IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE:19-3-2010 CORAM: THE HON’BLE MR.JUSTICE P.JYOTHIMANI W.P.No.2564 of 2010 and MP No.1 of 2010 M/s.Tejas Networks Ltd., Rep. by its A.Narayanachar, Office Manager, Abhisekhapakkam Revenue Village RS No.150/2, Abhisekhapakkam Road, Thavalakuppam Junction, Puducherry 605 007. ..Petitioner Vs. 1. The Commissioner of Central Excise, No.1, Goubert Avenue, Puducherry – 605 001. 2. Assistant Commissioner of Central Excise (Prev.), No.1, Goubert Avenue, Puducherry - 605 001. 3. Supdt. Of Central Excise, Office of the Asst. Commissioner of Central Excise Division, Puducherry. ..Respondents Writ petition filed under Article 226 of the Constitution of India for the issue of writ of Certiorarified Mandamus to call for the records of the impugned Mahazer dated 09.01.2010 drawn by the officers of the 3rd respondent more particularly herein and quash the as being violative of Rule 24 of Central Excise Rules, 2002 and Rule 15 of Cenvat Credit Rules, 2004 Sections 12 and 33 of the Central Excise Act, 1944 and notification issued thereunder and violative of Articles 14, 19(1)(g) and 265 of the Constitution of India and to direct the respondents to release the seized goods of the Petitioner company under the impugned Mahazer to the petitioner forthwith. For Petitioner : Mr.Arvind P.Datar, Sr.counsel for Mr.C.Saravanan https://hcservices.ecourts.gov.in/hcservices/ For Respondents : Mr.S.Udhayakumar, SCGSC 1 to 3 ORDER The writ petition is directed against the impugned mahazar issued by the third respondent dated 9.1.2010 by which the goods of the petitioner company as mentioned in the annexure to the Mahazar for the value of Rs.5,97,71,601/- were seized and kept in the specified place of the petitioner company on condition that they would be produced as and when called upon by the adjudicating officer, Central Excise and that the goods should not be disposed of or dealt with in any other manner. 2. The petitioner company is engaged in the manufacture of multiplexers used in the telecom industry at its factory at Puducherry. It is stated that the petitioner company imports various components like, resistors, capacitors, ICs., diodes, oscillators, heat sinks, PCBs. etc. and the petitioner has also procured other items locally like, cable assembly and chassis. On all the components, the petitioner avails CENVAT credit. The components are used for manufacture of populated PCBs. and thereafter sent on reversal of credit under rule 3(5) of the CENVAT Credit Rules, 2004 to its contract manufacturers. 3. It is stated that as per rule 3(5) of the said CENVAT Credit Rules, the Indian contract manufacturer, on receipt of components avails credit and sends to the petitioner company on payment of excise duty which in turn is availed as credit by the petitioner company. The final product manufactured by the company is cleared on payment of duty. According to the petitioner, the petitioner is not required to reverse the credit as per Rule 4(5)(a) of the CENVAT Credit Rules. The multiplexes, which are the backbone of the telecom industry, on being manufactured by the petitioner, are cleared on payment of duty to various customers viz., BSNL, Bharati Airtel, ITI etc. 4. Even though the petitioner is not required under the Rules, it has been following the procedure of sending components on which it availed credit on reversal of credit to its contract manufacturers for the manufacture of PCBs. The Inspector of Central Excise, Puducherry proceeded to seize the components to the value of Rs.5,97,71,601/- on the ground that the company had availed credit on the components which could not be considered as inputs for the manufacture in or in relation to the final products and the said inputs were received only for the purpose of selling to the suppliers and therefore, the credit taken is not appropriate. 5. It is stated that the total excise duty paid by the petitioner company between April, 2009 and December, 2009 is Rs.9.17 crores and the petitioner being one of the biggest duty payer, https://hcservices.ecourts.gov.in/hcservices/ requested the officials of the respondents to release the goods and the petitioner is willing to freeze the credit to the extent of input credit availed on material worth Rs.5,97,71,601/- and in spite of it, the respondent officials have not heeded to the said request. In those circumstances, it is stated that the components would be badly affected causing hardship to the end customers, if the petitioner is made to wait till the adjudication process is completed. 6. The Mahazar is challenged on various grounds including that the seizure is contrary to Rule 24 of the Central Excise Rules, 2002 since such seizure is possible only in respect of goods which are liable to excise duty, that the seizure was effected wrongly under Rule 15 of the CENVAT Credit Rules which only permits confiscation and penalty which would be possible only after issuance of a show- cause notice, that the action of the respondents is arbitrary, that at the seizure stage, the respondents have come to the conclusion that the petitioner company availed credit on components which could not be considered as inputs for the manufacture which is the issue to be decided in the adjudication process, that the burden of proving that there is violation of law is on the authority, that the impugned Mahazar is violative of Article 19(1)(g) of the Constitution of India and the seizure is in violation of Article 265 of the Constitution, since it is an illegal method of collection of tax without authority of law, that the petitioner has cleared the inputs on reversal of credit as per Rule 3(5) of the CENVAT Credit Rules, that the petitioner company has not gained anything by availing the credit as it reversed the credit on the components while clearing them to the contract manufacturers and that if the components are not released it would cause disruption in the manufacturing process of the petitioner, apart from raising other grounds as well. 7. In the counter affidavit filed on behalf of the respondents while denying various allegations raised by the petitioner company in the writ petition, it is stated that the verification was initiated based on intelligence by which it was revealed that the petitioner company has availed excise credit to the tune of Rs.1.94 crores against various bills of entry, and the same was admitted and paid. The verification also revealed that the petitioner company availed a credit on the components like, resistors, capacitors, ICs., Diodes, etc. used in the assembly of PCB Boards received from its Bangalore unit for the purpose of trading, and the Cenvated inputs valued at Rs.5,97,71,601/-were seized. 8. It is stated that under Rule 15(1) of the CENVAT Credit Rules, 2004, if any person takes CENVAT credit in respect of any input wrongly or any contravention of the provisions of the Rules is made, such goods are liable for confiscation. It is stated that the petitioner availed the credit on inputs which cannot be used in its manufacturing unit, but they have been received for the purpose of trading and therefore, the goods are prima facie liable for https://hcservices.ecourts.gov.in/hcservices/ confiscation. It is stated that the CENVAT Credit Rules provide for the recovery of wrong credit and imposition of penalty and is independent of Central Excise Rules, 2002 and therefore, the stand of the petitioner that the seizure can only be effected under section 24 of the Central Excise Rules is not correct. 9. It is stated that a show-cause notice would be issued and adjudication process would be commenced and it is only after completion of the said process the goods will be confiscated along with the recovery of wrong credit. It is stated that the petitioner unit at Bangalore which was having the facility of manufacturing PCB assembly was closed and the stocks were transferred to the petitioner unit at Puducherry and the Puducherry unit availed the credit on the same. It is stated that the Puducherry unit procures assembled PCB boards and it does not have the facility of assembling PCB boards from bare PCB and that part of Cenvated components and bare-board PCBs. received from Bangalore unit lying in the Puducherry unit were sold to its suppliers of assembled PCBs. and therefore, the components were received only for the purpose of trading. 10. It is stated that as per section 14 of the Central Excise Act, a statement was obtained from the Manager, Manufacturing Unit of the petitioner who admitted that the petitioner unit at Puducherry does not have any facility to manufacture assembled PCBs from bare- board and electronic components. The Rules provide that credit can be availed on the inputs received in the factory of manufacture which have to be used in relation to the manufacture of final product, in the presence of the manufacturer. In the present case, since the components referred to above, could not be used in the petitioner unit at Puducherry for manufacture and therefore, it should be treated as a trade. 11. It is stated that inasmuch as the Bangalore unit was closed, the accumulation of credit on account of receipt of inputs in that record, would only result in unintended cash refund of ineligible credit. It is stated in the counter affidavit that the department has no objection to release the seized components subject to the condition that the petitioner should execute a bank guarantee to safeguard the revenue. It is also stated that the department is not acceptable to the request that the goods can be released on undertaking that the petitioner would keep CENVAT credit to the extent of Rs.5,97,71,601/- as unutilized on the ground that there is no guarantee to safeguard the interest of the revenue. 12. As correctly submitted by Mr.S.Udhayakumar, learned counsel for the respondents, in Rule 2(k) of the CENVAT Credit Rules,2004 which is as follows: https://hcservices.ecourts.gov.in/hcservices/ “ ‘input’ means – (i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factor of production; (ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service; Explanation 1. – The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2. – Input include goods used in the manufacture of capital goods which are further used in the factor of the manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods.” while defining the term, ‘input’, more particularly, the words ‘input used in relation to the manufacture of final products’, the Supreme Court in MARUTI SUZIKI LTD. v. CCE [(2009) 9 SCC 193], in the context of generation of electricity, has clearly held that to the extent of clearance of excess electricity outside the factory either to joint ventures or vendors or grids, the same is not admissible for CENVAT credit, in the following lines: “ As stated, the definition is in three parts, namely, specific part, inclusive part and place of use. All the three parts are required to be satisfied before an input becomes an eligible input. It may be noted from the CENVAT Credit Rules of 2004 vis-à-vis the CENVAT Credit Rules of 2002 that the word ‘for’ in the inclusive part after the words ‘steam used’ is substituted by the words ‘ used in or in relation to the manufacture of final products’. In other words, the crucial requirement of the definition clause is restated by the legislature. We may not that the CENVAT Credit Rules of 2004 came in force in September 2004. In some of the cases, in batch before us, the show-cause notice goes right up to https://hcservices.ecourts.gov.in/hcservices/ January, 2005, hence, the CENVAT Credit Rules, 2004 also apply to those cases. 41.In short, an item would fall within the category of ‘inputs’ as defined only on compliance with all the three parts of the definition clause. 42. The question which still remains to be answered is: whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gies it to the grid for distribution? 43. In CCE v. Rajasthan State Chemical Works [(1991) 4 SCC 473: (1991) 55 ELT 444] the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own economics. Applying the said test, we hold that when the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the ‘input’ used in that electricity generation is an input used in the manufacture of final product. However, to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale) the ‘process and the use test’ fails. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that electricity generated is ‘used in or in relation to the manufacture of final product, within the factory’. Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures, vendors, grid, etc. would not be admissible for CENVAT credit as such wheeled out electricity, cleared for a price, would not fall within the definition of ‘input’ in Rule 2(g) of the CENVAT Credit Rules, 2002. This view is also expressed in para 9 of the judgment of this Court in CCE v. Solaris Chemicals Ltd. [(2007) 7 SCC 347: (2007) 214 ELT 481].” 13. On the facts and circumstances, as stated above, and as also seen in the impugned Mahazar, while it is the case of the petitioner company that the petitioner company in its unit at Puducherry is receiving the components for the purpose of manufacturing multiplexes by using other local components like, cable assembly and chassis, it is the specific case of the respondent department which is stated to have been concluded based on certain verification of intelligence that from the petitioner unit at Bangalore which has since been closed, certain components in respect of which CENVAT credit was availed, were transferred to the petitioner unit at Puducherry for the purpose of transferring them to third parties to effect https://hcservices.ecourts.gov.in/hcservices/ manufacturing process, since, as per the statement of officials of the petitioner, there is no manufacturing facility available in the petitioner unit at Puducherry and therefore, the conduct of the petitioner should be treated as ‘trade activity’ which is in violation of the CENVAT Credit Rules, and it is for the said violation, seizure has been effected as a preliminary measure to be followed by a proper adjudication. It is stated by the respondents in the counter affidavit that during the time of adjudication process, sufficient opportunity will be given and it is only after adjudication process is completed, the decision as to the confiscation of goods will be arrived at under the provisions of the CENVAT Credit Rules and therefore, in effect, at this stage, it is a premature one to decide as to whether any violation has been committed by the respondents or the petitioner is entitled to get the goods released pending adjudication as a matter of right. 14. Subsequent to the impugned Mahazar issued, there are various communications between the petitioner and the department which show that the department has been requesting the petitioner to produce various records for the purpose of finalization of adjudication process and it is seen that in the last letter of the petitioner company dated 5.2.2010 the petitioner forwarded certain records as required by the respondent department viz., CT-3 copies for the year 2008-09 (10 Nos.) and CT-Register for the year 2008-09, and therefore, the adjudication process appears to have already commenced. The department relies upon the statement of Mr.A.Shiju, Manager Manufacturing of the petitioner company given before the Superintendent of Central Excise, HPU, Puducherry in the form of question and answer, and the relevant portion of the said statement is as follows: “Q5: Why were they transferred from your Bangalore unit? Ans: As the Bangalore unit which has the facility to manufacture assembled PCB boards is in the process of closure the components were transferred to our Puducherry unit as per the management instructions. Q6: How are these components proposed to be used? Ans: Part of the components are being sold to our suppliers who supply assembled PCB boards. Our management will take decision on disposal of the said item”. 15. In the light of the above said statement, the respondents have prima facie come to the conclusion based on which the seizure has been effected as per the impugned Mahazar. 16. Be that as it may, now it has been specifically admitted by the respondents in the counter affidavit that pending final decision on the question as to whether the conduct of the petitioner unit is a https://hcservices.ecourts.gov.in/hcservices/ trading activity or not which would be taken at the end of adjudication, the department would have no objection to release the seized goods on the petitioner executing a bank guarantee. The relevant portion of the counter affidavit reads as follows: “13. With regard to averments made in para-(xvi) of the Affidavit under Counter, that the department have no objection to release the seized components subject to their execution of Bank Guarantee as prescribed, to safeguard the revenue in this case. Regarding the petitioner’s prayer that the goods can be released on their undertaking that they will keep CENVAT credit to the extent of Rs.5,97,71,601/- as unutilized, cannot be accepted since there is no guarantee to safeguard the revenue interest if the disputed amount itself is given as security.” 17. It is the case of the senior counsel for the petitioner that the petitioner is one of the largest excise tax payer, which fact is not actually disputed by the respondent department, and the petitioner is having a continuous account and therefore, the CENVAT credit of the petitioner which is available with the respondent, could be directed not to be utilized by the petitioner to the extent of the value of goods seized viz.,Rs.5,97,71,601/- subject to which the goods can be released. On the other hand, it is the vehement opposition by Mr.Udhakumar, learned counsel appearing for the respondents that such undertaking is not going to be in the interest of revenue since in the running account it is not possible to set apart an amount. It is his submission that to the extent of the value of the goods, the petitioner unit can be directed to give bank guarantee. The entire dispute involved in this writ petition has to be resolved only on the above said limited scope since the parties have admitted as stated above for the release of goods, however, differing with each other as to the terms on which the release could be made. 18. Rule 15 of the CENVAT Credit Rules, 2004 enables the authority to impose penalty apart from confiscation after adjudication process by following the principles of natural justice, which is explained in the said rule as follows: “Rule 15. Confiscation and penalty. – (1) If any person, takes CENVAT credit in respect of input or capital goods, wrongly or in contravention of any of the provisions of these rules in respect of any input or capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or two thousand rupees whichever is greater. https://hcservices.ecourts.gov.in/hcservices/ (2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or utlised wrongly on account of fraud, willful mis-statement, collusion or suppression of facts, or contravention of any of the provisions of the Excise Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act. (3) If any person, takes CENVAT credit in respect of input services, wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees. (4) In a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act. (5) Any order under sub-rule(1), sub-rule(2), sub-rule (3) or sub-rule(4) shall be issued by the Central Excise Officer following the principles of natural justice”. 19. In the absence of any power of seizure pending confiscation proceedings under the CENVAT Credit Rules, 2004, the respondent department has effected seizure under the impugned Mahazar in accordance with the powers under Rule 24 of the Central Excise Rules, 2002 which is as follows: “Rule 24. Power to detain or seize goods. – If a Central Excise Officer, has reason to believe that any goods, which are liable to excise duty but no duty has been paid thereon or the said goods were removed with the intention of evading the duty payable thereon, the Central Excise Officer may detain or seize such goods”. and that is also the admitted case as seen in the impugned order itself wherein it is expressly sated that by virtue of the powers under Rule 15 of the CENVAT Credit Rules,2004 read with Central Excise Act,1944, the impugned Mahazar has been issued by effecting seizure. 20. Section 34 of the Central Excise Act, 1944 empowers, after adjudication, the adjudicating officer to give an option to the owner to pay fine in lieu of confiscation. Section 34 reads thus: https://hcservices.ecourts.gov.in/hcservices/ “Section 34. Option to pay fine in lieu of confiscation. – Whenever confiscation is adjudged under this Act or the rules made thereunder, the officer adjudging it, shall give the owner of the goods an option to pay in lieu of confiscation such fine as the officer thinks fit”. 21. Such provisions are available to the adjudicating authority under section 110A of the Customs Act enabling him to make provisional condition with security and the said provision is as follows: “Section 110A. Provisional release of goods, documents and thinks seized pending adjudication. – Any goods, documents or things seized under section 110, may, pending the order of the adjudicating officer, be released to the owner on taking a bond from him in the proper form with such security and conditions as the Commissioner of Customs may require”. 22. Learned senior counsel appearing for the petitioner, while attempting to justify the stand of the petitioner that the CENVAT credit to the extent of the value of goods seized can be kept unutilized for the purpose of releasing the goods pending adjudication, would rely upon the judgment of a Division Bench of Karnataka High Court in Union of