1. The facts of the case are that M/s. Alstom Projects India Ltd., the appellants herein, are inter alia engaged in manufacture of Signal Equipment, Traction Equipment and Audio Frequency Circuit and are availing facility of cenvat credit. These items were supplied to Railways, mainly to Western Railways and to M/s. Delhi Metro Railway Corporation (DMRC). Central Excise was paid on goods supplied to Railways other than DMRC. The Traction Equipments were mainly supplied to DMRC for which Mitsubishi Corporation was the main contractor and the appellants was a sub-contractor. For the clearances made to DMRC through M/s. Mitsubishi Corporation, appellants were not paying duty since they were availing exemption under Notification No. 6/2002-CE as amended. The appellants were thus clearing traction equipment both on payment of Excise Duty as well as by availing exemption. Since they were availing cenvat credit on common inputs used in the manufacture of both dutiable and exempted final products, they paid an amount equal to 8% upto 09.09.2004 and thereafter @ 10% on the value of exempted goods as prescribed under Rule 6(3)(b) of Cenvat Credit Rules 2002/2004.
2. During the course of audit of accounts of the unit, it appeared that appellants had purchased certain goods, namely 'Traction Motor' and 'Vacuum Circuit Breakers' (VCB) from their group units at Kolkatta and Naini, Allahabad, for which they availed cenvat credit @ 16% ad valorem. Subsequently, they sold the said goods 'as such' to M/s. Mitsubishi Corporation, New Delhi without payment of duty by availing exemption under Notification No. 29/2003-CE, as amended, but only paid an amount equal to 8% till 09.09.04 and thereafter @ 10% of the price of the said goods cleared in terms of Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004.
3. It appeared that appellant removed cenvat availed inputs, namely, Traction Motor (166 Nos.) and Vacuum Circuit Breaker (52 Nos.) 'as such', from their factory, without paying an amount equal to the credit availed in respect of such inputs for the period from November 2003 to March 2005 in contravention of the provisions of Rule 3(4)/Rule 3(5) of Cenvat Credit Rules, 2002/2004 respectively. The total credit availed on the said inputs during the period from November 2003 to March 2005 worked out to Rs. 1,88,42,922/-. Further, on scrutiny of ER-1 Monthly Returns pertaining to the period November 2003 to March 2005 filed by the assessee, it appeared that appellant declared the said items namely 'Traction Motors' and 'VCB' as 'manufactured products' and availed duty exemption in terms of Notification 29/2003-CE dated 01.04.03 and paid only an amount equal to 8% or 10% of the price of the said items sold to M/s. Mitsubishi Corporation. Thus, while receiving 166 Nos. of Traction Motors and 52 Nos. of VCB, in their factory at Coimbatore, they availed credit @ 16% but when the same items were cleared 'as such' from their unit, they paid only 8% on the price of the goods. It therefore appeared to the department that appellants had willfully misdeclared the said items as "manufactured products" with the sole intention of evading payment of amount equal to the cenvat credit availed on the said inputs and willfully suppressed the above facts from the knowledge of the department with an intention to evade payment of duty. A show cause notice was issued to the appellants proposing demand of an amount of Rs. 1,88,42,922/- being the amount equal to the cenvat credit taken on the said inputs at the time of their receipt into the factory along with interest thereon and imposition of penalties under various provisions of law.
4. In adjudication, vide the impugned order, the Commissioner framed the following questions as requiring consideration:
(i) whether the process of testing and inspection conducted on the procured items, i.e. traction motor and vacuum circuit breaker amounts to the process of manufacture in terms of Section 2(f) of Central Excise Act, 1944 and
(ii) whether the amount paid at the time of clearance of these inputs in terms of Rule 6(3)(b) of Cenvat Credit Rules, 2002/2004 treating these goods as final products is correct.
The adjudicating authority held that process of quality attesting and inspection undertaking in the factory cannot be termed as "manufacturing activity" in terms of Section 2(f) of the Central Excise Act, 1944; that the clearance made by the assessee to M/s. Mitsubishi Corporation in respect of 166 Nos. of traction motors and 52 Nos. of vacuum circuit breakers are not 'manufactured products' but are only clearances 'as such' and that the goods namely, traction motors and vacuum circuit breakers cleared from factory are only inputs and not final products. Accordingly, adjudicating authority confirmed the demand amount of Rs. 1,88,42,922/- with interest liability thereon and also imposed equal penalty under Rule 13 of the Cenvat Credit Rules, 2002 and Rule 15 of CCR 2004 read with Section 11AC of the Central Excise Act, 1944. Aggrieved, appellants have filed this appeal.
5. On 21.11.2017, when the matter came up for hearing, on behalf of the appellant, Ld. Advocate, Shri Raghavan Ramabhadran made oral and written submissions which can be broadly summarised as under:
i) Traction motors and vacuum circuit breakers are part and parcel of traction equipment supplied to Mitsubishi in terms of the purchase order. The department looking in isolation when the goods are removed under CKD condition and thereby making a demand under Rule 3(4)/Rule 3(5) is incorrect. The department is failed to see that the impugned items were part of the larger equipment cleared for the MRTS Project. When seen so, it is clear that there was no removal of Cenvat credit availed goods a such.
ii) Assuming without admitting that the traction motor and vacuum circuit breaker were cleared as such, even then, the provisions of Rule 3(4)/Rule 3(5) will come into play because that two equipment are part and parcel of the larger equipment meant for the DMRC. The whole equipment removed under different invoices for the project as a whole is to be seen. An equipment may consist of some of the manufactured item and some other directly procured item; the whole product is to be seen and not in isolation.
iii) There was no as such removal of traction motor and vacuum circuit breaker. These were subjected to extensive quality control tests and performance tests and matching tests. The tests include routine test, di-electric test and characteristics test to find out the marketable quality and compatibility to function in the equipment. Therefore, the two impugned items were not removed as such to attract the provisions of Rule 3(4)/Rule 3(5). The fact that the goods are removed after the process of testing is not in dispute.
iv) The impugned goods fall under Chapter 84/85 and in turn, under Section XVI of the Central Excise Tariff. In terms of Note 6 to Section XVI, conversion of incomplete or unfinished goods into complete or finished goods amounts to manufacture. In terms of this chapter note also, the activities performed by the appellant amounted to manufacture under Section 2(f)(ii) and thereby the provisions of Rule 3(4)/Rule 3(5) are not attracted.
v) In the following cases, it has already been held that the testing is a process of manufacture:-
(a) CCE v. Indo-Asian Fuse Gears : 1993 (68) E.L.T. 207 (Trib.)];
(b) Brakes India Ltd. v. CCE : 2007 (214) E.L.T. 380 (Trib.-Chennai)] affirmed at Hon'ble Madras High Court at 2016 (337) E.L.T. 204 (Mad.)
(c) Flex Engineering v. CCE, UP : 2012 (276) ELT 153 (SC)]
(d) Tata Engineering & Locomotive Co. Ltd. V. CCE, Pune : 2010 (256) ELT 56 (Bom.)]
vi) Even assuming that the contention of the order that the present activity does not amount to manufacture is correct and that the Appellant is only buying and selling goods as such, it is submitted that the said activity is a trading activity for which Rule 6 obligations have already been discharged.
vii) Therefore, assuming that the appellant merely sells the bought out goods as such without carrying on any process on the same, even then it amounts to trading for which the attributable credit has been reversed in terms of Rule 6(3) which is an undisputed fact. Thus, in any case even if the activity does not amount to manufacture the amount of credit reversed would suffice and no further amount is payable.
viii) The entire demand is time barred. In this case, the demand pertains to the period 11/2003 to 3/2005 and the SCN is dated 29.08.2008.
ix) The demand has been made for Rs. 1,88,42,922 with equal penalty. The imposition of equal penalty is incorrect because it has been issued without considering Rule 6 amount of Rs. 1,62,61,504/- already paid at the time of clearance itself. Thus, in any case, the imposition of penalty of Rs. 1,88,42,922/- is incorrect.
6.1 On the other hand, on behalf of the department, Ld. A.R., Shri K. Veerabhadra Reddy supports the impugned order. He draws attention to para-18 of the impugned order where the adjudicating authority has analyzed the invoices issued for removal of traction motor and vacuum circuit breaker received from their sister units cleared to DMRC. The adjudicating authority has not found any mention in these invoices to indicate that these clearances were made as a part of the 'Traction Equipment' or any other Original Equipment. The said goods have actually been cleared as independent items which can also be to be treated as spares. Hence the contention that goods are cleared as part and parcel of traction motor is incorrect.
6.2 With regard to the appellant's plea concerning that goods are subjected to process of testing and quality inspection, such processes cannot be equated with any activity to bring about any change in the goods. The goods which are cleared by the sister unit and received by the appellants were complete and finished goods by themselves. Hence the credit in respect of credit availed inputs which should have been removed and cleared "as such" from the factory without undertaking any manufacturing activity the confirmation of amount equivalent to the cenvat credit availed on the goods is very much in order.
7.1 Heard both sides and have gone through the facts. The main argument made by the appellant is that the traction motor and vacuum circuit motor were subjected to testing in the factory of the appellant; that the main items are part of the larger equipment cleared for the MRTS project; that the activity/process carried out on these items amount to "manufacture" and hence for all these reasons, there has been no removal of cenvat credit availed goods as such. Hence the demand of duty liability made by the department is incorrect.
7.2 The disputed items namely tractor motors and vacuum circuit breakers are, undoubtedly, manufactured in the other factories of the appellants who cleared them on payment of duty to the appellant. Appellant in turn avails cenvat credit on these items. During the course of their argument, appellants have referred to pages 91 to 96 of Vol-I of paper book submitted by them giving the details of the processes carried out by them on the goods so received. On perusal of same, we find that these documents relate to a communication by the appellant to the Superintendent of Central Excise, Coimbatore vide their letter dt. 3.3.2005 conveying the details of their inspection and testing procedures for the impugned items. For the Traction Motors, the tests listed out by them are as follows:
1. Routine Test (including Visual inspection and Measurement of each dimension)
2. Dielectric test to verify function and scaling of instrumentation etc.
3. Characteristics test (carried out load test in accordance with electrical input conditions)
In the case of Vacuum Circuit Breaker, the tests listed out are (1) Visual test (2) Insulation Resistant test (3) Dielectric Withstand test. In an internal letter dt. 15.04.2004 of the appellants found in page 96 of the paper book, Vol-I, it is informed to all their departments that certain activities carried out on Tractor Motor and Vacuum Circuit Breaker at appellant's unit due to non-availability of the facilities with the respectively suppliers, are no longer required to be done, hence the said activities shall not be continued w.e.f. December 2004. We are not able to appreciate how these processes claimed to have been carried out by the appellants would fall within the ambit of a manufacturing process. In our view, the tests carried out by the appellants are essentially to confirm whether the said impugned items supplied to them by their sister units are in working condition or otherwise and definitely not in the nature of intensive testing. For that matter, we are not able to identify any process or processes carried out by appellant which bring about lasting or permanent change in the characteristics or functionality of the impugned items. It is also not the claim of the appellant that once the process of testing and inspection is complete, the procured items would no longer be called "Traction Motor" and "Vacuum Circuit Breaker" and that they would be influenced by any other nomenclature.
7.3 The appellants have also relied upon Chapter Note 6 to Section XVI of the Central Excise Tariff Act to buttress their stand. However, we find that the said reliance is misconceived since that Note lays down that "conversion of incomplete or unfinished goods into complete or finished goods amounts to manufacture". As already found, it is nobody's claim that the said items supplied the appellant's sister unit are not complete in all respects or that they are unfinished to any degree. There is certainly no process being undertaken by the appellant to complete the manufacture of those items or to complete any incomplete or unfinished goods into complete or finished goods.
7.4 In the circumstances, we find that the adjudicating authority has correctly analysed various issues involved and has come to a reasoned conclusion that the processes carried out by the appellant will not amount to a manufacturing process. Keeping in mind the discussions herein above, we are therefore not able to find any infirmity with the following conclusions of the adjudicating authority in the impugned order:
"19. The assessee has contended that the impugned goods namely, Traction motor, Vacuum circuit Breaker are subject to the process of testing and quality inspection which are essential before removal and therefore the removals cannot be treated as such removals. In this regard, they also invited attention to Section Note 6 of Section XVI of first Schedule to Central Excise Tariff Act, 1985 which covers these goods to emphasize the point that the activities performed amounted to manufacture under Section 2(f) of Central Excise Tariff Act, 1985. In the present case, the tests carried out after receiving the input goods in their factory are Di-electric test, characteristics test, Routine test, etc. to find out the marketable quality of the product and see whether the item can function with the original equipment, i.e., Traction Equipment. Here, the assessee are merely testing the goods to see whether the products received by them meet the required standard. The above items do not undergo any further engineering activity to bring about any change in their works at Coimbatore. Further, their reference to Note 6 of Section XVI of Central Excise Tariff Act is also not relevant in this case. This note states that conversion of incomplete or unfinished goods into complete or finished goods amounts to manufacture. In the instant case, the goods namely Traction motors and Vacuum Circuit Breaker are received from their sister units as fully finished goods and not as incomplete goods which require any further activity to complete their manufacture. As explained already, the process undertaken is only to check the standard or quality of goods which is normal before any goods are sent out of the factory and cannot be equated with the activity to bring about any change in the goods. The legal position in this regard is very clear. The test laid down by the various decisions and judgments of Hon'ble Supreme Court to find out if any process amounts to manufacture is to check as to whether the resultant product which emerges after carrying out the said process is a new and different product having its own identity and but for the said process the various inputs could not have been used as such. Here there is no emergence of any new product. Further, there is no completion of any incomplete or unfinished goods into complete goods or finished goods. Also no evidence has been brought on record by the assessee to the effect that the goods at the time of clearance from their sister units were not complete or unfinished goods. Here not only the process undertaken by the assessee after receipt of the goods at their factory but even the literature submitted by them along with reply to the notice explaining the various stages of testing did not help to arrive at a conclusion that the activity undertaken at their premises was a manufacturing activity. The received inputs namely Traction Motor and Vacuum Circuit Breaker very much remain the same and the activities performed by the assessee do not cover the definition of manufacture under Section 2(f) of Central Excise Act, 1944. In view of the facts brought on record any argument to the contrary is not legally sustainable.
xxx xxx xxx
23. In this case, the impugned goods namely Traction Motor and Vacuum Circuit Breaker are goods where cenvat credit are availed at the time of receipt in the factory. The assessee states that they discharged their obligation under Rule (3)(b) of Cenvat Credit Rules, 2004 by reversing an amount equal to 10% of the sale price of exempted goods cleared by them. Their submission is that since they paid the amount under Rule 6(3)(b) of Cenvat Credit Rules, the credit taken on the aforesaid inputs including traction motor and vacuum circuit breaker should be treated as reversed and therefore the demand made in the notice cannot sustain. I am unable to find any merit in this plea. The Rule 6(3)(b) will come into play only when final products manufactured using credit availed inputs are cleared without payment of duty and not when credit availed inputs are cleared without undergoing any process of manufacture. Here, the credit availed inputs without undergoing any manufacturing activity was cleared as such from the factory. As it is not a final product, Rule 6(3)(b) of Cenvat Credit Rules, 2004 cannot be applied to this situation, The appropriate Rule to be applied in situations where credit availed inputs are cleared without attempting any manufacture is Rule 3(4)/3(5) of Cenvat Credit Rules, 2002/2004 and the provisions of this Rule
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was not complied with in this case. Since the assessee has not paid an amount equivalent to the cenvat credit availed on the goods at the time of clearance from the factory, applying the provision of Rule 3(4)/3(5) of Cenvat Credit Rules, 2002/2004, the proposal in the show cause notice to demand an amount equal to ineligible credit available in the cenvat credit account is very much sustainable as per law." 8. We also note that the adjudicating authority has allowed set off of amount of Rs. 1,62,61,504/- already paid up the appellants and has demanded only the remaining amount of Rs. 25,81,418/- in para 28(ii) of the impugned order. We do not find any infirmity with this decision and uphold the same. 9. Coming to the matter of penalty, it is evident that the appellants being a large multi-national company had attempted to reduce their duty liability by adopting this ingenious modus operandi for the period November 2003 to March 2005. Only on account of the audit conducted by the department, has the evasion come to light. It is not the case that appellant had sought any clarification from the department on whether the manner in which they intend to discharge duty liability on the impugned items was correct as per law. Appellant not only did not disclose the activities done by them on these inputs but at the same time declared the clearances of the items as "manufactured products" in the monthly returns which is tantamount to misdeclaration and suppression of facts. This being so, invocation of extended period of limitation for demand of duty liability is very much in order and by consequence, the conditionalities for attracting penalty equal to the duty liability determined as provided in Section 11AC will get attracted. There can then be no escape for the appellant from imposition of equal penalty imposed under Rule 13 of the CCR 2002 and Rule 15 of CCR 2004 read with Section 11AC of Central Excise Act, 1944. 10. Viewed in this light, we do not find any merit whatsoever in the appeal, for which reason, same is dismissed. (Pronounced in court on 17.01.2018)