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M/S Mangalam Cement Ltd. v. Cce, Udaipur .
Tribunal Opinion Summary — V. Padmanabhan, Member (Technical)
Factual and Procedural Background
The appellant is a manufacturer of cement. It set up a second unit called Mangalam Grinding Unit (MGU) approximately 2 km from the original cement manufacturing plant. The appellant sought inclusion of MGU in the registration already granted to the original unit; the original registration certificate was amended to include MGU. The department subsequently challenged the grant of common registration. The Tribunal decided the registration issue in favour of the appellant by final order No. A/53424/2015 dated 06.11.2015. The department's appeal to the Rajasthan High Court was dismissed on 25.05.2016, thereby approving common registration effective 31.01.2014.
A Show Cause Notice dated 04.12.2014 proposed denial of Cenvat credit totalling about Rs. 13.73 crore (capital goods and input services) relating to installation and setting up of MGU, denial of Cenvat credit for inputs used in power supplied to MGU, and a demand of central excise duty of about Rs. 4.2 lakh on clearance of clinker from the original unit to MGU without payment of duty. The adjudicating authority confirmed these proposals in the impugned Order-in-Original no. 13-16 dated 09.07.2005 (as challenged in the present appeal). The appellant is before the Tribunal challenging that Order-in-Original.
Legal Issues Presented
- Whether Cenvat credit on capital goods and input services used for setting up the MGU can be denied on the ground that the common registration was granted only on 31.01.2014 and the relevant inputs/services were procured or utilized prior to that date.
- Whether denial of Cenvat credit on input services is justified by reference to the amendment to the definition of "input services" with effect from 01.04.2011 (i.e., whether certain services used in construction or laying foundations are excluded from credit after the amendment).
- Whether Cenvat credit for inputs used in generation of power supplied to MGU can be denied on the basis that the units were separate prior to common registration.
- Whether clearance of clinker from the original unit to MGU without payment of duty attracts a demand for duty or is eligible as captive consumption under Notification No. 67/95 dated 16.03.1995 when both units share a common registration.
Arguments of the Parties
Appellant's Arguments
- The impugned order wrongly denies Cenvat credit on the ground that common registration was obtained only on 31.01.2014 and, prior to that, the units had separate existence for Central Excise purposes.
- Demand of excise duty on clinker cleared from the original unit to MGU is baseless because common registration has been granted and the two units are within the same premises; such clearances are entitled to captive consumption benefit under Notification No. 67/95 dated 16.03.1995.
- Cenvat credit availed prior to registration of MGU should be allowable for inputs/services used in setting up the unit; settled law permits credit availed prior to registration for inputs/services used in setting up a unit.
- The denial of credit on input services by reference to the 01.04.2011 amendment to the definition of "input services" goes beyond the Show Cause Notice and is incorrect; the adjudicating authority has not identified particular input services that fall within the exclusion and has exceeded the scope of the SCN.
- Cenvat credit on inputs used in power supplied to MGU is without basis because common registration makes the two units a single factory, permitting credits to be common.
- The appellant relied on case law (specifically Rajshree Sugars & Chemicals Ltd. (Madras High Court)) in support of its position that credits can be merged/adjusted when single registration is taken for related units in the same premises and management.
Respondent's Arguments
- The Department (revenue) supported the impugned order which denied Cenvat credits and raised the duty demand; it maintained that, prior to common registration on 31.01.2014, the two units had separate existence for Central Excise law and therefore credits attributable to the MGU could not be allowed in the original unit.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rajshree Sugars & Chemicals Ltd., 2014 (299) E.L.T 277 (Mad.) | Illustrates that where two units under the same management and premises take a single registration, credits and accounts relating to two units connected in business can be treated together; merger of registration does not logically preclude credit adjustment. | The Tribunal held that the Madras High Court decision is squarely applicable to the present facts and relied on it to conclude that Cenvat credit on capital goods and related items used for setting up MGU prior to the grant of single registration cannot be denied. |
Court's Reasoning and Analysis
The Tribunal's analysis proceeded in several discrete steps, applying legal principle to the established facts:
- Registration and Finality: The Tribunal noted that the question of common registration for the original unit and MGU was finally decided in favour of the appellant by the Tribunal (06.11.2015) and the Rajasthan High Court dismissed the department's appeal (25.05.2016), thereby approving common registration w.e.f. 31.01.2014. Given this finality, the Tribunal treated the units as a combined unit for the relevant purposes.
- Cenvat credit on capital goods and pre-registration inputs: The Tribunal reasoned that procurement of capital goods and utilization of input services necessarily occurs before a new unit is commissioned and registered. It is therefore incorrect to deny Cenvat credit merely because the physical act of availing credit occurred prior to the formal date of registration. The Tribunal observed that there is no requirement in the Cenvat Credit Rules for separate Cenvat accounts for units comprised in one registration, and that credits of the MGU would merge with the combined unit upon common registration.
- Reliance on precedent: The Tribunal expressly relied on the Madras High Court decision in Rajshree Sugars & Chemicals Ltd., where facts of co-located units under the same management taking a single registration were considered and the High Court upheld the assessee's entitlement to credit adjustment. The Tribunal found that decision squarely applicable and persuasive for allowing credit on capital goods and related items.
- Denial of credit on input services and scope of Show Cause Notice: The Tribunal found that the adjudicating authority denied Cenvat credit on input services by invoking the amendment to the definition of "input services" effective 01.04.2011. However, the Tribunal emphasized that the Show Cause Notice dated 04.12.2014 had only proposed denial on the basis that credits pertained to the period before common registration on 31.01.2014. The newly-invoked ground (the 2011 amendment and specific exclusions for construction-related services) was not put to the appellant in the SCN. The Tribunal held that the Order-in-Original thus travelled beyond the scope of the SCN, which is impermissible, and further noted the adjudicating authority did not specify which services were hit by the amendment. For these reasons, the denial on this basis was unjustified.
- Inputs used in generation of power supplied to MGU: The Tribunal applied its earlier conclusion (that the units must be treated as one following common registration) to hold there was no reason to deny credit for inputs used in power generation supplied to MGU. The denial premised on separate existence before registration was therefore unsustainable.
- Clinker clearances and captive consumption: Treating the two units as a single factory with common registration, the Tribunal held that clearances of clinker from the main unit to MGU would qualify as captive consumption under Notification No. 67/95 dated 16.03.1995. Therefore, the demand of approximately Rs. 4.20 lakh on this account was not justified.
- Conclusion of analysis: For the reasons above — finality of common registration, applicability of precedent, the impermissible expansion of grounds in the Order-in-Original beyond the SCN, and absence of specific findings by the adjudicating authority regarding which input services were excluded — the Tribunal concluded that the impugned denials and demands were not sustainable.
Holding and Implications
Holding: The Tribunal set aside the impugned Order-in-Original and allowed the appeal. In summary:
The impugned order is set aside and the appeal is allowed.
Immediate consequences for the parties (direct effects):
- The denial of Cenvat credit on capital goods and input services utilized for setting up MGU (amounting to about Rs. 13.72–13.73 crore as noted in the record) is not sustained by the Tribunal and is to be reinstated in favour of the appellant.
- Cenvat credit claimed for inputs used in generation of power supplied to MGU (approx. Rs. 1.3 lakh) was found to have been wrongly denied and the denial is set aside.
- The demand of central excise duty of about Rs. 4.20 lakh on clinker clearances from the original unit to MGU is set aside on the ground that such clearances qualify as captive consumption under Notification No. 67/95 when the units have a common registration.
Broader implications:
The decision applies the principle that credits attributable to a unit that is later included in a common registration cannot be denied solely because the credits were availed prior to the formal grant of registration, particularly where the units are under the same management and premises. The Tribunal relied on an existing High Court decision (Rajshree Sugars) rather than announcing a new legal doctrine.
Note: The opinion does not purport to lay down a novel legal precedent beyond applying the cited High Court authority to the facts at hand; its practical effect is to restore the appellant's Cenvat credits and to set aside the duty demand in the circumstances described.
V. Padmanabhan, Member (Technical):— The present appeal is directed against the Order-in-Original no. 13-16 dated 09.07.2005 passed by the Commissioner (Central Excise), Udaipur. The appellant is engaged in the manufacture of Cement falling under Chapter 25 of the Central Excise Tariff. The appellant set up a second unit that is Mangalam Grinding Unit (MGU) within a distance of two Km from the Original Unit. When the MGU was nearly completed the appellant approached the department for including the MGU in the registration already granted to the Cement Manufacturing unit. Accordingly, the Original Registration Certificate was amended to include the MGU. However, subsequently the department changed its stand and challenged the order of the lower authority granting the common registration. The issue was finally decided in favour of the appellant by the Tribunal vide final order No. A/53424/2015 dated 06.11.2015 The appeal filed by the department against the Tribunal order to the Hon'ble Rajasthan High Court was dismissed through, its order dated 25.5.2016 Consequently, the common registration granted on 31.01.2014 was also approved by the Hon'ble High Court.
2. Show Cause Notice dated 04.12.2014 was issued to the appellant proposing to deny the Cenvat credit availed by the appellant in the existing factory in respect of capital goods and input services availed totaling to about Rs. 13.73 Crore for installing and setting up their new MGU. It was further denied the Cenvat credit in respect of inputs used in the power supplied to MGU. Further, demand of Central Excise duty amounting to about Rs. 4.2 lakhs was also raised on clearance of clinker from the original unit to the new MGU without payment of duty. In the impugned order all the above proposals were confirmed. Aggrieved by the same, the appellant is in appeal presently before the Tribunal.
3. With the above background, we heard Shri B.L Narsimhan, H. Bajaj, ld. Advocates for the appellant as well as Shri G.R Singh, ld. DR for the respondent.
4. The appellant has challenged the impugned order mainly on the following grounds:
i. The impugned order has proceeded to deny the Cenvat credit on the ground that both the units obtained a common registration on 31.01.2014 and prior to that both units had separate existence for the purpose of Central Excise Law.
ii. The demand of excise duty on clinker cleared from the original unit to MGU considering the two as separate units is without basis since the common registration has been granted and the two units are within the same premises. Such clearances will be entitled to the benefit of captive consumption under Notification No. 67/95, dated 16.03.1995
iii. The Cenvat credits are have been denied also for the reason that the credits have been availed prior to registration of the MGU. It is settled law that Cenvat credit availed prior to registration of the unit in respect of inputs/services used for setting up can be availed even though the registration will be issued only after the unit becomes operative.
iv. The credit availed on input services has been denied citing the amendment to the term “input services” made w.e.f 01.04.2011 It has been considered that all the input services have been used for construction of a building or civil structure or for laying of foundation for support of capital goods, which have been excluded w.e.f 01.04.2011 However, by taking such a view the Adjudicating authority has travelled beyond the Show Cause Notice wherein only a proposal has been made to deny the Cenvat credit availed in the existing unit prior to common registration. Cenvat credit denied in respect of inputs used in power supplied to MGU is without basis, since, the common registration makes the two units into one single factory.
They have also relied upon various case laws in support of their arguments.
5. The ld. Counsel for the appellant reiterated all the above grounds. The ld. DR supported the impugned order.
6. The dispute resulting in the demand of Excise duty and order for reversal of Cenvat credit has arisen, consequent upon the appellant setting up a second unit, i.e Mangalam Grinding Unit (MGU). MGU is located at a distance of about 2 Kms of the original cement manufacturing plant. The appellant approached the department for a common registration for both the units. This issue stands settled at the level of the Hon'ble High Court resulting in approval of single registration comprising both the units. Even though the issue attained finality with the order of Hon'ble High Court on 25.05.2016, in the result the appellant's have been granted the common registration w.e.f 31.01.2014 The appellant availed Cenvat credit on capital goods as well as input services utilized in setting up of MGU. This has been denied through the impugned order to the extent of about Rs. 13.72 crores. The main ground cited in the Show Cause Notice for such denial is that both the units obtained common registration only on 31.1.2014 and for the period prior to this date, both the units had separate existence for the purpose of Central Excise law and hence the credit which might have been allowable to setting up of MGU cannot be allowed to be taken in the original unit, since the inputs were procured and inputs services were utilized prior to 31.01.2014
7. The procurement of capital goods as well as utilization of input services for setting up the MGU happened prior to setting it up. The question of registration of the completed unit comes up after the unit is set up and is ready to start manufacturing. It would be incorrect to deny the Cenvat credit on such capital goods and input services by taking the view that it has been availed prior to the date of registration. This position is too well settled for taking a contra view. It is on record that the appellant has approached the department on 30.08.2013 for formally amending the registration certificate for the original unit to include MGU. Further, since the MGU has been commonly registered as part of the main unit by issue of a common registration, any credit which would have been in the books of MGU would stand merged with that of the combined unit. There is no requirement in the Cenvat Credit Rules that prohibits a common Cenvat account for all the units comprised in one registration. We note that the Hon'ble Madras High Court in the case of Rajshree Sugars & Chemicals Ltd., 2014 (299) E.L.T 277 (Mad.) (Supra) has considered a case where the facts are similar to the present case stands decided in favour of the assessee. The Madras High court considered a case where a sugar unit and distiller unit had separate registration certificates, but situated within the same premises under the same management. The dispute in that case is also with reference to issue of a single registration and merger of credits in the two units. The Hon'ble Madras High Court decided the issue as follows:
“We agree with the contentions made by the ld. Counsel appearing for the assessee. As already seen in the preceding paragraph, the sugar unit and the distillery unit belonged to the self-same management and they are in the same premises. Although there are two units functioning, it is not denied by the Revenue that the resultant Molasses from the manufacture of sugar was used by the assessee in the manufacture of denatured Ethyl Alcohol. Although in respect of two activities, it had maintained two accounts, yet, it related to the business of the same assessee in respect of two activities, which are interconnected too. In the circumstances, the assessee decided to go for one registration alone as against two registrations originally taken. This decision was in tune with the management, administration and control of two units under the same head. In the above circumstances, we do not find any logical reason to accept the plea of the Revenue that on the mere taking of a single registration as against the two registrations, there was merger or amalgamation or transfer to hold that the assessee would not be entitled to any credit adjustment on the duty payable on sugar manufactured”.
We are of the view that the decision of the Hon'ble Madras High Court is squarely applicable to the facts of the present case.
8. In view of the above, we find no reason to deny the credit on capital goods availed for installing and setting up of MGU prior to grant of single registration.
9. In the impugned order, the adjudicating authority has denied the Cenvat credit availed on input services by taking the view that w.e.f 01.04.2011, the definition of the term “Input Services”, of the Cenvat Credit Rules 2004 has been amended. The amendment has made the Cenvat credit inadmissible on input services used in relation to setting up new unit. More particularly it has denied Cenvat credit on certain activities such as construction services used in the construction of factory building or civil structure or a part thereof or for laying of foundation for support of capital goods. The adjudicating authority has proceeded to deny the credit on input services with the reasoning that the said input services were used by the assessee for the activities which stand denied after the amendment in 2011.
10. When we consider the grounds proposed for denial of Cenvat credit, in the Show Cause Notice dated 04.12.2014, we find that the only reason is that the credits pertain to the period prior to the issue of a common registration on 31.01.2014 The stand taken by the adjudicating authority for denying the Cenvat credit on input services was not taken in the relevant Show Cause Notice and to this extent the Order-in-Original has travelled beyond the scope of Show Cause Notice, which is illegal. In any case the adjudicating authority has not given specific findings as to which are the input services for which credit has been availed and which get hit by the amendment in the definition of “Input Services” w.e.f 01.04.2011 Without any such detailed findings, we find that the denial of Cenvat credit on input services is not justified.
11. Next, we turn to denial of Cenvat credit amounting to about Rs. 1.3 lakhs in respect of inputs used in the generation of power supplied to MGU. As held in the above paras, we find no reasons to deny the Cenvat credit by taking the view that the two units were separate prior to the date of common registration. In this view of things, we find no justification for denial of such Cenvat credit.
12. Lastly, we consider the demand of duty on clinker cleared to MGU amounting to about Rs. 4.20 lakh. The two units have to be considered as a single factory with common registration, clearances of clinker from the main unit to MGU will be entitled to the Notification No. 67/95 available to captive consumption. Consequently, the demand on this ground also merits to be set aside.
13. In view of the above discussions, the impugned order is set aside and appeal allowed.
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