1

Court No. - 7

Case :- CENTRAL EXCISE APPEAL No. - 89 of 2019

Appellant :- Commissioner, Central Goods And Service Tax

Commissionerate

Respondent :- M/S International Tobacco Co. Ltd.

Counsel for Appellant :- Dhananjay Awasthi

Counsel for Respondent :- Shubham Agrawal

With

Case :- CENTRAL EXCISE APPEAL No. - 88 of 2019

Appellant :- Commissioner, Central Goods And Service Tax

Commissionerate

Respondent :- R.K. Gupta

Counsel for Appellant :- Dhananjay Awasthi

Counsel for Respondent :- Shubham Agrawal

Hon'ble Biswanath Somadder,J.

Hon'ble Ajay Bhanot,J.

[Per: Hon'ble Ajay Bhanot,J.]

1. Both the Central Excise Appeals instituted under

section 35-G of the Central Excise Act, 1944 arise from

the same judgment and order passed by the learned

Customs, Excise & Service Tax Appellate Tribunal,

Allahabad, dated 3

rd

April, 2018, which sets aside the

Order-in-Original dated 21

st

October, 2010 passed by the

Commissioner of Customs, Central Excise & Service

Tax, Ghaziabad.

2. The appeals raise two separate substantial questions of

law but the facts are the same. The substantial questions

of law arising in both the appeals respectively can be

decided conveniently by one judgment.

3. The learned Customs, Excise & Service Tax Appellate

Tribunal (CESTAT), Allahabad, in its order dated

03.04.2018 held that the assessee – respondent is entitled

2

to CENVAT credit and has lawfully taken and utilized

CENVAT credit under Rule 16 of the Central Excise

Rules, 2002. The Commissioner of Customs, Central

Excise & Service Tax, Ghaziabad, had in the Order-in-

Original dated 21

st

October, 2010, found that the assessee

had wrongly availed of the CENVAT credit under Rule

16(1) of the Central Excise Rules, 2002 and accordingly

ordered recovery of evaded liability and imposed

penalty.

4. The connected Central Excise Appeal No.88 of 2019

(Commissioner, Central Goods and Service Tax

Commissionerate, Ghaziabad Versus R.K. Gupta) has

also been filed against the said judgment and order of the

learned Customs, Excise & Service Tax Appellate

Tribunal (CESTAT), Allahabad, dated 3

rd

April, 2018, in

regard to reversal of the penalty imposed upon Sri

R.K.Gupta under Rule 26 of the Central Excise Rules,

2002 by the Order-in-Original dated 21.10.2010.

5. The respondent – assessee is engaged in the

manufacture of various brands of cigarettes on job work

basis for M/s Godfrey Philips India Limited. During the

period under assessment, certain cigarettes manufactured

and removed by the appellant on payment of Central

Excise duty were returned by Godfrey Philips India

Limited for various reasons. The respondent – assessee

claimed that the goods were brought back to the factory

for refining.

6. The respondent – assessee took CENVAT credit by

3

treating the said returned goods as inputs for the period

November, 2006 to May, 2007 and for the period August,

2008 to April, 2009.

7. The respondent – assessee claimed entitlement to

credit under Rule 16(1) of the Central Excise Rules,

2002 and availed of the CENVAT credit under Rule

16(2) of the Central Excise Rules, 2002, when the goods

were removed from the factory after “refining”.

Principally, the controversy in the instant appeal centres

around Rule 16(1) of the Central Excise Rules, 2002.

8. When the offending transactions were noticed by the

Revenue, show cause notices were issued to the

respondent – assessee. The show cause notices recorded

that “refining” of cigarettes is not covered under Rule 16

of the Central Excise Rules, 2002. The sum and

substance of the case of the Revenue against the

respondent – assessee was that the respondent –

assessee engineered the return of the so-called non

marketable/non saleable cigarettes, with the intent to

unlawfully avail the benefits of CENVAT credit under

Rule 16 (1) of the CENVAT Credit Rules, by misleading

the Revenue.

9. The show cause notice specifically asserted that the

respondent – assessee had wilfully, knowingly and with

a mala fide intention, wrongly availed CENVAT credit

which is recoverable from it under Rule 14 of the

CENVAT Credit Rules, 2004, read with proviso to

section 11A of the Central Excise Act, 1944, along with

4

interest under section 11AB of the said Act. The

respondent – assessee was also liable for penal action

under Rule 15(2) of the CENVAT Credit Rules, 2004,

read with section 11AC of the Central Excise Act, 1944.

10. Sri R.K.Gupta is the appellant in the connected

appeal who was “the sole In-charge and responsible

person for day-to-day working in respect of all excise

matters in the factory” was also noticed for having

concealed facts to mislead the department and was liable

to penal action under Rule 26 of the Central Excise

Rules, 2002, read with section 11AC of the Central

Excise Act, 1944.

11. The respondent – assessee showed cause and

tendered its defence before the noticing authority and

contested the proceedings.

12. The assessing officer adjudicated the controversy by

order dated 21.10.2010 wherein it found in favour of the

Revenue and held that the assessee had wrongly claimed

CENVAT credit under Rule 16(1) of the Central Excise

Rules, 2002 and Sri R.K.Gupta, Deputy General

Manager (IT & Accounts) was liable to pay penalty

under Rule 26 of the Central Excise Rules, 2002.

13. The assessing officer found that the assessee –

respondent had wrongly availed CENVAT credit,

amounting to Rs.6,83,28,039/- (Rupees six crores eighty

three lakhs twenty eight thousand thirty nine only) under

Rule 16 of the CENVAT Credit Rules, 2004.

5

14. A penalty to the tune of Rs.6,83,28,039/- (Rupees six

crores eighty three lakhs twenty eight thousand thirty

nine only) was also imposed upon the respondent –

assessee.

15. A penalty of Rs.5,00,000/- (Rupees five lakhs only)

was imposed on Sri R.K.Gupta in the connected appeal

under Rule 26 of the Central Excise Rules, 2002. Sri

R.K.Gupta suffered the penalty for his involvement in

wrong availment of the above mentioned amount of

CENVAT credit in contravention of the provisions of

CENVAT Credit Rules, 2004, & Central Excise Act,

1944 and the Rules framed thereunder. This penalty is

the subject matter of Central Excise Appeal No.88 of

2019 (Commissioner, Central Goods and Service Tax

Commissionerate, Ghaziabad Versus R.K. Gupta).

16. The adjudicating authority in its Order-in-Original

dated 21.10.2010 fixed the aforesaid liabilities under the

CENVAT Credit Rules, 2004 and Central Excise Act,

1944 and Central Excise Rules, 2002 on the foot of such

reasons as set forth hereinunder:

“6.4 From the contents of show cause notice I find that there are

following basic issues raised-

(i) The cigarettes received back from sale offices or C & F agents are

not returned by the said sale offices or C & F Agents against damage

or defects but are returned as per guidance from ITC only for want of

reasons not disclosed to the Department. It has been brought out in the

notice that memos are issued to the sale offices for return of goods as

per directions of ITC themselves against which the cigarettes are

returned without any remarks as to why the same have been returned.

The challans accompanying returned cigarettes contain note “please

receive following brands of cigarettes against your order". On receipt

of cigarettes, ITC had informed the Department the reasons like

“Brand not marketable", cigarettes giving bad smell". However, it was

6

found that the cigarettes of same brand which was claimed to be not

marketable were again dispatched to the same sale office from where

they received the returned cigarettes. In every case, ITC informed the

Department that the cigarettes were received for refreshing. The

cigarettes received back were found in original packing and even

outer cartons were intact. It has been alleged in the SCN that the claim

of the party that the same found defective were received back for

refreshing is not true as even without removing the outer carton, how

one can come to know that the cigarettes are not in a condition to be

marketed.

(ii) The process of refreshing has been elaborated in the SCNs. It has

been found that on receipt of returned cigarettes, the same are

scrapped and the outer cartons, cigarette packets, cigarette wrapper,

filter almost every cenvatable material on which Cenvat credit had

been availed by ITC are thrown away without payment of duty. It is

only the tobacco of the returned cigarettes which is recovered (to the

extent of around 80%) and the same is reused for the manufacture of

fresh cigarettes. It has thus been alleged that all the inputs except

tobacco are separated first and disposed off and then only the tobacco

portion is used in manufacturing of fresh cigarettes.

6.5 From the above I find that cigarettes received back for refreshing

are not put to use as inputs for the manufacture of finished goods.

These are actually put to the process of separation of all inputs other

than tobacco by method of scrapping and to my opinion, the said

process cannot be treated as a manufacturing process. The returned

cigarettes as such can also not be treated as inputs as the same cannot

be put to use as inputs in the manufacture of cigarettes. I also feel that

the use of retrieved tobacco by mixing with fresh tobacco is done by

the party with the sole aim to avail credit on returned goods as the

value of such tobacco is very low as compared to the credit available

to them on returned cigarettes.

6.6 As discussed above, the value of tobacco is comparatively much

smaller as compared to the value of all other goods which are

scrapped and thrown away without payment of duty. Going into the

process of refreshing, I find that the entire material received back is

put to scrapping process and two things are obtained namely, (1)

scrapped cartons/packet/cigarette paper/ filter and (2) tobacco. The

scrapped material is a non excisable material and is disposed off

without payment of duty and the tobacco so recovered is put to use for

the manufacture of cigarettes. Thus it is evident that the returned

cigarettes are actually used in the manufacture of scrapped goods (non

dutiable) and only tobacco can be said to be used in the manufacture

of dutiable goods. Thus it is evident that the purpose of receipt of

cigarettes is to remove them from the market stream and to destroy

them and not to use them as inputs in the manufacture of fresh goods.

As such I feel that the returned cigarettes do not come within the

purview of rule 16 of CER, 2002 under the provisions of which ITC

have availed credit on them.”

17. The respondent – assessee carried the Order-in-

7

Original passed by the adjudicating authority in appeal

before the learned Customs, Excise and Service Tax

Appellate Tribunal. The learned Customs, Excise and

Service Tax Appellate Tribunal, by its judgment dated

15.10.2018, held in favour of the assessee and quashed

the order passed by the adjudicating authority. The

learned Appellate Tribunal found the assessee to be

entitled for CENVAT credit under Rule 16(1) on the

following understanding of the said Rule:-

“A bare perusal of Rule 16(1) supports the contention of the learned

counsel for the Appellants inasmuch as it enacts a fiction of law to

the effect that the goods on which duty has already been paid at the

time of removal thereof are brought into any factory for various

reasons mentioned in the Rule, including but not limited to any other

reason, they are entitled to take CENVAT Credit of duty paid on such

goods, as if such goods are received as inputs under the CENVAT

Credit Rules, 2002 and is entitled to utilize this credit according to the

said Rule. These returned cigarettes were brought back into the

factory under conditions specified under Rule 16 of the Central Excise

Rules, 2002 alongwith the Forwarding Challan-cum-Invoice counter

signed by the Officer of the Department. From the record, we find that

the adjudicating authority while coming to the conclusion in para 6.2

has observed that:

“6.2. The issue in the present proceedings before me is

whether cigarettes received back from sale offices or from

clearing and forwarding agents are eligible for credit of

duty paid on them originally at the time of their clearance

from the factory under the provisions of rule 16 of CER,

2002. I would like to analyze the provisions of this rule

under which the impugned credit has been availed by the

party. In terms of this rule, goods should be brought back

for being re-made, refined re-conditioned or for any other

reason and the assessee is entitled to take credit of duty

paid if such goods are received as inputs under the Cenvat

credit rules, 2002. I find that ITC, in their reply have given

force on the words “for any other reason”. I find that the

availment of Cenvat credit is primarily governed by CCR,

2002/2004 and thus the availment of Cenvat credit

provided by any other rule like CER, 2002 cannot be

beyond the provisions of Central Credit Rules. Here I also

find that in the said rule 16 of CER, 2002, there is clear

mention that goods must be received to be used as inputs in

term of CCR, 2002. Thus the very first condition for

eligibility of credit on returned goods is that the goods

8

must be usable and used as inputs in the manufacture of

finished goods. I find that the very basis of the present

dispute is that Department has alleged that the goods have

not been brought back for being used as inputs but only to

take credit in the guise of rule 16 of CER, 2002. On the

other hand, ITC have stressed that conditions of Rule 16 of

CER, 2002 have been satisfied by them for availment of

credit on returned cigarettes.”

From the above, we find that the reasoning given by the adjudicating

authority with respect to Rule 16 is by assuming that it deals with

inputs “as such” and not inputs “as if”.

6. We further find that Rule 16 is wide enough to cover the case of the

Appellants in view of the wordings used in it which inter alia includes

“any other reason” for receiving the duty paid goods. The duty paid

character of the goods, being not disputed in the present case, Rule 16

is squarely applicable and accordingly the Appellants have rightly

taken the CENVAT Credit and utilized the same.”

18. The following are the substantial questions of law

which fall for determination in these appeals:

1. “Whether the learned Customs, Excise & Service Tax

Appellate Tribunal (CESTAT) was misdirected in law in

its interpretation of Rule 16 (1) of the Central Excise

Rules, 2002, by unlawfully including scrapping within

the scope of Rule 16(1) of the Central Excise Rules,

2002 ? Further, whether the learned Customs, Excise &

Service Tax Appellate Tribunal (CESTAT) erred in law

by finding that the respondent – assessee had lawfully

availed CENVAT credit in the offending transactions ?”

2. “Whether the learned Customs, Excise & Service Tax

Appellate Tribunal (CESTAT) was justified in law to

revoke the penalty imposed upon the appellant under

Rule 26 of the Rules by the Order-in-Original dated 21

st

October, 2010 ?”

19. Rule 16(1) is germane to the controversy and thus

needs careful consideration. For ease of reference, Rule

9

16 (1) of the Central Excise Rules, 2002, is being

extracted in its entirety:

“Rule 16. Credit of duty on goods brought to the factory. – (1)

Where any goods on which duty had been paid at the time of removal

thereof are brought to any factory for being re-made, refined, re-

conditioned or for any other reason, the assessee shall state the

particulars of such receipt in his records and shall be entitled to take

CENVAT credit of the duty paid as if such goods are received as

inputs under the CENVAT Credit Rules, 2002 and utilise this credit

according to the said rules.”

20. Rule 16 states the procedure and eligibility to avail

credit of duty on goods brought to the factory. Various

ingredients of Rule 16(1) will now be discussed.

21. Rule 16(1) is applicable to goods on which duty had

been paid at the time of removal of such goods and the

same are brought back to the factory. The goods are

brought back to the factory for being “re-made, refined,

re-conditioned or for any other reason”. The assessee is

also required to state the particulars of such receipt of

goods in his records.

22. Once the above conditions are fulfilled, the assessee

becomes entitled under Rule 16(1) to take CENVAT

credit of the duty paid on the returned goods as if such

goods are received as inputs under the CENVAT Credit

Rules, 2002. The credit shall be utilised by the assessee

according to the latter Rules.

23. The purpose of manufacture of goods in this case is

sale. Bringing the goods back to the factory after they

have been removed for sale does not ordinarily make

good business sense. However, at times for some valid

reasons, the goods cannot be sold or they are not fit for

retention in the market. In such circumstances, the goods

10

may be recalled and brought to the factory. In terms of

Rule 16(1), these goods are brought to the factory for

being “re-made, refined, re-conditioned or for any other

reason”. After being subjected to said processes, the

goods are again removed having become saleable

commodities and worthy of acceptance in the market.

24. The phrase “or for any other reason”, in Rule 16(1)

of the Central Excise Rules, 2002, has to be necessarily

read on the construction canon of ejusdem generis. Any

other rule of interpretation would make the Rule

unworkable and defeat the clear intention of the

legislature.

25. The learned Customs, Excise & Service Tax

Appellate Tribunal (CESTAT), proceeded to give a wide

interpretation to the phrase “or for any other reason” and

thus included the offending transaction within its scope.

The legislative intent was not to read the phrase in

isolation and give it such a wide berth. Otherwise, there

would be no necessity to precede the phrase “or for any

other reason” by the three processes of “re-made”,

“refined” and “re-conditioned”. The three preceding

phrases depicting three similar processes qualify and

restrict the scope of the phrase “or for any other reason”.

26. While explaining the concept of ejusdem generis this

Court in Special Appeal No.33 of 2019 in Gyanwati

Devi v State of U.P. and 5 others held:

“The reason is, when a general word or phrase follows a list of

specifies, the general word or phrase will be interpreted to include

only items of the same class as those already listed.”

11

27. The phrase “for any other reason” has to be

interpreted in light of the preceding expressions of “re-

made, refined, re-conditioned”. The processes coming

under the category of “for any other reason”, have to be

in the likeness of the processes which immediately

precede the aforesaid phrase. All the processes should

have such similarities so as to be constituted into the

same class.

28. The legislature has employed the words “re-made”,

“refined”, “re-conditioned” and the phrase, “or for any

other reason” and eschewed the phrase “for being

scrapped”. Understanding this distinction is the key to

interpreting the scope of “re-made”, “refined”, “re-

conditioned” and the phrase, “or for any other reason”.

29. The essential characteristics of the brought back

goods survive even after they are “re-made”, “refined”

or “re-conditioned”. The original identity of the goods is

retained even after the goods undergo the said processes.

30. When goods are scrapped, all the constituent

components of the goods may be reclaimed. After

scrapping, the original identity of the manufactured

goods completely perishes. Scrapping of goods is done

for various purposes, including cannibalisation and

extraction of vital or valuable parts of the original goods.

31. “Re-made”, “refined” and “re-conditioned” are

processes akin to manufacture; while scrapping involves

destruction of the original identity of the goods.

Scrapping is neither a species nor in the likeness of “re-

12

made”, “refined” or “re-conditioned”. Consequently,

when goods are scrapped, it cannot be stated that the said

goods were brought to the factory for being “re-made”,

“refined”, “re-conditioned”, “or for any other reason”

provided in Rule 16(1). Scrapping of goods does not fall

within the ambit and scope of Rule 16(1).

32. Ordinary business prudence requires that valid

commercial reasons must exist for bringing the goods

back to the factory. The validity of these reasons is the

test of the bona fides of the assessee. These can be

ascertained from authentic records, relating to receipts of

goods and particulars contained therein. Scrutiny of such

records and the contents of the receipts will help

determine the bona fides of the assessee to bring back

the goods.

33. Offending transactions and the findings of the

Assessing Officer as well as learned Appellate Tribunal

have to be examined in the light of the true scope and

correct interpretation of Rule 16(1), as stated in the

preceding paragraphs of this judgment.

34. We find that the learned Appellate Tribunal, while

interpreting the phrase, “any other reason”, in Rule 16(1)

and held that the same was “wide enough to cover the

case of the appellants”. Consequentially, the learned

appellate Tribunal included scrapping within the fold of

Rule 16(1).

35. It is evident that the learned Appellate Tribunal has

incorrectly interpreted the scope of Rule 16(1) by

13

bringing scrapping within the embrace of Rule 16(1) and

has proceeded to legitimise the benefit of CENVAT

availed by the respondent – assessee. These fault-lines

vitiate the judgment of the learned Customs, Excise &

Service Tax Appellate Tribunal (CESTAT), Allahabad.

The judgment of the learned Customs, Excise & Service

Tax Appellate Tribunal (CESTAT), Allahabad, is

therefore unsustainable in law.

36. The findings of facts returned by the Assessing

Officer thus attain finality since they were not

successfully impeached by the learned Appellate

Tribunal. These findings extracted in extenso in the

earlier part of the judgment are set forth, in brief,

hereinafter to take the discussion forward and to its

logical conclusion.

37. The cartons containing cigarettes were not even

opened and found in packed condition. The alleged

defects in goods, as claimed by the assessee, thus could

not be ascertained without opening the cartons. The

goods were actually sent back to the same purchasers in

the self-same condition in which they were received.

38. The receipts were not found to be reliable. There are

no records of the reasons given by the purchasers for

rejecting the consignments of goods. On this foot, the

reasons for bringing back the goods to the factory, as

adduced by the assessee, were disbelieved.

39. The scrapping of the goods stood established by

reliable evidence and cogent findings in the record. The

14

assessee, in fact, scrapped the goods and tried to pass it

as “refining” the goods.

40. Clearly, the goods were not brought back to the

factory by the assessee to be “re-made”, “refined”, “re-

conditioned”, “or for any other reason” as contemplated

in Rule 16(1) of the Central Excise Rules, 2002. The

transactions were devices to illegally avail CENVAT

credit. The intent to illegal avail CENVAT credit and

escape duty was fully established.

41. In wake of the preceding narrative, we find that the

ingredients to avail credit of duty of goods brought back

to the factory, as contemplated under Rule 16(1) of the

Central Excise Rules, 2002, were not satisfied. The

assessee was not entitled to avail the benefit of CENVAT

credit of the duty paid on the aforesaid goods and

illegally availed such credit. The intent of the assessee to

defraud the revenue and escape tax is thus proved.

42. The controversy in the connected Central Excise

Appeal No.88 of 2019 (Commissioner, Central Goods

and Service Tax Commissionerate, Ghaziabad Versus

R.K. Gupta) in respect of imposition of penalty upon Sri

R.K.Gupta turns on the construction of and observance

of the ingredients of Rule 26 of the Central Excise Rules,

2002. For facility of reference, Rule 26 is extracted

hereunder:-

“RULE 26. Penalty for certain offences. — (1) Any person who acquires

possession of, or is in any way concerned in transporting, removing,

depositing, keeping, concealing, selling or purchasing, or in any other

manner deals with, any excisable goods which he knows or has reason to

believe are liable to confiscation under the Act or these rules, shall be liable

to a penalty not exceeding the duty on such goods or [two thousand rupees],

15

whichever is greater:

(2) Any person, who issues-

(i) an excise duty invoice without delivery of the goods specified therein or

abets in making such invoice; or

(ii) any other document or abets in making such document, on the basis of

which the user of said invoice or document is likely to take or has taken any

ineligible benefit under the Act or the rules made thereunder like claiming

of CENVAT credit under the CENVAT Credit Rules, 2004 or refund, shall

be liable to a penalty not exceeding the amount of such benefit or five

thousand rupees, whichever is greater.”

43. Rule 26 of the Central Excise Rules, 2002, has to be

read in conjunction with the findings of facts narrated in

the preceding part of the judgment. The ingredients of

Rule 26 for imposing the penalty upon Sri R.K.Gupta,

Deputy General Manager (IT & Accounts), are fully

satisfied. The provisions of the Rule 26 have been duly

adhered to. The order imposing penalty against Sri

R.K.Gupta under Rule 26, is a lawful and just order, in

the facts and circumstances of this case.

44. Accordingly, the substantial questions of law are

answered against the assessee and in favour of the

Revenue in the following terms:-

I. The learned Customs, Excise & Service Tax Appellate

Tribunal (CESTAT) was clearly misdirected in law in its

interpretation of Rule 16(1) of the Central Excise Rules,

2002 by unlawfully including “scrapping” within the

scope of Rule 16(1) of the Central Excise Rules, 2002.

The learned Customs, Excise & Service Tax Appellate

Tribunal (CESTAT) also erred in law by finding that the

respondent – assessee had lawfully availed CENVAT

credit in the offending transaction.

II. The learned Customs, Excise & Service Tax Appellate

16

Tribunal (CESTAT) was completely unjustified in law by

setting aside the penalty imposed upon R.K. Gupta, in

connected Central Excise Appeal No.88 of 2019

(Commissioner, Central Goods and Service Tax

Commissionerate, Ghaziabad Versus R.K. Gupta), even

in the face of the fact that the ingredients of Rule 26 of

the Central Excise Rules, 2002, were fully satisfied.

R.K.Gupta, in law, was liable to pay the penalty imposed

in the Order-in-Original passed by the Commissioner of

Customs, Central Excise & Service Tax, Ghaziabad.

46. As a consequence, the judgment of the learned

Customs, Excise & Service Tax Appellate Tribunal

(CESTAT), Allahabad, dated 3

rd

April, 2018, is liable to

be set aside and is set aside. The judgment of the

Commissioner of Customs, Central Excise & Service

Tax, Ghaziabad, dated 21

st

October, 2010, is upheld to

the extent and manner indicated in the body of this

judgment.

47. Both the appeals are accordingly allowed.

Order Date :- 6.12.019

Ashish Tripathi

(Biswanath Somadder,J.)

(Ajay Bhanot,J.)