CESTAT Allows Acer India CENVAT Credit, Says Revenue Neutrality Negates Intent To Evade Duty

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 5 November partly allowed Acer India's appeal, permitting CENVAT credit on Special Additional Duty (SAD) paid on imported computer components used for free warranty replacements.

A Bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao held that CENVAT credit cannot be denied in the absence of fraud, wilful misstatement or suppression of facts with intent to evade duty, particularly where the transaction is revenue neutral. It said:

“A quasi judicial authority imposing a penalty is bound by the ingredients of the provision invoked. General deterrence, divorced from any finding that those ingredients exist, is no ground for a penalty under a taxing statute”

Acer India manufactures desktop and laptop computers. It imported components, including microprocessors, hard disk drives and DVD writers, without paying SAD by claiming an exemption available for goods imported for manufacturing purposes.

During an audit, the Department found that some of these components had been transferred to the company's service centres for replacing defective parts under warranty instead of being used in manufacturing computers.

The Department concluded that Acer India had violated the exemption conditions and demanded SAD along with interest. It also denied CENVAT credit on the duty subsequently paid and imposed penalties on the ground that the company had suppressed facts.

Acer India challenged the demand, contending that the components were used for free warranty replacements and that the SAD paid was available as CENVAT credit. It argued that the transaction was revenue neutral as it had no financial incentive to evade payment of duty.

The Tribunal observed that supplying imported components as warranty replacements could not be treated as using them in the manufacture of computers. It therefore held that Acer India had failed to fulfil the conditions of the exemption and was liable to pay SAD.

However, on the allegation of suppression, it found that the transaction was revenue neutral since the company was entitled to claim CENVAT credit for the SAD paid.

It also noted that the transfers involved only a small portion of the imported components and had been disclosed in the company's monthly returns. Further, Acer India had admitted the transfers during the audit and paid the duty before the show cause notice was issued.

Further, the Bench held that the incorrect declarations arose from a mistaken understanding of the exemption conditions and not from any deliberate attempt to evade duty. Consequently, the restriction on CENVAT credit under Rule 9(1)(b) of the CENVAT Credit Rules, 2004, could not be invoked in the absence of an intention to evade duty.

It also set aside the penalties imposed under Section 114A of the Customs Act and Rule 15 of the CENVAT Credit Rules. It observed that penalties could not be imposed merely for general deterrence without establishing the statutory ingredients necessary for their imposition.

Accordingly, the CESTAT upheld the SAD demand and interest, while allowing CENVAT credit and setting aside both penalties, thereby partly allowing Acer India's appeal.

For Acer India: Advocate Raghavan Ramabhadran.

For Revenue: O.M. Reena, Authorised Representative.