ORDER
R.K. Abichandani, J. (President)
1. This appeal has been preferred by the Revenue against the order of the Commissioner (Appeals) made on 30-7-2004 reducing the penalty to Rs. 20,000/- imposed on the assessee by the Assistant Commissioner under Rule 173Q. The cross-objection has been preferred by the assessee against this order of the Commissioner (Appeals) with a prayer that the disallowance of Modvat credit of Rs. 46,631/- be set aside and the respondent be allowed to retake credit thereof along with interest amount of Rs. 3,648/- got deposited through TR-6 challan.
2. The assessee was engaged in manufacture and clearance of sugar and molasses and availed the facility of Cenvat credit under Rule 57AB of Central Excise Rules, 1944 read with Rule 57AA thereof. On scrutiny of the Cenvat credit records for the month of April, 2001 to May, 2001, it was noticed by the revenue officer that the assessee had availed credit to the tune of Rs. 24,821/- wrongly, because the items mentioned at serial Nos. 1 to 4 of Annexure-1 to the show cause notice were in respect of free supplied goods under the invoices, and since credit was already taken in respect of the previous consignment, double credit to the tune of Rs. 14180/- was not admissible. Furthermore, even from the invoices at SI. Nos. 5 to 6 of Annexure-A to the show cause notice, it appeared that the goods were supplied free, and since credit was already taken on the previous consignment against which the goods were supplied, double credit to the tune of Rs. 9135.50 where was taken by the assessee was not admissible. Moreover, the assessee had taken 100% credit in respect of the items mentioned at serial Nos. 7 to 8 of the Annexure-A, while only 50% could have been taken in the year 2001.
3. According to the assessee it had received identical goods of the description as given in the invoices during the earlier periods on the receipt of which Cenvat credit was taken by the assessee as per the rules. Once the goods were found defective and the assessee complained to the supplier, the supplier, in order to maintain the goodwill and to fulfil the guarantee/warranty obligation, sent the subject goods by way of replacement free of charge. The assessee, reversed the credit on the direction by the Range Superintendent who came to know about the replacement. However, according to the assessee, the goods which were brought were found to be defective, and they were replaced and, therefore, since no demand was raised in respect of the earlier goods, the demand made in respect of the replaced goods which were put to use, was not sustainable.
4. The adjudicating authority found that in the instant case, the assessee had received identical capital goods of the description given in the concerned invoices of the earlier period on which Cenvat credit was already taken. Thereafter, since the goods were defective, the supplier replaced their earlier goods free of charge on the complaint being made by the assessee. The assessee took Cenvat credit again on these replaced capital goods. It was therefore, held that double credit was taken in respect of both, the consignments, of identical capital goods which were defective as well as on the replaced goods. It was held that the assessee was not entitled to take credit on the capital goods received as replacement of the earlier consignment, on which they had already taken the Cenvat credit, and therefore the credit taken was liable to be recovered. It was, further found that the assessee had taken 100% credit in their Cenvat account instead of 50% and had reversed 50% on 29-6-2001. The assessee ultimately reversed the full credit amounting to Rs. 48136/- and the interest of Rs. 3648/-. Penalty, however, came to be imposed on the ground that the assessee had contravened the provisions of 57AB of Rule 57AC(2)(b) of the said rules.
5. In the appeal preferred before the Commissioner (Appeals), the assessee took up the contention that the goods received under the six invoices were in lieu of duty paid inputs received earlier which were found defective on use, as noted in para 3 of the order-in-appeal. It was urged that the supplier had sent the goods as free replacement. However, the goods were received under the duty paid documents for these free replacements and therefore, credit of the duty paid by the manufacturer was rightly taken. It was also argued that both the defective goods and their subsequent replacement was not disputed, but they were used in or in relation to the manufacturer of the finished products. Since the requirement that the goods should be duty paid was fulfilled, this was not a case of taking double credit.
6. The learned Commissioner (Appeals) held that the goods were replaced and assessee had not borne the cost, nor the duty in respect thereof. It was observed that the Modvat scheme was specifically for reducing the cascading effect of duties paid on inputs used in the manufacture of dutiable finished goods and the cascading effect would arise only if the manufacturer of the finished goods paid the duty on the inputs. When no duty was paid by the manufacturer of the finished goods to the manufacturer of the inputs, and the goods were received free of cost and duty free he could not have cleared any duty burden which was required to off set by resorting to the Cenvat scheme. It was, therefore, held that the denial of the second Cenvat credit of duty not paid by the assessee was in order. The learned Commissioner (Appeals) in respect of the assessee’s having taken 100% credit instead of 50% in the second year, found that the assessee had reversed the entire credit on 29-6-2001, but had become eligible to take the balance of 50% in 2002, and they were entitled to take such credit, subject to the provisions of Rule 57AC(2)(b). On the aspect of penalty, no reasons were given, for reducing it. The learned Commissioner, in para seven of the impugned order, simply held: “As regards penalty, taking into consideration the facts and circumstances of the case, I reduce the same to Rs. 1000/- (One thousand) only”.
7. The learned authorised representative for the department submitted that there was no reason given at all by the Commissioner (Appeals) for reducing the penalty from Rs. 20,000/- to Rs. 1,000/-. He pointed out from the provisions of Rule 173Q that the minimum penalty contemplated thereunder could never have been less than Rs. 5,000/-. He submitted that as per the provisions of Rule 173Q, as it stood at the time, relevant to the present proceedings, penalty not exceeding three times the value of excisable goods, or 5000/- rupees, whichever was greater could be imposed. He submitted that the authorities below had correctly come to the conclusion that the assessee was not entitled to take Cenvat credit on the goods which were replaced in lieu of the earlier goods of same nature.
8. The learned authorised representative for the assessee on the other hand submitted that even if the goods were supplied free because the earlier goods were defective since they were duty paid goods, the assessee was entitled to take Modvat credit even in respect of these goods. He placed on record copy of the invoice No. 21046, dated 6-9-2000 to point out therefrom that, the goods mentioned therein were supplied free and that Central excise duty was paid on those goods by the supplier as shown in the invoice. In this invoice the particulars of the goods are described as “Misc. items as per attached packing slip (Chapter No. 8406-10)”. There is no indication in the invoice that the goods replaced were for the earlier corresponding defective goods. However, it is the assessee’s own case that all these freely supplied goods were in lieu of defective goods and the supplier had as per the guarantee /warranty condition, in order to maintain its goodwill, had supplied them free on the complaint of defect being made by the assessee.
9. The contention on behalf of the assessee is that even on freely supplied goods Cenvat could be taken under the provision of Rule 57AB, since duty was already paid on these goods when they were received in the factory of the assessee.
10. There could be no dispute over the proposition that when duty paid goods were received in the factory, the assessee became entitled to take Modvat credit. However, the issue in the present case, is whether the goods which are said to be capital goods and which were found to be defective were, in fact, used by the assessee. Since the assessee’s own case was that the goods were defective and that a complaint was made to the supplier to replace the defective goods, ordinarily the defective goods could not have been put to use. The user aspect, however, has not received sufficient attention of the Commissioner (Appeals). When the goods are rejected as defective and replaced by the supplier, a question may arise whether those goods, be they capital or inputs, on which credit was taken were removed “as such” from the factory and sent to the supplier and credit reversed to that extent. If the defective goods on which credit was taken were substituted, on the complaint of the assessee, ordinarily, it would involve movement of such goods from the factory of the assessee to the supplier, and, in such an event, the supplier on receiving back the defective goods would be able to take credit. Though the learned authorised representative for the assessee has argued on the footing that all the goods replaced were capital goods for the similar defective capital goods, the invoices, particularly the one which mentions “miscellaneous items”, do not throw light on that aspect. The Commissioner (Appeals) has described the goods as inputs. It was necessary for the appellate authority to have examined the question whether the defective goods were in fact used and give a definite finding thereon, because, if they were replaced being defective, ordinary, they could not have been used, and if they were used they would ordinarily not have been defective. This aspect has escaped notice of the learned appellate authority. If the goods were defective and not used and replaced, the taking of Cenvat credit on the new replaced goods would not have been warranted, because no credit could have been taken in respect of the defective goods not used. Taking of credit on the defective goods which were replaced, if they were not used, and also taking of credit on the replaced goods that had substituted such defective goods, would obviously amount to taking of double Cenvat credit, which is not permissible under the law.
11. Furthermore, the learned Commissioner (Appeals) seems to have overlooked the provisions of Rule 173Q under which the maximum of the penalty not exceeding three times the value of excisable goods in respect of which any contravention of the nature referred to in Clause (a) or Clause (b) or Clause (bb) or Clause (bbb) or Clause (c) or Clause (d) has been committed, or Rs. 5000/-, whichever is greater, shall be imposed. Where the three times of the value of excisable goods is less than Rs. 5000/- then the penalty imposed would be Rs. 5000/- and if it is more than Rs. 5000/-, then such greater amount will be imposed. Therefore, penalty of Rs. 5000/- prescribed in Rule 173Q (1) would constitute minimum penalty required to be imposed in such cases.
12. For the foregoing reasons, the matter is required to be remanded to the Commissioner (Appeals) for considering it afresh and taking a decision in accordance with law after hearing both the sides. The impugned order is accordingly set aside, and the matter is remanded to the Commissioner (Appeals) who shall expeditiously dispose it of. Both the appeals and cross-objection are accordingly allowed.
(Order dictated and pronounced in the open Court on 31-8-2006)