THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN CENTRAL EXCISE APPEAL Nos.312 and 322 of 2010 February 01, 2011 Between: The Commissioner of Central Excise, Visakhapatnam – II Commissionerate. … Appellant And M/s.Sai Sahmita Storages (P) Ltd., represented by its Managing Director, Beach Road, Kakinada … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN CENTRAL EXCISE APPEAL Nos.312 and 322 of 2010 COMMON JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) This order shall dispose of the two appeals filed by the Revenue under Section 35G of the Central Excise Act, 1944. First of them is filed against the final order No.711/2010, dated 12.04.2010 passed by the Customs, Central Excise and Service Tax Appellate Tribunal (CESTAT) in Appeal No.E/631/2008 whereby and whereunder the respondent was held eligible to claim credit under the CENVAT Credit Rules, 2004 (the Rules). The other appeal is against the final order No.858/2010, dated 21.5.2010 in Appeal No.ST/420/2008 whereby and whereunder the CESTAT vacated the penalty imposed by the first appellate authority, namely, the Commissioner of Central Excise and Customs (Appeals), Visakhapatnam. Both the appeals were against the common order dated 30.7.2008 passed by the appellate authority. The fact of the matter, which is not disputed by the appellant, is that the respondent assessee was registered under Section 69 of the Finance Act, 1994 (the Finance Act) with Central Excise, Service Tax Cell, Kakinada–II Division, Kakinada, for providing Storage and Warehousing Services. Admittedly they are filing ST-3 returns regularly classifying the services under storage and warehousing services. While scrutinizing the ST-3 returns for the period from April, 2005 to September, 2005 the assessing authority, namely, the Additional Commissioner came to the conclusion that the assessee had taken credit on Central Excise duty paid on cement, iron bars, expansion bellows and pipes. Therefore a show cause notice was issued proposing to adjudicate and determine short paid service tax and penalty thereon. After receiving the reply of the assessee, the assessing authority passed the Order in Original dated 19.6.2007 confirming the proposal in the show cause notice demanding service tax under Section 73 of the Finance Act, interest thereon under Section 75 of the Finance Act read with Rule 14 of the Rules, and penalty under Section 78 of the Finance Act read with Rule 15(1) of the Rules; adjusted the service tax through CENVAT credit taken in ineligible items and imposed penalty of Rs.100/- per day till the amount of Rs.1,24,744/- is paid under Section 76 of the Finance Act. But penalty, under Rule 15 of the Rules, was not imposed. The assessee then filed two appeals under Section 84 of the Finance Act before the appellate authority; one against the demand of service tax and another against imposition of penalty. Aggrieved by the order, the assessee filed appeal before the Commissioner of Central Excise and Customs (Appeals), Visakhapatnam. The department also filed an appeal in so far as the Order in Original declined to levy penalty under Rule 15(2) of the Rules. By common order dated 30.7.2008, the appellate authority dismissed the assessee’s appeal and allowed the department’s appeal accepting the plea that there was suppression regarding usage of ineligible goods and availment of CENVAT credit on such goods attracting Rule 15(2) of Rules read with Section 11AC of the Central Excise Act. The assessee, therefore, filed two appeals before the CESTAT. The Junior Standing Counsel for Central Excise and Customs submits that cement used for making foundations, and TMT bars used for reinforcement, cannot be treated as ‘capital goods’ as defined in Rule 2(a) of the Rules; the assessee wrongly claimed credit though these items cannot come within the definition of ‘input’ under Rule 2(k); the assessee suppressed these facts and irregularly filed returns adjusting the credit they were not entitled to. We have perused the Order in Original, common order in appeals as well as the two orders passed by the CESTAT. For the reasons to follow we are convinced that these two appeals are misconceived and no interference is called for. The only allegation against the assessee is that they claimed CENVAT credit irregularly with reference to cement and TMT bars used in the construction of warehouses through which the storage and warehousing services are provided by the assessee. Section 65(102) of the Finance Act defines “storage and warehousing” as to include storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or in service provided by cold storage. As per Section 65(105)(zza), read with Section 66 of the Finance Act, there shall be levied tax on storage and warehousing services at 12% of the value of taxable service. The service tax payable is determined in accordance with Section 67(4) read with the Service Tax Rules, 1994 made in exercise of the powers under Section 94 of the Finance Act. There is no dispute that every provider of taxable service is entitled to claim CENVAT credit in relation to input service. Rule 2(k) and (l) of the Rules are relevant and they read as under. 2. Definitions.- (k) "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 factory 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 factory of the manufacturer; (l) "input service" means any service,- (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal. A plain reading of both the above definitions would show that, unless excluded, all goods used in relation to manufacture of final product or for any other purpose used by a provider of taxable service for providing an output service are eligible for CENVAT credit. In Maruti Suzuki Ltd v Commissioner of Central Excise, Delhi-III[1], the Supreme Court laid down as follows. 9. Coming to the statutory definition of the word "input" in Rule 2(g) in the CENVAT Credit Rules, 2002, it may be noted that the said definition of the word "input" can be divided into three parts, namely: (i) specific part (ii) inclusive part (iii) place of use 10. Coming to the specific part, one finds that the word "input" is defined to mean all goods, except light diesel oil, high speed diesel oil and 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. The crucial requirement, therefore, is that all goods "used in or in relation to the manufacture" of final products qualify as "input". This presupposes that the element of "manufacture" must be present. Yet again considering the inclusive part of the definition of “input”, it was held as follows. All these considerations become relevant only when they are read with the expression "used in or in relation to the manufacture of final product" in the substantive/specific part of the definition. In each case it has to be established that inputs mentioned in the inclusive part is "used in or in relation to the manufacture of final product". It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression "used in or in relation to the manufacture" have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product. Hydrogen gas used in the manufacture of sodium cyanide is an eligible input, since it has a significant role to play in the manufacturing process and since the final product cannot emerge without the use of gas. Similarly, Heat Transfer Oil used as a heating medium in the manufacture of LAB is an eligible input since it has a persuasive role in the manufacturing process and without its use it is impossible to manufacture the final product. Therefore, none of the categories in the inclusive part of the definition would constitute relevant consideration per se. They become relevant only when the above crucial requirement of being "used in or in relation to the manufacture" stands complied with. In our view, one has to therefore read the definition in its entirety. There is no dispute, in these cases, that the assessee used cement and TMT bard for providing storage facility without which storage and warehousing services could not have been provided. Therefore the finding of the original authority as well as the appellate authority are clearly erroneous, which was correctly rectified by the CESTAT. In so far as the levy of penalty under Rule 15(2) of the Rules is concerned, unless and until there is a finding that there was suppression of fact, and irregular claim of CENVAT credit, the question of levying penalty under Rule 15(2) of the Rules does not arise. In that view of the matter, the order levying penalty was rightly set aside by the CESTAT. These two appeals, for the above reasons, are, accordingly, dismissed. No costs. ________________ (V.V.S. RAO, J) _______________________________ (RAMESH RANGANATHAN, J) February 01, 2011 YS [1] (2009) 9 SCC 193 : 2009 (240) E.L.T. 641 (SC)