Star Battery Limited: Cenvat Credit on Granules Sent for Conversion vs. Alleged Trading – CESTAT Kolkata Ruling
Background of the Dispute
Star Battery Limited, engaged in manufacturing batteries, required PPCP containers as packing material for selling its finished batteries. The assessee was paying central excise duty on clearance of batteries from its factory.
However, Star Battery Limited did not have the in-house infrastructure to manufacture PPCP containers. To meet this requirement, it procured granules on which Cenvat credit was availed and subsequently cleared these granules to job workers who manufactured PPCP containers.
The key features of the arrangement were:
- Granules were received in the factory and Cenvat credit was availed.
- When these granules were removed from the factory to the job worker, the assessee reversed the Cenvat credit in terms of
Rule 3(5)of the Cenvat Credit Rules, 2004. - The job worker, being a manufacturer of PPCP containers, availed Cenvat credit on the duty paid on granules, manufactured PPCP containers, and cleared them on payment of excise duty.
- Star Battery Limited then availed Cenvat credit of the excise duty paid on such PPCP containers, which were used as inputs in the manufacture of duty-paid batteries.
The Department alleged that the granules cleared by the assessee were not sent for conversion but were in fact cleared as traded goods, and hence the Cenvat credit availed initially on those granules was wrongly taken. This resulted in issuance of a Show Cause Notice demanding reversal of Cenvat credit along with consequential liabilities.
The adjudicating authority confirmed the demand. The Commissioner (Appeals) did not go into the merits and dismissed the appeal only on the ground of delay. The matter ultimately reached the Kolkata Bench of the CESTAT following directions from the Hon’ble Calcutta High Court.
Procedural History
Proceedings before the Department and Commissioner (Appeals)
Show Cause Notice
- A Show Cause Notice dated 28.01.2010 was issued proposing to deny Cenvat credit and demand duty for the period from February 2005 to June 2007.
- The sole allegation was that the assessee had cleared Cenvat availed granules as traded goods rather than inputs sent to job worker for conversion, and therefore was not entitled to the credit allegedly taken.
Order of the Adjudicating Authority
- The original authority accepted the Department’s contention and confirmed the demand of Cenvat credit on the granules, treating the clearances as trading activity.
Order of the Commissioner (Appeals)
- The assessee preferred an appeal before the Commissioner (Appeals).
- The appeal was found to be delayed and was dismissed solely on the ground of limitation in filing the appeal, without adjudicating the substantive issues.
Intervention by the Calcutta High Court
- Aggrieved by the dismissal on limitation, Star Battery Limited approached the Hon’ble High Court at Calcutta.
- By order dated 08.09.2022, the High Court directed the assessee to deposit 25% of the confirmed demand and, upon such deposit, permitted the assessee to pursue its appeal before the CESTAT.
- Complying with the High Court’s direction, the assessee deposited 25% of the demand and filed an appeal before the Tribunal.
Assessee’s Core Contentions before CESTAT
1. Compliance with Rule 3(5) of the Cenvat Credit Rules, 2004
The assessee’s Consultant argued that the entire credit mechanism complied with Rule 3(5) of the Cenvat Credit Rules, 2004. Specifically: