Madras High Court Disallows CENVAT Credit on CVD Paid through DEPB Scrips for 2003-04 and Rejects Revenue Neutrality

The Madras High Court in Commissioner of Central Excise Vs Computer Graphics Limited examined whether an assessee could invoke revenue neutrality to escape a substantial demand of Central Excise duty when the claimed CENVAT credit was based on additional customs duty paid by debiting DEPB scrips. The Court also considered the applicability of the extended limitation period under Section 11A and the consequential levy of penalty and interest.

This decision is significant for assessees dealing with imports under the DEPB scheme and claiming CENVAT credit of CVD against excise obligations on final products.

Background of the Dispute

Business Operations of the Respondent

The respondent company, Computer Graphics Limited, is a public limited company incorporated under the Companies Act, 1956. Its activities comprised:

  • Conversion of jumbo photographic film rolls into smaller rolls of varied sizes through cutting and slitting, in accordance with customer requirements.
  • Trading in imported, ready-to-use, unexposed colour photographic films, which were supplied in individual plastic canisters and were independently marketable.

The dispute relates specifically to the activity of taking these imported unexposed colour film rolls, already packed in plastic canisters, and further placing them into printed cartons bearing brand name and MRP for retail sale.

Show Cause Notice and Adjudication

A show cause notice dated 29.08.2006 was issued by the Commissioner of Central Excise, Chennai-II. The Department proposed:

  1. To treat the process of packing imported unexposed colour film rolls (already in plastic canisters) into branded, printed cartons showing MRP as “manufacture” under Section 2(f)(iii) of the Central Excise Act, 1944; and
  2. To demand Central Excise duty on clearances of such goods for the period 01.03.2003 to 31.08.2004, along with:
    • Interest under Section 11AB, and
    • Penalty under Section 11AC,
      by invoking the extended period under Section 11A(1) proviso.

The adjudicating authority passed an order dated 28.11.2006, holding:

  • The activity amounted to “manufacture” under Section 2(f)(iii).
  • Duty demand of Rs. 20,37,33,174 was confirmed under Section 11A(2).
  • Equal penalty was imposed under Section 11AC.
  • Interest was levied under Section 11AB.

Assessee’s Stand before CESTAT

The assessee challenged the order before CESTAT and raised multiple contentions:

  1. No manufacture – mere trading activity
    It was argued that the act of putting canister‑packed film rolls into printed cartons did not amount to “manufacture”; the assessee described this as a pure trading/packing operation.

  2. Revenue neutrality based on CENVAT credit
    The assessee submitted that:

    • If the Department’s “manufacture” view was accepted, it would become entitled to CENVAT credit of:
      • CVD (additional customs duty) on imported film rolls, and
      • Central Excise duty on indigenous inputs.
    • The total admissible CENVAT credit (including credit of CVD on imports and excise on local inputs) would exceed the duty demanded; hence the situation was revenue neutral and demand ought to be dropped.

  3. Limitation – no suppression and bona fide belief

    • The assessee contended that it had acted under a bona fide understanding that no manufacture was involved.
    • On this basis, invocation of the extended period under Section 11A was stated to be unjustified and time-barred.

CESTAT’s Decision

Relying heavily on Commissioner of Central Excise & Customs, Vadodara Vs. Narmadha Chemataur Pharmaceuticals Limited, reported in 2005 (179) E.L.T. 276 (SC), the Tribunal concluded:

  • For 2004-05 and subsequent years, the assessee was eligible for CENVAT credit of:
    • CVD paid through debit to DEPB scrips on imported raw materials; and
    • Excise duty on indigenous raw materials.
  • It considered the earlier part of the demand as time-barred.
  • It held that total admissible CENVAT credit exceeded the duty demand, and therefore set aside the entire demand including interest and penalty.

The Revenue carried this order in appeal to the Madras High Court.

Preliminary Objection: Maintainability of Revenue Appeal