ORDER
P. Karthikeyan, Member (T)
1. M/s. Precot Mills Ltd., Pollachi (hereafter referred to also as ‘PML’ or the ‘assessee’) manufactured grey fabric of cotton falling under the Chapter Heading 52.07, 52.08, and 52.09 of the schedule to the Central Excise Tariff Act, 1985. They had taken Modvat credit/Cenvat credit of a total of Rs. 57,94,586/- being duty paid on capital goods under Rule 57 AB of Central Excise Rules, 1944, (CER) for the period 01/03/01 to 30/06/01 and under Rule 3 of the Cenvat Credit Rules, 2001 (CCR) for the period 01/07/01 to 28/02/02. It was observed that the capital goods had been used . exclusively for the manufacture of exempted goods, grey/unprocessed woven fabrics of cotton. As the assessee had manufactured exempted final product using the credit availed capital goods and appeared to have withheld the fact of exclusive use of those goods in the manufacture of exempted goods, a show cause notice was issued to the assessee proposing to recover Rs. 57,94,586/- under Rule 57 AH of the Central Excise Rules, 1944 and Rule 12 of the Cenvat Credit Rules, 2001 read with the provisions of Section 11A of the Central Excise Act, 1944 (the Act). It was also proposed to demand interest on the above amount under Rule 57 AH of the Central Excise Rules and Rule 12 of the Cenvat Credit Rules, 2001 read with Section 11AB of the Central Excise Act: Notice proposed also to penalize the assessee under Rule 57AH(2) and 173Q of Central Excise Rules, 1944 and Rule 13(2) of Cenvat Credit Rules, 2001 and under Section 11AC of the Act. After allowing sufficient opportunity to the assessee to present their case, the Commissioner passed the impugned order disallowing modvat/cenvat credit of Rs. 57,94,586/- and ordering its recovery under Rule 57 AH of Central Excise Rules, 1944 and Rule 12 of Cenvat Credit Rules, 2001 read with Section 11A of the Central Excise Act, 1944. The Commissioner imposed a penalty of Rs. 57,94,586/- under Section 11AC of Central Excise Act, 1944 read with Rule 57AH(2) and 173Q of the Central Excise Rules, 1944, and Rule 13(2) of Cenvat Credit Rule, 2001. The Commissioner did not demand any interest under Section 11AB of the Central Excise Act, 1944 on the credit demanded.
2. The assessee and the Revenue have filed appeals against the above order. In the appeal filed by the assessee, it is submitted that its weaving division had been newly established which had started its commercial production on 01/03/01 and that the subject proceedings pertained to the preparatory machines and certain other capital goods. They had obtained Registration Certificate No. 1/2001 dated 25/01/01. The Registration Certificate had been obtained for the manufacture of cotton fabrics falling under the chapter heading 52.07, 52.08, 52.09 and woven fabrics of synthetic staple fibers falling under the chapter heading 55.11, 55.12, 55.13. They had obtained another PAN based Registration Certificate on 28/01/2002 which included also the articles of apparel and clothing accessories not knitted or crocheted, in addition to the above goods. It was submitted that some of the goods they had intended to manufacture were dutiable. They had started clearing processed fabrics on payment of duty from March, 2002. As the grey fabrics manufactured by the assessee were input for the manufacture of processed fabrics and articles of apparel, they claimed that the capital goods installed had not been exclusively used in the manufacture of the exempted product and therefore, provisions of Rule 57AD(3)/Rule 6(4) were not attracted. Their intention to clear the processed fabrics on payment of duty had been intimated to the jurisdictional Deputy Commissioner of Central Excise vide their letter dated 11/05/01. They had also intimated that they would be sending grey fabrics for further processing to job workers which would be cleared on payment of duty from their factory as per the Notification No. 11/01 CE dated 01/03/01. They also submitted that the Dy. Commissioner had ‘confirmed’ the proposed procedure. The appellants further submitted that they had filed a declaration under Rule 173(B) of Central Excise Rules, 1944 under cover of their letter dated 18/05/01, wherein manufacture of both dutiable and exempted cotton fabrics had been declared. The declaration also indicated the procedure under Rule 57AC(5) followed by them for getting grey fabrics processed by the job workers. The assessee argued that the Modvat credit could not be denied on the capital goods for the reason that they would also be used in the manufacture of dutiable goods over the life span of the factory, though initially they had been deployed in the manufacture only the exempted goods.
3. In the proceedings before the Commissioner, they had contested the allegation that they had not disclosed that credit availed capital goods had been exclusively used in the manufacture of exempted product and the same had been with an intention to evade payment of duty. They had informed the department about the range of manufacture and the Certificate of Registration issued had indicated manufacture of dutiable goods falling under various Chapters. They had paid duty of excise on processed fabrics as well as articles of apparel manufactured using grey fabrics produced with the impugned capital goods. They had intimated taking of Modvat credit and had disclosed the entire manufacturing details in their letters to the department, when the impugned credit had been taken by them. Therefore, there was no question of levy of penalty and interest.
4. In the grounds of appeal, the assessee has submitted that the impugned capital goods were meant for use in the manufacture of both processed and unprocessed fabrics falling under Chapter 52 as well as articles of apparel falling under Chapter 62. Therefore, provisions of Rule 57 AD (3) of Central Excise Rules, 1944 and Rule 6 (4) of Cenvat Credit Rules were not attracted. The Commissioner had failed to appreciate that they had discharged the duty on processed fabrics as well as on articles of apparel from March, 2002, that they had paid duty on processed fabrics and articles of apparel was obvious from the ER1 returns they had filed under Rule 12 of the Central Excise Rules for the months of March/April/May, 2002. The manufacture of exempted fabric during the initial establishment of the factory should not be the criterion for deciding the eligibility of Modvat credit on capital goods. They relied on the Tribunal’s decision in the case of Kailash Auto Builders Ltd. 2002 140 ELT 148, wherein it was held that. there was no time limit for utilizing the credit taken on capital goods. The impugned order in para 22 contained the observation that Rule 57Q at the material time required that the capital goods were used by the manufacturer in his factory and had not contained the expression “used in the factory of manufacturer of final product”. The Commissioner had also observed that in the subject case the capital goods in question had been used in the manufacture of products other the final products, processed fabrics. They concluded that the impugned order was not in line with the Modvat scheme and the finding distinguishing the decision of Kailash Auto Builders Ltd. (supra) was incorrect. As the assessee had cleared the articles of apparel on payment of duty from March, 2002 and had also cleared the processed fabrics on payment of duty, the observation in the impugned order that the assessee had not manufactured dutiable final product was contrary to the facts. As per the Board’s Circular No. 665/56/02 CE dated 25/09/02, the fact that the appellants had discharged the duty on the processed fabrics as well as on the articles of apparel had clearly established that the unprocessed fabric was further used captively in the manufacture of the processed fabrics. Therefore, the benefit of impugned credit was admissible. The observation in the impugned order that no dutiable final product was manufactured within the premises was not based on facts, as was obvious from the ER1 returns filed by them. The grey fabric used in the manufacture of processed fabric and articles of apparel were intermediate products manufactured by the appellants using the impugned capital goods. The Assistant Commissioner of Central Excise, Pollachi Division, Coimbatore Commissionerate had referred to the following directions contained in the Board’s Circular No. 267/94/99-Cx.8 dt. 30.09.02, in his Order in Original No. 49/2004 dated 04.04.03, in a similar case pertaining to them, dealing with balance credit on same capital goods taken in 2002 – 2003.
… That usage of the capital goods in the manufacturing process of dutiable goods is not in dispute. Therefore, if the credit is to be denied under Rule 57R, during the period 1.3.97 to 31.8.97, the credit shall still be available on the same capital goods under Rule 57Q for being used in. the manufacturing of dutiable goods. Further the intention behind rule 57R has been to deny credit on such capital goods used exclusively for manufacturing of exempted goods only. It is therefore, clarified that credit shall be admissible on ” capital goods used in the manufacturing of both dutiable and exempted goods which were installed and put to use during the period 1.3.97 to 31.08.97.
These directions had not been considered by the Commissioner while passing the impugned order and the principle underlying the aforesaid directions equally applied to the appellant’s case. Therefore, Rule 57AD (3) of CER, 1944/Rule 6(4) of CCR, 2001 was not attracted.
5. As regards the penalty, the appellants submitted that the Commissioner’s observation that PML had taken credit on capital goods with an apparent intention to avail ineligible credit in contravention of Rule 57AD(3) of CER, 1944 and Rule 6(4) of CCR, 2001, was untenable as there was no such contravention since the appellants had manufactured both dutiable as well as exempted final products. As the Commissioner had observed that the appellant had taken credit with “apparent intention”, proviso to Section 11A(1) of the Central Excise Act was not attracted, as there had been no “intention” to evade payment of duty, which the order did not establish. The appellants had made full disclosure of the manufacturing activity proposed to be carried on vide their various communications. The department vide its letter No. IV/16/96/2000 Policy dated 31.05.01, had confirmed their eligibility to capital goods credit and therefore, there was no contravention of Rule 57AD(3) and Rule 6(4). The order had confirmed that the activity undertaken by the appellants had not amounted to manufacture in para 19 of the order. Therefore, there was no question of intention to evade payment of duty. The appellants argued that in view of the correspondence exchanged between them and the department on the eligibility to impugned credit and the ER1 returns they had filed, the situation contemplated in proviso to Section 11A(l) did not exist in the subject case and penalty imposed was not based on a conclusion supported by facts.
6. The operative part of the order imposing penalty reads as under:
I impose a penalty of Rs. 57,94,586/- on PML under Section 11AC of CEA 1944 read with Rules 57AH(2) and 173Q of CER, 1944 Rule 13(2) of CCR 2001 and Section 38A of CEA, 1944.
The appellants submitted that the imposition of penalty without apportionment between Section 11AC of the Act read with Rule 57AH(2) and Rule 173Q of CER 1944/Rule 13(2) of the CCR 2001 was unsustainable in view of the ratio of the decision in the case of Agarwal Pharmaceuticals 2002 (146) ELT (190)(Tri-Del.), which was as under:
Penalty not sustainable for want of apportionment of Section 11AC of the Central Excise Act, 1944 and Rule 173Q of erstwhile Central Excise Rules 1944.
7. The appellants further submitted that the credit had not been utilized and the question of penalty did not arise as there was no revenue loss to the Government. In Bata India Limited. 2001 (131) ELT 62, it was decided as under:
Penalty – remedy for loss of revenue – where no such loss caused imposition is not justified – Rule 173Q(1)(a) of the CE Rules 1944.
8. The same principles governed the Modvat scheme replaced by Cenvat Credit Rules 2000 with effect from 01.03.2000, as modified by Notification No. 27/2000 CE NT dt. 31.03.2000. The erstwhile Rule was emphatic to the effect that levy of penalty/interest was dependent on the liability to pay the amount of credit disallowed which implied that no penalty/interest could be levied if the disallowed credit was to be expunged. Rule 57U(6)/57U(8) dealing with penalty and interest respectively was attracted only when the manufacturer was liable to pay the Modvat credit disallowed. Even though during the material period, the provisions did not prescribe that penalty/interest was dependent on whether the disallowed credit had been utilized or not, since the appellants had not utilized the credit on capital goods, imposition of penalty was not justified. The appellants prayed that the impugned order may be set aside
9. In the written submissions filed in the court on 13/11/06, jt was submitted that the weaving unit established by them was.a composite unit consisting of looms and processing machineries such as stentering, washing, desizing machines etc. It was stated that they had received preparatory machines forming part of the integrated unit which were installed as and when the supplies were received. Out of a total Modvat credit of Rs. 1,07,02,130A availed by them upto 31.3.04, Cenvat credit availed on the preparatory machines used in the manufacture of grey fabric was Rs. 32,81,011/- in the initial period of setting up of the composite unit and that balance credit of Rs. 74,21,119/- represented credit on Preparatory Machines/Processing Machineries installed airing October, 2001 to March, 2002 and used in the manufacture of both dutiable and non-dutiable final products. The integrated weaving unit became operational fully from March, 2002 manufacturing both dutiable and exempted products. They claimed that there was no time limit for utilizing the Cenvat credit taken on capital goods as decided in Aravind Mills Ltd v. CCE . In that case the facts were that knitting machines had been initially used in the manufacture of products not chargeable to duty but subsequently used in the manufacture of goods chargeable to duty. Credit taken by the appellants was utilized only after commencement of manufacture of dutiable goods. It was decided that bar under Rule 57R(1) of CER,44 was not attracted in such a case and.credit was admissible, They also cited the ratio of Kailash Auto Builders Ltd. v. CCE , to buttress their claim. In that case it was decided that credit could not be denied in respect of goods received between May 1995 to August 1995 on the ground that appellant had not cleared any dutiable product in August 1995. It was decided further that ‘there was no time limit for utilizing the credit taken on capital goods’. It was alleged that the Commissioner had failed to notice that the capital goods referred in the Show Cause Notice had been received simultaneously along with processing machines except to the extent of Rs. 32.81 lakhs. He had also failed to observe that the appellants had discharged the duty of excise on the articles of apparel of Chapter 61 and processed fabric of Chapter 52 since February, 2002. Hence, the impugned goods had not been exclusively used in the manufacture of exempted final product. The Commissioner had erred in entering a finding that grey fabric was a final product and could not be considered as an intermediate product. They relied on the Board’s Circular No. 665/56/02/CE dt. 25.09.02 and invited our attention OIA No. 16/05 dated 11.2.05 setting aside Order No. 49/04 dt 6.7.04 passed by the Asst. Commissioner Pollachi Division, wherein in para 7.3, the Commissioner (Appeals) had accepted the appellant’s plea that they had necessary processing facilities as confirmed by the Original authority vide their letter IV/16/266/04 dated 2.12.04. The above orders related to Rs. 31,41,8437- being balance 50% of the Cenvat Credit availed in Janaury/February, 2003, when the processing facilities were under installation, while the first 50% of the credit had already been availed during January/February, 2002 disallowed in the impugned order. It was argued that when the department had accepted the use of processing machines and dropped the proposals (to recover the credit) in the subsequent proceedings, there was no ground for the department to sustain disallowance proposed in the previous SCN on the same capital goods which had been received simultaneously along with processing equipment for which credit had been taken during Jan/Feb’02. There was no suppression of fact as confirmed in para 20 of the impugned order and that from 1.4.02 onwards filing of declaration under Rule 57T had been dispensed with. They had filed classification list under cover of letter dt. 18.05.01, they Had intimated their activities to the department and obtained confirmation of the working procedure to be adopted by them. They had not been put on notice on the exact nature of the offence they had committed, which was mandatory. The appellants relied on the following decisions of the Apex Court in this regard:
(a) Tamilnadu Housing Board v. CCE Madras 94 (74) ELT 9.
(b) CCE v. Chemphar Drugs and Liniment 89 (40) ELT 276.
(c) Pushpam Pharm Co. v. CCE Bombay 95 (78) ELT 401
(d) Padmini Products v. CCE 89 (43) ELT 195 It was stated that the unutilized credit as on 31.07.06 was Rs. 62,78,6687- after the predeposit of Rs. 15,00,00,0/-, and that the disputed credit had been kept in tact and not utilized. As there was no revenue loss to the government, penalty was not imposable. It was stated that a demand proposing to recover capital goods credit taken on preparatory machines and spares during the period from 01.03.2002 to 28.02.2003, on the ground that the same had been used exclusively in the manufacture of exempted goods namely grey fabric though confirmed by the Assistant Commissioner, was . dropped by the Commissioner (Appeals) on the ground that the appellants had started clearing both dutiable and non-dutiable goods ie. processed fabrics and grey fabrics from March, 2002.
10. During hearing the Ld. Counsel submitted that the impugned order covered a demand of Rs. 57.94 lakhs on preparatory machinery and processing machines received during the period 3/2001 to 2/2002. A similar SCN issued to demand Rs.31.42 lakhs being capital goods credit taken on same goods as covered by the impugned order during 1.3.2002 to 28.2.2003 was dropped by the order of the Commissioner (Appeals), Coimbatore vide 0-I-A No. 16/05 CE dated 11.2.05 finding that the appellants had manufactured both dutiable and exempted final products from 3/02. It was further explained that the appellants had not suppressed any relevant fact. There was no misdeclaration. They had kept the department informed of their activities and had filed classification, list on 18/05/01. Therefore no penalty was imposable. They relied on Apex Court’s decisions in and in support of their above claim.
11. The Ld. Consultant referred us to several case law against the demand and the imposition of penalty in the impugned order and cited relevant observations in them as follows:
(a) CCE Bhopal v. Baskar Industries Ltd. 2003 (54) RLT 301 CEGAT (Del.)
At the time of acquisition of the capital goods the final product coming under heading 52.02 stood excluded from liability to duty. It was then held that when Modvat credit could not be taken at the time when the goods were received, the question of making available a portion of Modvat credit thereafter when the item 52.02 came to be included later under Rule 57Q would not arise. The availability of Modvat credit has to be determined at the time when the goods are received in the factory and if no Modvat credit was available at that time, the question of subsequently making available any Modvat credit would not arise. In the present case, we are concerned with a composite mill and the final product at the third phase is dutiable. According to us, decision of Ld. Single Member in Kailash Auto Builders Ltd. v. CCE (A) Bangalore 2001 (47) RLT 950 (CEGAT- Ban.) relied on by the respondent assessee is more akin to the facts of the present case. It was held therein that there is no time limit for utilizing the credit and merely because there was no dutiable items, which were required to be cleared, on payment of duty on the date when the capital goods credit was taken, that credit could not be denied. We therefore, agree with the Ld. Commissioner (Appeals) that the assessee is entitled to avail the credit on the capital goods installed during the implementation of second phase of the project, when the composite mill had reached its third phase and where the processed grey fabrics are dutiable items.
(b) CCE v. EMM Ltd.
Therefore in order to attract the proviso to Section 11A (1), it must be alleged in the show cause notice that the duty of excise had not been levied or paid by reason of fraud, collusion or wilfull misstatement or suppression of facts on the part of the assessee or by reason of contravention of any of the provisions of the act or the Rules made there under with intent to evade payment of duties by such person or his agent. There is no such averment to be found in the show cause notice.
(c) Rajbahadur Narain Singh Sugar Mills Ltd v. UOI .
The show cause notice in question specifically speaks of an erroneously granted credit only. There is no mention-In it of any collusion, willful misstatement or suppression of fact by the appellants for the purposes of availing of the larger period of 5 years. For the issuance of a notice under Rule 10, the party to whom a show cause notice under Rule 10 is issued must be made aware that the allegation against him is of collusion or willful misstatement or suppression of fact. This is a requirement of natural justice. Unless the assessees put to notice, the assessee would have no opportunity to meet the case of the authorities.
(d) Avdel (I) Pvt. Ltd. v. CC Mumbai it was decided that composite penalty under Section 11 AC and Rule 173Q was not permissible.
(e) Freezair (I) Pvt. Ltd. v. CCE Delhi
It was held that Section 11AC and Rule 173Q- were independent provisions standing on different, footings. One could not be read with the other. The Commissioner had not given breakup of the penalty between the two provisions. Therefore, the penalty could not be sustained. The Tribunal-remanded the question to decide separate penalties under Section 11AC and Rule 173Q.
(f) Madhur Hosiery Industries v. CCE Meerut
The Tribunal decided that the Supreme Court has laid down the law stating that for the imposition of penalty, under Rule 173Q ibid, the particular clause of the said Rule has to be mentioned in the SCN issued to the assessee. As the specific clause was not mentioned, the appellants were not put to notice about violation of Rule 173Q under which they were sought to be penalized. Therefore, the penalty under Rule 173Q was set aside.
12. The Ld. SDR submitted that the unit was not a compbsite mill. As per Rule 57AD (3) of CER, if capital goods were used for the manufacture of exempted goods alone no credit was available. During the period of dispute, the impugned capital goods had not been used for any other purpose but to manufacture exempted goods. The processed fabric received from job workers were removed as such by the appellants without undertaking any process of manufacture. The Ld. SDR cited excerpts from the relevant caselaws in support of the impugned order as follows.
1) CCE Indore v. Surya Roslmi Ltd.
Sub-rule 1 Rule 57R(1) bars availment of credit of the duty., if the capital goods are used in the manufacture of final products on which no excise duty is payable. The credit is availed as and when the capital goods are received by the manufacturer. When the impugned machine was received it has been used in the manufacture of bulbs, which were exempted from the whole of the duty of excise leviable on them. ….
The availability of modvat credit is to be looked into at the time of receipt of capital goods. If the capital goods are exclusively used in the manufacture of exempted products, modvat credit will not available to the manufacturer. Subsequently, the exempted products becomes dutiable on account of withdrawal of exemption or the manufacturer puts the capital goods to other use would not revive the question of modvat credit which stands determined at the time the capital goods were received. The decision of the single bench of the Tribunal in Kailash Autobuilders case is not applicable to’ the facts of the present matter as the appellants therein “have made their intention clear that they would be using the said capital goods in the manufacture of excisable final products once the factory starts working to its full capacity”. Further, the facts are also different in the case of Bhaskar Industries Ltd. in as much as in the said matter the respondents “had a project to set a composite mill for spinning, weaving and processing” meaning thereby for manufacture of excisable goods which are chargeable to duty. We observe that the respondents therein “kept the option availing the modvat credit on capital goods in abeyance for about a year, till implementation of the third phase, namely, the fabric processing. The assessee submitted the required declaration under Rule 57T of the Central Excise Rules with a clear intention that he shall be availing the credit on implementation of the third phase, as the final product of the third phase was dutiable.”
Vide Surya Roshini Ltd v. Commissioner , the Apex Court dismissed the assessee’s appeal as not maintainable.
2) Binani Cement Ltd. v. , CCE Jaipur II
The Tribunal observed that the contention of the revenue is that modvat credit must accrue on the goods on the date of receipt in the factory and not on the date of installation. We agree with this contention of the revenue.
3) Grasim Industries Ltd. v. CCE Trichy 2004 (176) ELT 265 (Tri.-Chen.)
In the instant case the quantum of credit permissible was only 75% at the relevant time when the goods were received in the factory. It was on a later date that the quantum was raised to 100% by amending Notification No. 11/2000 dt. 1.3.2000 and this Notification is not retrospective. Therefore, we are of the considered opinion that the appellants are eligible to claim the benefit that was permissible on the date of receipt for the capital goods in the factory” Vide Grasim Industries v. Commissioner 2005 (179) ELT A38 (SC), the Apex Court had upheld the above decision.
4) Accumac Machine Tool Pvt. Ltd. v. CCE Bangalore 2004 (175) ELT330 (Tri.-Bang.)
It was decided in this case that subsequent development was not a criterion to decide the eligibility of Modvat credit and the fact that the manufacturer puts the capital goods later on would not revive the question of admissibility of Modvat credit which stood determined at the time the capital goods were received.
13. The department has come in appeal as per the direction of the Board vide order F. No. 199/311/2003-JC/(BMB) dated 18 March 2004. Revenue has submitted that the Commissioner had erred in not demanding interest under Section 11AB of the Act, on the ground thai the assessee had not utilized the credit. In the grounds of appeal, the following submissions have been made in support of the plea that interest should have been demanded by the Commissioner.
On perusal of the provisions contained in Rule 57AH of CER,1944 covering the period from 1.3.2001 to 30.6.2001 and Rule 12 of CCR. 2001 covering the period from 1.7.2001 to 28.2.2002, it is seen that interest becomes payable if the credit is taken or utilized wrongly, under the provisions of Section 11AB Central Excise Act, 1944
Rule 57AH (2) of erstwhile CER 1944 (prevalent during the period from 1.3.2001 to 31.6.2001) read as under:
Where the Ccnvat Credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of Section 11A, 11AA and 11AB of the Act, shall mutatis mutandis for effecting such recoveries.
Rule 12 of Cerivat Credit Rules, 2001, (prevalent during the period from 1.7.2001 to 28.2.2002) read as under:
Where the Cenvat Credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of Section 11A and 11AB of the Act, shall apply mutatis mutandis for effecting such recoveries.
14. The appeal seeks to modify the impugned order to demand interest as per the above statutory provisions. The learned SDR reiterated the grounds taken in the Revenue’s appeal.
15. We have carefully considered the facts of the case and the rival submissions. The machinery in respect of which the capital goods credit had been taken were not used to manufacture any dutiable goods during the period of dispute. After the machinery was received in 2001, during the period 1.3.2001 to 28.2.2002 they were put to use only to manufacture grey woven fabrics of cotton on which no duty was paid. In terms of Rule 57AD (3) of CER, ‘1944. and Rule 6(4) of CCR, 2001 (which was in force since 1.7.2001), no credit of duty paid on capital goods shall be allowed if the capital goods are used exclusively in the manufacture of final products on which no amount of excise duty is payable. Therefore, the order for the recovery of capital goods credit availed on such machinery passed by the Commissioner is in accordance with law. The assessee did not have a production programme culminating with setting up of machinery for manufacturing processed fabric or articles of apparel which they had intimated to the department. A classification list was filed on 18.5.2001, which showed woven fabric of cotton containing 85% or more by weight of cotton as the only dutiable item along with other non-dutiable products manufactured by the assessee. Apparently this entry was meant to cover clearances of such fabrics got manufactured on job work basis. As the appellants did not manufacture any dutiable goods in May, 2001 or in ‘the near future, it cannot be inferred that the said classification list was filed in view of their imminent production of dutiable goods. The assessee’s claim that they correctly took the credit in view of the various case law cited, cannot be accepted in view of the decision of the Tribunal in CCE Coimbatore v. Sengunthar Spinning Mills , wherein it was decided that the availability of Modvat credit had to be determined at the time when the goods were received in the factory and if no Modvat credit was available at that time, the question of subsequently making available any Modvat credit would not arise. In Surya Roshini Ltd. (supra), the Tribunal reiterated the same legal position when it observed that ‘if the capital goods are exclusively used in the manufacture of exempted products Modvat credit will not be available to the manufacturer. Subsequently, the exempted products become dutiable on account of withdrawal of exemption or the manufacturer puts the capital goods to other use would not revive the question of Modvat credit which stands determined at that time the capital goods was received”. In the instant case, the appellants did not have any intention of using the subject capital goods in the manufacture of dutiable final products which they had intimated to the department as in Kailash Auto Builders case (supra). Similarly, the department was not informed that the appellants had a project for sitting up a composite mill for manufacture of excisable goods chargeable to duty as in the case of Bhasker Industries Ltd. (supra). Therefore, the ratio of those two decisions is not relevant to the subject case. The Suryaroshini decision was upheld by the Supreme Court. A similar ratio laid down by the Tribunal in Grasim Industries Ltd. case (supra) also was upheld by the Apex Court. Therefore, the demand as regards the capital goods credit taken in the impugned order is unassailable.
16. In their written submissions, the appellants have claimed that the impugned credit on machinery not eligible for capital goods Credit was only 32.81 taken. It is also stated that a SCN had been issued to recover Rs. 31,41,843/- being the balance 50% taken in the subsequent financial year. This demand was since decided to be not payable by the appellants vide 0-I-A 16/05 dt. 11/02/05, as the appellants had cleared dutiable goods during the material time. As the claim regarding a lower liability compared to the amount proposed in the SCN and confirmed in the impugned order had not been raised before the Commissioner, this aspect is remanded for a fresh decision by the Commissioner.
17. As regards the penalty imposed, it. is seen that a composite penalty has been imposed under Section 11AC of the Act read with Rule 57AH (2), Rule 173Q of CER, 1944 and Rule 13(2) of CCR, 2001. Judicial authorities are unanimous in the view that composite penalty under different provisions of the statute is impermissible. Therefore the composite penalty imposed is liable to be set aside . The judicial objection to imposing composite penalty and imposing penalty without citing the precise provision in the Show Cause Notice is referable to requirement to fulfill principles of natural justice.
In the case of Freezair India (P) Ltd. v. CCE, Delhi 2003(152) 321 (Tri. Del), cited by the appellants, Tribunal made the following observations :
The Commissioner has imposed a penalty of Rs. 45,62,3257- on v M/s. Freezair under Section 11AC read with Rule 173Q. Section 11 AC and Rule 173Q are independent provisions standing on different footings. One cannot be read with the other. The learned Commissioner has not given any break-up of the penalty between the two provisions. Therefore, we are unable to sustain the penalty. The Commissioner will be at liberty to decide afresh on the question whether separate penalties under Section 11AC and Rule 173Q were liable to be imposed on M/s. Freezair and, if so, to what extent
In the subject case the violation had been elaborately explained in the Show Cause Notice. Therefore, the appellant cannot have any grievance that it was not put on notice as regards the offence and its liability to penalty. In Amrit Foods v. COE, U.P. 2005 (190) ELT 433 (SC), the Hon’ble Supreme Court set aside the penalty because the relevant sub-clause of Rule 173Q was not cited in the SCN. However, the Supreme Ccurt prescribed the requirement as follows:
It was, therefore, necessary for the assessee to be put on notice as to the exact nature of contravention for which the assessee was liable under the provisions of the Rule 173Q.
This was done in the instant case . Moreover, in Zunjarrao Bhikaji Nagarkar v. UOI , the Hon’ble Supreme Court made the following observation as regards penalty under Rule 173Q:
When we examine Rule 173Q it does appear to us that apart from the offending goods which are liable to confiscation the person concerned with that shall be liable to penalty up to the amount specified in the Rule. It is difficult to accept the argument of the appellant that levy of penalty is discretionary.
In Madhur Hoisery Inds. v. CCE, Meerut , the Tribunal made the following observation :
It was, therefore, necessary for the assessee to be put on notice as to the exact nature of contravention for which the assessee was liable under the provisions of the 173Q.
On a perusal of the SCN we find that the assessee was put on notice as to their liability to penalty on account of the undisputed contravention of rules with perceived intention to evade payment of duty. The Commissioner had felt that the assessee had taken the credit knowing fully well that they had not been eligible for the same in view of the legal provisions. We find that the appellants had intimated the jurisdictional Dy. Commissioner, vide its letter dt. 10.5.2001, the details of the goods cleared by the unit and the fact of import of capita! goods and the CVD paid, of which they were entitled to take Cenvat credit. The Dy. Commissioner in his letter dt. 31.5.01, approved the procedure followed by the appellants and specifically informed them that “in the event of clearing the processed fabric without payment of duty, they are not eligible to take Cenvat credit on both inputs and capital goods”. The appellants had been clearing the processed fabric received on job work basis on payment of duty. The Dy. Commissioner’s letter did not enlighten the appellants on the position that they were not eligible to take credit on capital goods which were not used in the manufacture of dutiable goods. Considering the fact that the assessee had cleared dutiable goods during the material time though not manufactured by them, and that they had intimated the procedure followed by them to the department, the appellant is entitled to benefit of doubt that they had bonafidely believed in their’ eligibility to the impugned credit . Also, the credit remains unutilized in their accounts even today. In the circumstances , we find that the appellants do not deserve a penalty under Section 11 AC of the Act.
19. As regards their penal liability under Rule 173Q/Rule 13(2) , the notice left no room for doubt to the assessee. The decision of the Hon’ble Supreme Court in Amrit Foods (supra) does not support the appellant’s claim but the impugned order. Moreover, the decision in Zunjarrao Bhikaji Nagarkar (supra) mandates that when a person is found liable o penalty under Rule 173Q, the adjudicating authority does not have discretion not to impose penalty, but has discretion only as regards the amount of penalty. Rule 13 of the Cenvat Credit Rules is also similar as regards the relevant language considered in Zunjarrao Bhikaji Nagarkar case. In view of above discussion, we hold that the appellants are liable to penalty under Rule 173Q/Rule 13(2). The appeal filed by M/s. Precot Mills Ltd is thus allowed by way of remand in the above terms. Needless to say that the appellants shall be afforded a reasonable opportunity of being heard in the remand proceedings.
20. As regards the appeal filed by the department, Rule 57AH (2) of erstwhile CER, 1944 provided for recovery of interest in the following terms: “where the Cenvat Credit has been taken and’ utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of Section 11AA and 11AB of the Act shall apply mutatis mutandis for effecting such recovery”. Rule 12 of the CCR, 2001, is “where the Cenvat Credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of Section 11A and 11AB of the Act shall apply mutatis mutandis for effecting such recoveries”.
21. In refraining from demanding interest under Section 11AB on the credit taken by the appellants, the Commissioner relied on a case law relating to interpretation of provisions of Section 139 and 215 of the Income Tax Act. In Central Provinces Manganese Ore Co. Ltd. v. CIT 1986 -160- IT, the Hon’ble Apex Court had read the above provisions and ruled that levy of interest was in the nature of compensation as the revenue was deprived of the benefit of tax for the period during which it had remained unpaid. As the credit involved in the instant case was not utilized by the appellants, the Commissioner decided that interest was not payable by the appellants in view of the ratio of the above judgment.
22. It is seen that the case law dealt with provisions in the Income Tax Act, which are not similar to the provisions in the Central Excise Rules prescribing recovery of interest for ineligible credit taken. In the provisions of the Income Tax Act interpreted by the Apex Court, the income tax authority is conferred discretion to waive the interest or to levy lower amount of interest than the interest otherwise due. The relevant Central Excise Rules involved in the instant case during the material period read as under:
Where the Cenvat Credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer….
We find that as pev the statutory provisions, it is mandatory that when Cenvat credit has been taken wrongly, the same shall be recovered along with interest. In view of the unambiguous mandate of the law, the Commissioner’s order not demanding interest as per the above rules is incorrect. In the circumstances, we allow the department’s appeal and order that the appellants shall pay appropriate interest on the wrongly taken Cenvat credit to be determined in de novo proceedings.
(Pronounced in the open Court on 22.12.2006)