23.02.2022- No Need For Reversal Of Any Amount Under Rule 3(5A) of CENVAT Credit Rules,2004 On The Sale/Removal Of Capital Goods As Scrap By The Output Service Provider.

The Hon’ble CESTAT Delhi vide its order dated 31 January 2022 in the matter of M/s Bharti Infratel Limited Vs.  Additional Director General, DGCEI in Service Tax Appeal No. – 53095 of 2016 held that the Appellant being an Output service provider, is not required to reverse any amount under rule 3(5A) of the CENVAT credit rules, 2004 on disposing off/sale of Capital Goods as scrap.

The Appellant preferred the Appeal before the Hon’ble CESTAT assailing order dated 31.08.2016 passed by the Additional Director General (Adjudication) confirming the demand of Service Tax along with penalty and interest against the Appellant for non-compliance of rule 3(5A) of the CENVAT Credit rules.

Facts:

  • The Appellant is engaged in telecom infrastructural support services to various telecom companies duly discharging its service tax liability under the category of ‘Support services of business and commerce’
  • The Appellant for the provision of its output services purchased various capital goods like- lead acid batteries, air conditioners, transmission racks, fire alarms etc. and utilized the credit for discharging its output service tax liability.
  • The Appellant later removed certain capital goods after usage which were waste/scrap without payment/reversal of any amount under rule 3(5A) however on the capital goods which were removed as ‘used capital goods’, the Appellant duly reversed/paid amount under rule 3(5A).
  • The Appellant claimed that it had internally devised a ‘Inventory Management Process’ for identification of scrap and explaining the process of the same submitted ‘that the unworkable capital goods are inspected by the outside vendors in the warehouse and a health Certificate is issued by them. On the basis of health report and cost analysis, a decision is made by the Appellant to either undertake repair of such capital goods by outside vendors or purchase a new one. However, if the said capital goods could not be made workable even after repairs, the said goods are classified as obsolete and cleared as scrap after getting approvals from various levels.  Those capital goods classified as scrap are sold via e-auction and the auction documents and the invoices raised clearly mention the description of goods as scrap.’
  • It was further informed by the Appellant that the purchasers are all scrap management companies having a certificate from Rajasthan State pollution control board for procurement and recycling of scrap.
  • The department for the above transaction initiated an enquiry by issuing summons, recording statements and examination of the documents submitted and subsequently considering the statements made and documents submitted, issued a Show cause notice dated 29.12.2015 proposing recovery of the amount along with penalty and interest under rule 3(5) of the CENVAT credit rules.
  • The Appellant duly submitted a reply dated 28.06.2016 to the show cause notice however the Additional Director. DGCEI after considering the submissions confirmed the demand of Rs. 19,65,03,338/- with interest and penalty.

Appellant Plea:

  • Rule 3(5A) will have no application in the present matter as under 3(5A) manufacturer was required to pay an amount in case of clearance of capital goods or scrap and not the output service provider.
  • Relying on Valji Khimji and Company Vs. Official liquidator of Hindustan Nitro product (Gujarat) limited and ors, submitted that the capital goods removed were scrap and there is a difference between ‘used goods and scrap’.
  • The Additional Director wrongly observed that goods no longer of any use cannot be termed as scrap, it should be of no use for the market as whole.
  • The said capital goods have been sold to scrap management companies have valid certificate from Rajasthan State Pollution Control Board for procurement and recycling of scrap and also the invoices for sale describes the goods as scrap only.
  • The Additional Director wrongly hold that there was no evidence that the goods cannot be used, hence cannot be considered as scrap.
  • Relying on MSCO P. Ltd.   Union of India and ors., submitted reference to definition of ‘scrap’ from other statutes cannot be made.

Revenues Plea: –

  • Old and used capital goods were removed, mentioning the description on the invoice as ‘scrap of batteries’ and ‘scrap of AC’
  • The health checkup and reports submitted by the Appellant do not mention any reason for declaring the said goods as scrap, moreover the goods were removed in the original form.
  • There is large gap between the shelf life of some items and the actual life before being declared as scrap

Held:

  • After perusal of the rule 3(5A) from 27.02.2010 to 27.09.2013 and onwards, observed that during the period-in-dispute i.e., 27.09.2013 to 31.03.2015 in terms of payment under rule 3(5A) only manufacturer was required to pay the amount in case of clearance of capital goods as scrap and not an Output Service provider, moreover, the position has also been accepted by the Additional Director while passing the impugned order.
  • Referring to judgment of Hon’ble Supreme Court in valji khimji noticed that there is difference between the two terms ‘used’ and ‘scrap’, the Additional Director erred in coming to the conclusion that goods cannot be treated as scrap if they are no longer of use and it is required to be seen that the goods are of no use for the market as a whole.
  • The Appellant follows a detailed procedure as already mentioned for declaring the said goods as scrap after getting the capital goods inspected from outside vendors and thereafter getting approvals from various levels (Note for approval) for clearance of the same as scrap, thus the Additional Director failed to take the notice of the said evidence and wrongly held that no evidence of goods being ‘scrap’ brought on record by the Appellant.
  • The findings of the Additional Director are also perverse on the ground that reports from vendors, made after inspection and clarifying that the said goods can be further used or not after repairs, was ignored him.
  • The Hon’ble Bench relying on the decision of Hon’ble Supreme Court in MSCO Pvt. Ltd. held that the Additional Director could not have referred to definition of ‘scrap’ given in the Income Tax Act, as referring to definitions in other statutes if the same is not defined in applicable statute is not permissible.
  • The goods declared as scrap were sold to scrap management companies having certificates for procurement and recycling of scrap under the Hazardous Waste Management, thus it could be urged on the behalf of revenue that those goods would not be scrap as not broken before disposal.
  • After considering the matter at length held that the said capital goods cleared as ‘scrap’ only and the Appellant is not required to pay any amount as per rule 3(5A) of the Credit rules.

The Hon’ble CESTAT with the above findings allowed the appeal filed by the Appellant and set aside the impugned order with the directions to the department to refund the amount already paid by the Appellant in respect of the impugned transaction.

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