The Madras High Court has held that an assessee cannot escape excise duty merely by claiming that the transaction was revenue neutral without substantiating the availability of CENVAT credit. Setting aside the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) order, the Court restored a Central Excise demand of over ₹20.37 crore, along with penalty and interest, against M/s. Computer Graphics Ltd. 

The Division Bench comprising Justice G. Jayachandran and Justice N. Mala allowed the appeal filed by the Commissioner of Central Excise, Chennai-II Commissionerate, reversing the Tribunal’s decision that had quashed the duty demand on the ground of revenue neutrality. 

The respondent/assessee is a company engaged in converting jumbo rolls of photographic films into smaller rolls based on customer specifications. Apart from this, the company also traded imported ready-to-use unexposed photographic colour films packed in plastic canisters.

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The Central Excise Department issued a show cause notice alleging that the company’s activity of placing imported film rolls in printed cartons bearing brand names and Maximum Retail Price (MRP) amounted to “manufacture” under Section 2(f)(iii) of the Central Excise Act. On this basis, the Department demanded excise duty for the period from March 1, 2003 to August 31, 2004, invoking the extended period of limitation and proposing penalty and interest. 

The adjudicating authority confirmed the demand of ₹20,37,33,174, imposed an equivalent penalty under Section 11AC and directed recovery of interest under Section 11AB. 

Before the Tribunal, the assessee argued that even if its activity was held to be manufacture, the entire exercise was revenue neutral because it would have been entitled to CENVAT credit on the imported and indigenous inputs used in the process. It also contended that much of the demand was barred by limitation.

Accepting these submissions, CESTAT held that the admissible CENVAT credit exceeded the duty liability for the relevant years and consequently set aside the entire demand, treating the dispute as revenue neutral. 

The High Court found serious flaws in the Tribunal’s reasoning.

The Bench observed that the Tribunal had accepted the plea of revenue neutrality without undertaking any factual examination of the actual CENVAT credit available to the assessee. According to the Court, such a conclusion cannot be reached merely on assumptions.

The Court emphasized that the burden lies on the assessee to establish, through supporting records and evidence, that the admissible CENVAT credit was equal to or exceeded the excise duty demanded. Since no such factual determination was made by the Tribunal, its conclusion was held to be legally unsustainable. 

A central issue before the Court concerned whether the assessee could claim CENVAT credit where the additional customs duty (CVD) had been discharged through DEPB (Duty Entitlement Pass Book) scrips instead of cash.

The Court relied upon its earlier decision in Mohan Breweries & Distilleries Ltd. and the Larger Bench ruling in ESSAR Steel Ltd., holding that for the period up to August 31, 2004, CENVAT credit was generally unavailable where CVD had merely been debited through DEPB scrips rather than paid in cash.

It further observed that although subsequent Foreign Trade Policies permitted such credit after changes in the policy framework, the Tribunal had still failed to determine the actual quantum of admissible credit available to the assessee for the later period. Consequently, its finding of revenue neutrality lacked any factual foundation. 

The High Court also disagreed with the Tribunal’s conclusion that the extended period of limitation was not available to the Department.

The Bench noted that the adjudicating authority had recorded detailed findings regarding deliberate suppression of facts, concealment of manufacturing activities and intention to evade excise duty. It observed that the Tribunal brushed aside these findings without providing any independent reasoning.

The Court therefore held that invocation of the extended limitation period under Section 11A was justified, particularly since the assessee had voluntarily begun paying excise duty only from March 1, 2006, despite carrying on the disputed activity earlier. 

Having upheld the Department’s case, the High Court also restored the penalty and interest imposed by the adjudicating authority.

It found no perversity in the original authority’s conclusion that the assessee had violated multiple provisions of the Central Excise Rules, including Rules 4, 6, 8, 10, 11 and 12, warranting penalty under Section 11AC and recovery of statutory interest under Section 11AB. 

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