CENVAT Credit Permitted Despite Non‑Manufacture: Analysis of Sandeep Laminators Pvt. Ltd. Vs Commissioner of Central Excise (CESTAT Chandigarh)

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, has once again reiterated an important principle on CENVAT credit: even where the activity carried out by an assessee is ultimately held not to be “manufacture”, CENVAT credit cannot be denied if the inputs are cleared on payment of duty and such payment is equal to or exceeds the credit originally taken.

This article examines the decision in Sandeep Laminators Pvt. Ltd. Vs Commissioner of Central Excise (CESTAT Chandigarh), the arguments from both sides, and the settled legal position that guided the Tribunal in allowing the appeal and setting aside the Commissioner’s order.

Background: Nature of Business and Departmental Investigation

Business Activity of the Appellant

The appellant, Sandeep Laminators Pvt. Ltd., is engaged in the production of:

  • Plastic laminates classified under Chapter sub-heading 3920.38, and
  • Pouches classified under Chapter sub-heading 3923.90

of the First Schedule to the Central Excise Tariff Act, 1985. These laminates are used downstream for manufacturing packaging pouches, primarily for products like Pan Masala and Namkeen snacks.

The appellant had been:

  • Availing CENVAT credit on inputs and capital goods under Rule 3 of the CENVAT Credit Rules, 2004, and
  • Paying Central Excise duty on Printed Laminated Polyester Films since as far back as 1993, following departmental practice and the then-prevailing Board circulars.

Process Undertaken

The Anti-Evasion Branch observed that the appellant’s manufacturing process involved:

  1. Procuring duty-paid polyester/metallised polyester films and polyethylene films.
  2. Printing the polyester film using printing machinery.
  3. Laminating the printed polyester film with metallised film or polyethylene film using adhesives.
  4. Clearing the resulting printed laminated films/pouches on payment of Central Excise duty, while availing CENVAT credit on the inputs.

Statements of key personnel such as:

  • Shri Pinak Sarkar, Production Manager, and
  • Shri Rajesh Goyal, Director

were recorded during the inquiry.

Department’s Stand: Non-Manufacture and Denial of CENVAT Credit

Reliance on Supreme Court Ruling in Metlex (I) Pvt. Ltd. Vs CCE, New Delhi

The Department anchored its case on the decision of the Hon’ble Supreme Court in:

Metlex (I) Pvt. Ltd. Vs CCE, New Delhi – 2004 (165) ELT 129 (SC)

In that case, the Supreme Court held that lamination/metallisation of duty-paid plastic film does not amount to “manufacture” because:

  • The input is film at the start, and
  • The output remains film after lamination or metallisation,
  • Hence, no new, distinct commodity emerges.

On this basis, the Department concluded:

  • The processes undertaken by the appellant also did not constitute “manufacture”, and
  • Consequently, the duty paid by the appellant on the final product was not legally “duty”, but merely an amount collected without the backing of a taxable event,
  • As a corollary, CENVAT credit availed on inputs was alleged to be inadmissible, as there was no dutiable manufactured final product.

Show Cause Notices and Commissioner’s Order

Two separate show cause notices were issued:

  1. Show Cause Notice dated 05.01.2006

    • Allegation: Wrong availment of CENVAT credit on inputs.
    • Period covered: December 2000 to August 2005.
    • Demand: CENVAT credit of ₹99,30,054 along with interest and penalty.

  2. Show Cause Notice dated 07.12.2006

    • Allegation: Non-payment of Central Excise duty on clearances.
    • Period covered: November 2005 to January 2006.
    • Demand: Central Excise duty of ₹9,79,983.

Subsequently, the Commissioner of Central Excise, Delhi-III, by order dated 30.04.2013: