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IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 11TH DAY OF JUNE 2014

PRESENT

THE HON’BLE MR.JUSTICE N.KUMAR

AND

THE HON’BLE MR.JUSTICE B.MANOHAR

CEA NO.49 OF 2009

BETWEEN:

The Commissioner of Central Excise, Bangalore-II Commissionerate C.R. Building, Queens Road, Bangalore-560001.

...Appellant (By Sri T.M. Venkata, Adv.,)

AND:

M/s Solectron Centum Electronics Ltd., No.44, KHB Industrial Area, Yelahanka New Town Bangalore-560 064. .. Respondent (By Sri K.S.Ravishankar and Sri. N. Anand, Advs.,)

This CEA is filed under Section 35G of the Central

Excise Act, 1944 arising out of Order dated 04.08.2008 passed in Final Order No.1111/2008, praying that this Hon’ble Court may be pleased to

i) to decide the substantial question of law stated therein,

ii) set aside the CESTAT, South Zone Bench, Bangalore in final order No.1111/08 dated 4.08.2008 in Appeal No.142/2005 CE dated 25/7/2005 passed by the Commissioner of Central Excise (Appeal) at Bangalore by allowing the above appeal, in the ends of justice and equity.

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This Appeal coming on for fresh disposal this day, N.KUMAR J., delivered the following:

JUDGMENT

M/s. Solectron Centum Electronics Ltd., (for short

hereinafter referred to as “assessee”) is situated at

No.44, KHB Industrial Area, Yelahanka New Town,

Bangalore-64, which is registered under the Central

Excise Registration No.AAACC7369PXM001. They are

manufacturing PCB Assembly falling under Chapter

8534. The said unit is also having an EHTP unit

registered vide Registration No.AAACC7369PXM002

manufacturing Hybrid Micro Circuit and Piezo Crystal

Oscillator falling under Chapter 8542 and 8541. During

the audit, it was observed that the assessee has

removed certain inputs and used capital goods without

payment of duty, on both of which Cenvat Credits were

availed to their own EHTP unit. Therefore, it was

pointed out by the Audit that they have to reverse the

Cenvat Credit. However, the assessee contended that

the clearances were made against CT-3 certificate

issued in terms of Notification No.22/2003 dated

31.03.2003 by the customs authorities and that such

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clearances made to EOUs/EHTPs have the status of

deemed exports and therefore, there is no need to

reverse the credit involved. The Audit contended that

the issuance of a CT-3 certificate does not automatically

mean that the subject goods can be cleared without

payment of duty or without reversing the credit

involved, if it turns out that the CT-3 certificate has

been issued beyond the scope or in contravention of the

Notification No.22/2003 dated 31.03.2003 under which

the said certificate had been issued. Condition No.(1) of

para (1) of Notification No.22/2003 specifically states

that the user industry should bring the excisable goods

directly from the factory of manufacture or warehouse.

As such, the impugned inputs and capital goods cleared

as such are not eligible for the benefits of this

Notification, since they are neither manufactured nor

deemed to be manufactured in the factory from where

they were removed. In reply, the assessee amongst

other things stated that during early 2003 i.e., between

March 2003 to May 2003, they shifted some of the duty

paid raw material and used capital goods on which

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credit was taken from DTA unit to EHTP unit, after duly

obtaining permission from the department. Further, as

per the audit contention the assessee has discharged

duty amount of Rs.22,21,477/- through Cenvat debit

under protest as per their letter dated 22.11.2004.

Therefore, the assessee filed an application for refund of

Rs.22,21,477/- paid under protest. The Deputy

Commissioner of Central Excise, “C” Division

adjudicated the dispute and rejected the refund

application filed by the assessee by his order dated

31.03.2005. Aggrieved by the said order, the assessee

preferred an appeal to the Commissioner of Central

Excise (appeals). The appellate authority held that

assessee knowingly cleared the item under CT-3

certificate without giving full information as brought out

by the lower authority. The condition that the excisable

goods should be brought directly from the factory of

manufacture or warehouse is not fulfilled. Therefore, he

found no merit in the appeal and rejected the same.

Aggrieved by the said order the assessee preferred an

appeal before the CESTAT. The Tribunal by the

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impugned order dated 04.08.2008 held that the capital

goods had been removed only after considerable use

and therefore there was no liability to pay any duty or

credit on capital goods and therefore, set aside the order

of the Original Authority as well as Appellate Authority

and directed the refund of Rs.22,21,477/- claimed by

the assessee. Aggrieved by the said order, the Revenue

is in appeal. This Court after hearing both the parties

by its judgment dated 08.03.2011 declined to interfere

with the order passed by the Tribunal and dismissed

the appeal. Aggrieved by the same, the Revenue

preferred an appeal to the Apex Court in Civil Appeal

No.2844/2014. The Apex Court has set aside the order

passed by this Court and remanded the matter to the

High Court to decide the case in the light of the

judgment of the larger bench of the Tribunal in

“Lakshmi Automatic Loom Works Ltd., vs.

Commissioner of Central Excise, Tricy (2008 (232)

E.L.T. 428 (Tri-LB)” on the ground that said judgment

was neither brought to the notice of the High Court nor

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the High Court noticed it. That is how, the appeal is

listed before us for fresh hearing.

2. Learned counsel for the Revenue assailing

the impugned order contends, as the assessee has not

received the excisable goods directly from the factory of

manufacture or warehouse, the condition stipulated in

the Notification No.22/2003 is not fulfilled. In the

instant case, the assessee has imported the impugned

capital goods on which Cenvat credit has been availed

and cleared without payment of duty to EHTP under the

cover of CT-3 and therefore, the impugned order passed

by the Tribunal is not legal and requires to be set aside.

3. Per contra, learned counsel appearing for the

assessee submitted, the assessee is having the DTA unit

in the ground floor and EHTP unit in the First floor.

When the assessee purchased the capital goods as well

as raw material, it has paid excise duty. With the

permission of the authority, it has transmitted or

shifted the capital goods after its use and raw material

as such to the EHTP unit. When it purchased the goods

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it had availed Cenvat credit. During the audit, the

authorities compelled the assessee to reverse the Cenvat

credit which was illegal. It reversed the Cenvat credit

under protest and thereafter filed an application for

refund. When the authorities have permitted the

transmission of raw material and used capital goods

which have suffered duty to EHTP unit, it was not liable

to reverse credit. The assessee was not required to

reverse the Cenvat credit which he had availed. By

force, that entry was reversed. The assessee is entitled

to refund which has been upheld by the Tribunal.

Therefore, he submits no case for interference is made

out.

4. In so far as the judgment of the Tribunal in

“Lakshmi Automatic Loom Works Ltd., vs.

Commissioner of Central Excise, Tricy (2008 (232)

E.L.T. 428 (Tri-LB)”, which the Supreme Court wants

this Court to take note of while deciding this case, is

concerned, it has no application to the facts of this case.

Therefore, he submits no case for interference is made

out.

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5. In the light of the aforesaid facts and rival

contentions, the questions of law that arise for our

consideration in this appeal are as under:

1) Whether the Tribunal is correct in

holding that the Notification

No.22/2003 would be applicable to the

present case i.e., the imported capital

goods on which Cenvat credit was

availed and removed without payment

of duty, under the cover of CT-3, is

correct and legal?

2) Whether the Hon’ble Tribunal is correct

in holding that the terms “Capital goods

as such” occurring in Rule 3(4) of

Cenvat Credit Rules 2002 refers to only

“Unused cenvated capital goods?

3) Whether the assessee was entitled to

the benefit of Cenvat credit availed in

respect of inputs?

6. Notification No.22/2003-CE dated

31.03.2003 deals with exemption to goods brought into

EOU/STP/EHTP. In exercise of powers conferred by

sub-section (1) of Section 5A of the Central Excise Act

1944 (1 of 1944), read with sub-section (3) of section 3

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of the Additional Duties of Excise Duties of Excise

(Goods of Special Importance) Act, 1957 (58 of 1957)

and sub-section (3) of section 3 of Additional Duties of

Excise (Textile and Textile Articles) Act, 1978 (40 of

1978), the Central Government being satisfied, that it is

necessary in the public interest so to do, hereby

exempts,-

(a) all goods specified in Annexure-I to this

notification, when brought in connection with,-

(i) manufacture and packaging of

articles or for production or packaging or job

work for export of goods or services, into

export oriented undertakings (hereinafter

referred to as the user industry) other than

those units referred to in clauses (b) to (c);

(ii) manufacture or development of

software, data entry and conversion, data

processing, data analysis, control data

management or call center services for

export, into Software Technology Park (STP)

Unit or a unit in Software Technology Park

Complex under the hundred percent export

oriented scheme (hereinafter referred to as

the user industry); or

(iii) the manufacture or development

of electronics hardware or electronic

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hardware and software in an integrated

manner for export, into Electronics

Hardware Technology Park (EHTP) unit or a

unit in an Electronic Hardware Technology

Park Complex (EHTP) under the hundred

percent export oriented Scheme (hereinafter

referred to as the user industry); or

Subject to following conditions, namely:-

(1) the user industry brings the excisable

goods directly from the factory of

manufacture or warehouse;

xxxxxx

(5) the manufacturer of said goods follows the

procedure contained in rules 11 and 20 of the Central

Excise Rules, 2002;

7. The larger bench of the CESTAT in Lakshmi

Automatic Loom Works Ltd., vs. Commissioner of

Central Excise, Trichy, was dealing with Notification

No.1/95-C.E. which is now substituted by Notification

No.22/2003. At paras 6.4, 6.5, 6.7 and 6.8, it has been

held as under:

“6.4. It can be seen that Rule 57F

contains provisions relating to utilisation of

the inputs and utilisation of credit taken. As

far as the inputs are concerned, the general

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rule is that they should be utilised for the

manufacture of final products. However, it

contains certain exceptions. The inputs can

be both imported as well as locally procured.

The inputs can, after intimating the

jurisdictional excise authorities, be exported

under bond; it can also be cleared for home

consumption but only on payment of duty or

on reversal of credit. There is no provision for

supply of such inputs to 100% EOUs on

deemed export basis. Thus, the Rule 57F(1)

permits clearance for home consumption only

on payment of duty and only for export,

clearance can be effected on bond.

6.5. The provisos to Rule 57F(4) relied

upon by the appellant permits utilisation of

the credit attributable to inputs used in final

products even when the final products are not

exported but, say, supplied to 100% EOU. In

this case, it is admitted that the inputs

supplied as such to 100% EOU have not been

used for manufacture of final products by the

appellants.

6.7. A submission has been made to

the effect that the supplies have been made

on the basis of CT-3 certificate issued by

jurisdictional Central Excise authorities in-

charge of 100% EOUs and, therefore, should

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be deemed to have been utilised by the 100%

EOUs for the manufacture of final products by

the recipients and they were ultimately

exported. The dispute here is not whether the

100% EOU can procure inputs duty-free or not

or whether the recipient 100% EOU has

utilised the input received from the appellant

and whether the final products of the

recipient 100% EOUs were exported or not.

There can be no dispute that any EOU is

entitled to procure inputs duty free. Such

procurement is permissible only subject to

fulfillment of the conditions of the exemption

Notification. The dispute relates to the

legality of clearance of the cenvated inputs

(which can include imported inputs, as in the

present case) by the appellants without

reversing the credit and without payment of

duty. Therefore, the said submission is not

relevant.

6.8. We hold that the Notification 1/95

is not applicable to the present case and the

clearances are governed only by the

provisions of Rule 57F. We hold that the

inputs cleared as such by the appellants to

100% EOUs can not be deemed to have been

manufactured by the appellants; the supplies

(which are deemed exports) can not be

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treated on par with export under bond for the

purpose of Rule 57F. There is no warrant or

justification to extend the instructions dated

31.12.1996 issued by the Ministry/Board to

cover supplies to 100% EOU which are

treated as deemed exports for certain

purposes under EXIM Policy. The appellants

are not entitled to remove the inputs without

reversal of the credit or payment of equivalent

amount of duty.”

8. From the aforesaid, it is clear, the EOU is

entitled to procure goods duty free. Such procurement

is permissible only subject to fulfillment of condition of

the exemption notification. Further, the decision of

Larger Bench of the Tribunal in Lakshmi Automatic

Loom Works Ltd., (supra) deals with only reversal of

input as such and not removal of used capital goods. In

the instant case, the assessee is having Domestic Tariff

Area (DTA) Unit in the ground floor. It is having

Electronic Hardware Technology Parks (EHTP) Unit in

the first floor. The assessee while purchasing the

capital goods as well as inputs to its DTA unit has paid

duty. Therefore, it has availed Cenvat credit. In so far

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as the capital goods are concerned, it was used by the

assessee in DTA unit. Thereafter, with the permission

of the authorities in terms of the Rules 11 and 20 of the

Central Excise Rules 2002 and Clause (6) of the

Notification No.22/2003, the assessee removed the said

goods from DTA unit to EHTP unit. As the said removal

of used capital goods was done before the amendment

to Rule3(4)(5) of the Cenvat Credit Rules 2004 during

November 2007, no credit was reversible on removal of

used capital goods and as such they were not liable to

pay duty. In so far as the inputs are concerned, with

the permission of the authorities as reflected in Form

CT-3 they were also removed to EHTP unit. The

assessee had purchased those inputs for its DTA unit.

It was not liable to reverse credit as it had paid duty as

it was purchased for DTA unit and thereafter with the

permission of the authority removed to EOU unit. They

were entitled to refund duty paid or reversal of the

Cenvat credit. It is, during audit, the department took

objections and made them to reverse those entries.

They reversed the entries under protest and then they

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have preferred this application for refund. The

argument is that the assessee is entitled to the said

benefit only if the user industry brings excisable goods

directly from the factory of manufacture or warehouse.

In the instant case, when it removed goods to EHTP

unit, it was not bringing excisable goods directly from

the factory of manufacture or warehouse and therefore

they are not entitled to the benefit of Notification

No.22/2003. This is not a case where the assessee was

purchasing those goods for its EHTP unit for the first

time. It purchased the capital goods as well as inputs

for its DTA unit. Therefore, duty was paid. Thereafter,

with the permission of the authorities as reflected in CT-

3, the inputs were removed from DTA unit to the EHTP

unit. Similarly, the capital goods purchased for DTA

unit was used, it was not removed as such and when it

was removed to EHTP unit again, they have no liability

to pay the credit. This aspect has been completely

missed by the authority. They proceeded on the

assumption that user industry thereby mean EHTP unit

was not bringing excisable goods directly from the

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factory of manufacture or warehouse and therefore they

are not eligible for exemption. In the light of the

aforesaid Notification which granted exemption, it is

very clear that EHTP unit is entitled to exemption of

payment of duty. Therefore, the assessee rightly availed

the Cenvat credit and then reversed it when those goods

were moved to EHTP unit and claimed refund.

Therefore, the said question of law is answered in favour

of the assessee and against the Revenue.

9. The next question is whether the assessee

was not liable to pay any duty when capital goods after

it is being used was removed to the EOU unit.

10. Rule 3 Sub-rule 4 of Cenvat Credit Rules,

2002 reads as under:

“(4) When inputs or capital goods, on

which CENVAT credit has been taken, are

removed as such from the factory, the

manufacturer of the final products 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 7.”

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11. The liability to pay duty on capital goods

arises after the capital goods have been removed as

such. The word “as such” is being the subject matter of

interpretation by the various Courts. Punjab and

Haryana High Court in the case of Commissioner of

Central Excise, Ludhiana vs. Khalsa Cotspin (P)

Ltd., reported in 2011 (270) E.L.T. 349 (P & H) has

held as under:

“The assessee having validly availed

cenvat credit, same is required to be reversed

only if goods were cleared in the same

position without payment of excise duty. In

the present case, it has been held by the

Tribunal that goods were not cleared in the

same position but after having been used and

in such situation Rule 3(5) of the Rules will

not apply.”

12. Bombay High Court in the case of Cummins

India Ltd., vs. Commissioner of Central Excise,

Pune-III reported in 2007 (219) E.L.T. 911 (Tri-

Mumbai) confirmed the order of the Appellate Tribunal

which has held as under:

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“The plain and simple meaning of

expression “as such” would be that capital

goods are removed without putting them to

use. Admittedly, in the present case capital

goods have been used for a period of more

than 7 to 8 years. As such, interpretation

given by the authorities below would lead to

absurd results if an assessee is required to

reverse the credit originally availed by them

at the time of receipt of the capital goods,

when the said capital goods are subsequently

removed as old, damaged and unserviceable

capital goods. This would defeat the very

purpose of grant of facility of Modvat credit in

respect of capital goods and would not be in

accordance with the legislative intent.”

13. The Delhi High Court in the matter of Harsh

International (Khaini) Pvt. Ltd., vs. Commissioner of

Central Excise reported in 2012 (281) E.L.T. 714

(Del.), after referring to the various judgments held as

under:

“In the present case the appellant

purchased the capital goods in the period

between 2003 and 2005 and used them in its

factory till they were sold to M/s Harsh

International (Khaini) Pvt. Ltd., in June and

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July, 2007. Thus the capital goods were

used for a period of 2 to 4 years. They

cannot, therefore, be stated to be sold “as

such” capital goods. They were sold as used

capital goods.”

14. Therefore, it is clear, till the law was

amended as on 13.11.2007 in respect of used capital

goods, there was no liability to pay duty. In fact, this is

evident from the fact that in Cenvat Credit Rules 2004,

the proviso was added making the position clear which

was not there in the earlier orders. The proviso reads

thus:

“if the capital goods, on which CENVAT

Credit has been taken, are removed after

being used, the manufacturer or provider of

output service shall pay an amount equal to

the CENVAT Credit taken on the said capital

goods reduced by 2.5 per cent for each

quarter of a year or part thereof from the date

of taking the Cenvat Credit.”

This proviso was added by a Notification

No.39/2007 dated 13.11.2007. Therefore, prior to

13.11.2007, there was no duty payable in respect of

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capital goods which was used before it is removed. In

that view of the matter, second question of law is

answered in favour of the assessee and against the

Revenue.

15. In so far as the inputs are concerned, it is

not in dispute that the assessee while purchasing the

said goods for its DTA unit has paid duty. It is only

when those inputs as such were removed to the EHTP

unit, the Cenvat credit availed was reversed. It is

because, if the assessee had purchased those inputs for

its EHTP unit by virtue of aforesaid Notification, there

was no duty payable, as the said inputs were removed

with the previous permission of the department as

reflected in CT-3. There was no liability to pay the duty

and already Cenvat credit had been taken, it was

reversed under protest and therefore, they were entitled

to the refund of the said amount. That question is also

answered in favour of the assessee and against the

Revenue.

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For the foregoing reasons, we do not see any merit

in this appeal. Accordingly, the appeal is dismissed.

Sd/-

JUDGE

Sd/-

JUDGE PMR/mn