price and selling price for the tubes
and flaps is one and the same. However, during enquiry it was found
that the sale price was at much below the purchase price because
otherwise there can be no short-levy of duty as alleged by the
Department. Assessee does not deny having written the letter referred
above. On the other hand, assessee’s case is that letter is written in a
different context and the Tribunal accepted their contention. We are
unable to agree with this because if the assessee had not misrepresented
that the sale price of tubes and flaps supplied to OE Manufactures is the
same, then the Department would have taken action in time. So much
so, the extended period of limitation under Section 11A(1)(a) is
C.E.A. Nos.14&15/2010 10
applicable and, therefore, the finding of the Tribunal on this issue also
is not sustainable. Consequently we allow the appeals by reversing the
orders of the Tribunal and by restoring the adjudication orders
demanding differential duty with interest. However, we do not think
there is any scope for penalty because the claim happened to be made
by the respondent-assessee on account of misunderstanding of law
which found acceptance with the Tribunal. Consequently penalty
levied will stand cancelled.
C.N.RAMACHANDRAN NAIR
Judge
HARUN-UL-RASHID
Judge
pms