IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE HARUN-UL-RASHID TUESDAY, THE 17TH AUGUST 2010 / 26TH SRAVANA 1932 C.E.Appeal.No. 14 of 2010() --------------------------- (FINAL ORDER NO.1228/2009 IN APPEAL NO.EXCISE/804/2008 OF THE CESTAT BANGALORE.) APPELLANT ----------------------------- THE COMMISSIONER OF CENTRAL EXCISE CUSTOMS AND SERVICE TAX, CALICUT COMMISSIONERATE C.R.BUILDING, MANANCHIRA, KOZHIKODE. BY ADV. SRI.JOHN VARGHESE,SC,CEN.BOARD OF EXCIS RESPONDENT: --------------- M/S. APPOLLO TYRES LTD. PERAMBRA ,CHALAKUDY, THRISSUR DISTRICT 680 689. ADV. SRI.ARSHAD HIDAYATHULLA, SENIOR ADVOCATE ADV. SRI.JOSEPH KODIANTHARA, SENIOR ADVOCATE FOR R1 SRI.B.J.JOHN PRAKASH FOR R1 SRI.TOM THOMAS (KAKKUZHIYIL) FOR R1 SRI.MATHEWS K.UTHUPPACHAN FOR R1 SRI.TERRY V.JAMES FOR R1 THIS CENTRAL EXICISE APPEAL HAVING BEEN FINALLY HEARD ON 28/06/2010, ALONG WITH CEA NO.15 OF 2010, THE COURT ON 17/08/2010 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & HARUN-UL-RASHID, JJ. .................................................................... C.E. Appeal Nos.14 and 15 of 2010 .................................................................... 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