To The Additional Commissioner, Customs, Central Excise & Service Tax, Hyderabad III Commissionerate, L.B.

Stadium Road, Basheer Bagh, Hyderabad-500 004. Sir,

Hyderabad, 16thFeb., 2010

Subject : Reply to Show Cause Notice reg.

**

1.0

Please refer to Show Cause Notice in O.R.No.15/2008-Hyd.III-

Adjn., dated 29.06.2009 issued to M/s. Sri Rama Engineering Company, Survey No.329, Manchal Road, Ibrahimpatnam, R. R. District ( hereinafter referred to as noticee). In terms of the above notice, the noticee is required to show cause to your Honour as to why:

a) an amount of Rs.45,18,163/-

( Rs.44,29,569/- towards CENVAT, Rs.88,594/- towards Education Cess) should not be recovered from the notice along with appropriate interest payable thereon under the provisions of Rule 14 of the CENVAT Credit Rules, 2004 ( hereainfter referred to as Credit Rules) read with proviso to sub-section (1) of Section 11A and Section 11AB of the Central Excise Act, 1944 ( hereinafter referred to as Act) and why an amount of Rs.39,45,764/being the amount already paid/reversed under clause (b) of sub-rule (3) of Rule 6 of the Credit Rules; and notice under Rule 15 (2) of the Credit Rules read with Section 11AC of the Central Excise Act, 1944.

b) Penalty equivalent to Rs.45,18,163/- should not be imposed on the

2.0

At the outset, the noticee would like to submit that the allegations

and the proposals for recovery of CENVAT and Education Cess contained in the Show Cause Notice are inconsistent and contrary to settled law and to the

facts enumerated in the show cause notice itself and hence not at all tenable.

3.0

The noticee is engaged in the manufacture of M.S.Pipes, as

detailed in para 3.1 of this reply, falling under Chapter sub-heading No.7306 90 11 of the first schedule to the Central Excise Tariff Act, 1985 and availing the credit of duty paid on the inputs viz., H.R. Plates/Sheets, Cement, Welding

Electrodes and Wire-mesh used in the manufacture of the M.S.Pipes.

The

M.S.Pipes that are being manufactured by the noticee are being used for supply of water for human and animal consumption. Since, these Pipes are

used for supply of either raw water or potable water (treated water) for human and animal consumption, the same are manufactured of various dia, depending the requirement and the same are manufactured by using MS Plates/HR Sheets with electric resistance welding or sub-merged arc welding with cement mortar coating inside and out-coating with cement mortar by of various

shortcreting/brushcoating or guniting duly providing wire mesh sizes as per the requirement.

3.1

The process of manufacture of these MS Pipes with in and out-

coating of mortar is a simple process. The noticee procures the required size HR Plates, M.S. Sheets, Cement, MS Wire-mesh and Welding electrodes. The Plates/sheets are converted into bare Pipes by using a bending machine as per the required dia. required sizes. In this process, if required, the plates are also cut to the

After completion of the process of bending, the bare pipe is

cleaned with brushes at the place where it is required to be welded and the the same is welded ( electric resistance welding or sub-merged arc welding) by using the electrodes. The base pipe is sent for testing and thereafter, the bare pipe is sent for inside coating (spinning) of Cement mortar and after completing of the coating the pipe is cleared for curing for two days by using sprinklers. After curing the MS Pipe inlaid with Cement mortar, MS Wire-mesh is fixed by using binding wire and on that MS Wiremesh brush coating of mortar is applied for the purpose of outcoating. After completion of the above process the MS Pipes coated with mortar (inside and outside) are sent for curing by sprinklers for a minimum period of 7 days and once the curing is completed the M.S.Pipe will be cleared either on payment of appropriate Central Excise duty liable to be paid thereon or on reversal of CENVAT credit to the tune of 10% of the value of the M.S. Pipe under the provisions of clause (b) of sub-rule (3) of Rule 6 of Credit Rules after completion of quality control inspection by the Engineers of M/s. Hyderabad Metro Water Supply Sewerage Board.

3.2

In

terms

of

Notification

No.47/2002-CE,

dated

06.09.2002/Notification No.06/2006-CE, dated 01.03.2006, M.S.Pipes used for supply of water of human and animal consumption are exempted from Central Excise duty, subject to a condition that, if, a certificate issued by the Collector/District Magistrate /Deputy Commissioner of the District in which the plant is located, is produced to the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, having jurisdiction, to the effect that such goods are cleared for the intended use specified in column (3) of the Table. The noticee, basing on the above

exemption, has claimed exemption from Central Excise duty on MS Pipes eligible for such exemption and also paid full rate of Central Excise duty, where such exemption is not available to them. Inasmuch as the noticee is availing the

duty of excise paid on the inputs viz., M.S. Plate/H.R.Sheet, Cement, M.S. Wiremesh and Electrodes, used in the manufacture of exempted as well as dutiable finished goods as the same are common inputs used in the manufacture of the said finished goods, had reversed 10% of the value of the finished goods which were cleared at Nil rate of duty by availing the benefit of exemption of Notifications mentioned supra.

4.0

This being the factual position, the present show cause notice has

been issued for recovery of CENVAT on the full value of the goods cleared by the noticee by availing the exemption under Notification No.47/2002-CE, dated 06.09.2002/Notification No.06/2006-CE, dated 01.03.2006 during the period July, 2005. The contention of the present notice is that the M.S.Pipes

manufactured and cleared by the noticee for the purpose of executing a back to back contract awarded to them by M/s. IVRCL Infrastructures & Projects Ltd., Hyderabad are not eligible for the common inputs option that has been exercised by the noticee in terms of clause (b) of sub-rule (3) of Rule 6 of the Credit Rules. The notice is based on the following:

That the Invoices addressed in the name of IVRCL ( as detailed in

Annexure A to the notice) were of size 10 x 1250 x 7750 classifiable under 7208 37 30 and the invoices addressed in the name of noticee

( as detailed in Annexure B to the notice)

were of size 10 x 1250 x

7750 classifiable under 7208 11 and sizes of 10 x 1250 x 5980 or 10 x 1250 x 6500 or 10 x 1250 x 3877 and 8 x 1250 x 598 classifiable under 7208 52 10 and hence the goods received for the manufacture of MS Pipes for IVRCL as listed in Annexure A are different from the goods

received in the name of the noticee for the manufacture of dutiable goods mentioned in Annexure B of the notice are different; Since, Plates are the main input for the manufacture of MS Pipes the inputs are identifiable both for the manufacture of exempted finished goods and dutiable finished goods; Since, Shri L. Anji Reddy of the noticees company could not give a specific reply to Q.3 which reads Have you ever used HR Plates

received in the name of M/s. IVRCL for use in the manufacture of dutiable goods and HR Plates received in the name of your Company in the use of exempted goods? it implies that HR Plates received in the name of IVRCL ( as listed in Annexure A) are used for IVRCL related finished goods and hence the same cannot be treated as common inputs;

The main input i.e., HR Plates of size 10 x 1250 x 7750 classified under
Ch.S.H.No.72083730 as listed out in Annexure A to the noticewere only received during the month of July, 2005 and all other HR Plates, as listed in Annexure B to the notice were received during the period from June, 2005 to July, 2005 and September, 2005 and hence Plates required for manufacture of exempted goods are identifiable. 5.0 Before further dwelling into the matter, the noticee would like to

re-produce para 3, 4 and 5 of the notice which are as under: 3. As per Rule 6(1) of Cenvat Credit Rules, 2004, the Cenvat Credit shall not be allowed on such quantity of input which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule 2. 4. As per Rule 6 (2) of Cenvat Credit Rules, 2004, where a manufacturer

avails Cenvat credit on any inputs and manufacture such final products which are chargeable to duty as well as exempted goods, then the manufacturer shall maintain seperae accounts for receipt, consumption and inventory of

Inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take Cenvat credit only on that quantity of input which is intended for use in the manufacture of dutiable goods. 4. As per condition (b) of Rule 6 (3) of Cenvat Credit Rules, 2004, the

manufacturer, opting not to maintain separate accounts, interalia, shall pay an amount equal to ten per cent of the total price of the exempted final products, if the exempted goods are other than those described in condition (a) of the said Rule. It is clarified vide explanation-III provided under the said Rule that the credit shall not be allowed on inputs used exclusively of exempted goods. 5.1 A perusal of the above rule position as enumerated in the show

cause notice itself reveals that :

No Cenvat Credit if the finished goods are exempted Separate accounts of the Inputs used in the manufacture of exempted goods have to be maintained The manufacturer is endowed with an OPTION (emphasis supplied) to not to maintain separate accounts and reverse 10% CENVAT credit of the value of the exempted goods. 5.2 As submitted above and as enumerated in para 1 of the notice,

the noticee is manufacturing MS Pipes, which are in and outcoated with Mortar and embedded with MS Wire Mesh. The said MS Pipes are meant for supply of water for human and animal consumption and for supply to M/s. Hyderabad Metro Water Supply and Sewerage Board. manufacture of the finished goods are: M.S. Plates/HR Sheets falling under Chapter 73 of the first schedule to the Central Excise Tariff Act, 1985; Cement falling under Chapter 25 of the first schedule to the Central Excise Tariff Act, 1985; M.S. Wire Mesh falling under Chapter 73 of the first schedule to the Central Excise Tariff Act, 1985; and Electrodes falling under Chapter 83 of the first schedule to the Central Excise Tariff Act, 1985; The inputs required for the

5.3

This being the case, the notice basing on certain points come to a

conclusion that since HR Plates supplied by M/s. IVRCL are identifiable, the noticee is not entitled to OPT(emphasis supplied) for Common Inputs as envisaged under clause (b) of sub-rule (3) of Rule 6 of the Credit Rules. This assumption of the notice is totally incorrect and contrary to the rule position as enumerated in the notice itself. The concept of CENVAT credit is that the

manufacturer is entitled to avail the credit of duty paid on all INPUTS used in or in relation to manufacture of the finished goods, if such finished goods are liable to be cleared on payment of duty and in cases where the manufacturer is manufacturing exempted as well as dutiable goods, the OPTION is given to the manufacturer. There is no provision in the law that such OPTION can only be taken by the manufacturer if the Principal Raw Material can only be not identifiable or accountable. On the contrary, even if one input used in the

manufacture of exempted and dutiable goods, the manufacturer has the OPTION to avail the common input facility. As a matter of fact, the

department itself has issued innumerable demands stating that one input, like Furnace Oil is used in the manufacture of dutiable and exempted aerated waters and 10% reversal was sought and confirmed by the higher appellate authorities. The Honble C.E.S.T.A.T. in the case of M/s. Pepsico India

Holdings Pvt. Ltd. Vs. Commissioner of Central Excise, Pondicherry [2007 (214) E.L.T. 248 (Tri. - Chennai)] has held that Cenvat/Modvat - Furnace oil - Common inputs used in exempted and dutiable final products Non-maintenance of separate accounts as regards receipt,

consumption and stock of common input used - Rule 6(3)(b) of Cenvat Credit Rules, 2004 applicable. Zonal Bench in the case of Further, the Honble C.E.S.T.A.T., South M/s. Aurobindo Phrma Ltd., Vs.

Commissioner of Central Excise, Hyderabad I [2007 (215) E.L.T. 81 (Tri.-Bang)] has very clearly held that Cenvat/Modvat - Inputs Manufacture of both exempted and dutiable goods - Credit taken on inputs used in the manufacture of exempted goods - Rule 6 of erstwhile Cenvat Credit Rules, 2002 - Compliance with the said rule relates to the entirety of inputs used in the exempted final products including exclusive as well as common inputs - Hence, payment of 8%

under Rule 6 ibid enables manufacturers to take credit on inputs of exempted goods also - Rule 6 of Cenvat Credit Rules, 2004. The

noticee would like to humbly submit that the decision of the Honble Tribunal is squarely applicable in their case and the Department ought to have taken the fact of usage of entirety of inputs used in the manufacture of exempted final produces including exclusive as well as common inputs and in the absence of the same and only relying on one single input, i.e., MS Plates no demand can be made and such demand is not in consonance with the law.

5.4

Accordingly, the noticee would like to humbly submit that the

inputs as mentioned supra are being used in the manufacture of exempted as well as dutiable MS Pipes and hence they have OPTED for the facility of Common Inputs as envisaged under the law and basing on the fact of identifiability of one input the common input facility cannot be denied to them. In this regard, the noticee would like to draw your kind attention to the decision of the Honble C.E.S.T.A.T., South Zonal Bench in the case of M/s. PSL Ltd., Vs. Commissioner of Central Excise, Pondicherry [2007 (220) E.L.T. 510 (Tri.-Chennai) wherein it was held that Cenvat/Modvat -

Common inputs used for both exempted and dutiable final products Non-maintenance of separate accounts - Option - Revenues plea that only those manufacturer of dutiable and exempted final products who are incapable of maintaining separate accounts are allowed under Rule 6(3) of Cenvat Credit Rules, 2002/2004 to pay 8% of price of exempted final products, denied - When an option is given to the manufacturer, Revenue cannot force him to adopt a particular course. Likewise, the Honble C.E.S.T.AT., South Zonal Bench at Bangalore in the case of M/s. Taher Ali Industries & Projects Pvt. Ltd., Vs. Commissioner of Central Excise, Hyderabad III [2006 (195) E.L.T. 225 (Tri.-Bang)] has held that Cenvat/Modvat - Common inputs used in the manufacture of dutiable as well as exempted products - Rule 6(3) of Cenvat Credit Rules, 2002 giving option not to maintain separate accounts and pay 8% of the price of exempted final products - Payment of 8% of the price of exempted final products is compliance with the Cenvat Credit

Rules, Revenues contention that assessee governed by Rule 6(2) ibid in view of certain private documents seized, not correct - Revenue cannot force to adopt particular course when option given to

manufacturer - Impugned order set aside - Rules 6(2) and 6(3) of Cenvat Credit Rules, 2004.

6.0

In view of the above factual and legal position, the noticee would

like to humbly submit that inputs inter alia includes all inputs used in the manufacture of exempted and dutiable finished goods and department cannot deny the same basing on one single input and that availing the OPTION of common inputs is the prerogative of the manufacturer and the same also cannot be denied or dictated by the department. Hence, the demand made in the present notice is not at all sustainable.

7.0

The noticee would also like to submit that the present demand is

hit by LIMITATION. 7.1 On the one hand as per para 6 of the show cause notice, the

notice itself enumerates that as per the ER-1 monthly returns filed by the noticee the fact of availing CENVAT credit on all the inputs intended for use in the manufacture of exempted and dutiable goods, paying duty at applicable rates on dutiable goods and reversing/paying an amount equal to 10% of the value of the exempted goods as provided under Rule 6 (3) (b) of Cenvat Credit Rules, 2004. On the other hand vide para 16 of the notice it is alleged that the irregular availment of credit came to the light on verification of the documents/records maintained by the assesses and during enquiry while recording the statement dated 26.10.2007 from Shri L. Anji Reddy, Managing Partner of the assesses. 7.2 The above facts will clearly evidence that the Department is in the

knowledge of the entire issue relating to the manufacture of MS Pipes, inputs used and option availed by the noticee in terms of clause (b) of sub-rule (3) of Rule 6 of the Credit Rules and subsequent reversal of 10% value of the CENVAT credit availed on all the inputs right from the beginning. This being

the case, the invoking the provisions of extended period under proviso to subsection (1) of Section 11A of the Central Excise Act, 1944 in the present show cause notice, dated 29.06.2009, for demanding alleged ineligible CENVAT credit during the period June, July, August and September, 2005 is not sustainable.

7.3

Further, as per the notice ( Para 16) it is construed that even

otherwise, the department is aware of all the facts when they have recorded the Statement of Shri L. Anji Reddy, Managing Partner on 26.10.2007, however, the present notice was issued on 29.06.2009, i.e., nearly after 613 days from the date of relevant knowledge of the issue, even assuming that the department has come to know about the issue on 26.10.2007. The noticee

would like to humbly submit that the abnormal delay in issuance of the notice, in particularly when there is no investigation whatsoever is pending, itself makes the present notice not sustainable under limitation. In this regard, the noticee would like to rely on the following decisions in support of the above submissions. 1. Mopeds India Ltd. v. CCE - 1991 (56) E.L.T. 241 (T) maintained by the Supreme Court in Collector v. Mopeds India Ltd. - 1991 (53) E.L.T. A79 (S.C.). Department aware of malpractices of the party on the date of search on 23-10-1975 but show cause notice issued on 5-1-1997 - held that department was not entitled to recover differential duty as the same was time-barred.

2.

Gammon India Ltd. v. Show cause notice issued after two CCE - 2002 (146) E.L.T. years of completion of enquiry 173 (T) maintained by held that demands are time-barred. the Supreme Court in Commissioner v. Gammon India Ltd. 2002 (146) E.L.T. A313 (S.C.) J.S.L. Industries Ltd. v. Relevant information supplied by CCE - 1999 (109) E.L.T. assessee as desired by department 316 (T) on 1-9-1987 and show cause notice issued on 6-9-1989 to be barred by time. Rivaa Textile Industries Ltd. v. CCE 2006 (197) E.L.T. 555 (T) Officers visited factory premises on 28.9.1996 and drew factual panchnama on 20/21-9-1996 and show cause notice having been issued after six months latter demands held to be time-barred.

3.

4.

5.

TISCO Ltd. v. CCE - From date of visit of the revenue 2006 (199) E.L.T. 855 officers to the factory of assessee, (T) department having knowledge

10

about activities, but no show cause notice issued for a period of six months prior to that date held that the demand was time-barred. 6. Lovely Food Industries Department gathered information v. CCE - 2006 (195) on their visit to factory on 5-11E.L.T. 90 (T) 1999 - held that show cause notice issued on 25-7-2002 barred by limitation. Shree Renuka Sugars Ltd., Vs. CCE, 2007 (210) E.L.T. 3857(Tri.Bang)) Demand Limitation Clandestine removal Evidence Investigation was done in 2002 and show cause notice was issued only in 2005, proving inordinate delay of 800 days Moreover, no evidence as to excess production, excess receipt of raw materials or electricity consumption to establish clandestine manufacture and removal In the absence of concrete evidence, demand not sustainable Time bar also applicable Section 11A of the Central Excise Act, 1944.

7.

7.4

Further, as could be seen from the relied upon documents

mentioned at Para 21 of the notice and also as could be seen from Annexure A and Annexure B of the notice itself, it is evident that the investigation in to the matter of availing ineligible Credit or short payment of duty has been completed on 26.10.2007, i.e., the date on which the Statement of Shri L. Anji Reddy, Managing Partner was recorded or by 17.12.2007, on which date the Annexure A and Annexure B to the notice have been prepared. This being the case, the present show cause notice ought to have been issued atleast within one year from 26.10.2007 or even 17.12.2007, however, the present notice was issued on 29.06.2009 and hence the notice is hit by limitation. In this

regard, the noticee would like rely on the decision of the Honble C.E.S.T.A.T., Chennai in the case of M/s. Rattan Steel Works Vs. Commissioner of

Central Excise, Chennai [2009 (236) E.L.T. 152 (Tri.-Chennai)], wherein the Honble Tribunal has held that Demand - Limitation - Investigation completed in April, 97 and show cause notice issued only in August, 1998 - Demand notice much beyond the normal period of six months after the Department came to know of alleged clandestine production and clearances - Longer period of limitation not invocable - Section 11A of Central Excise Act, 1944.

11

8.0

In view of the above submissions, the noticee would like to

humbly submit that the demand is not sustainable either on merits or on limitation and accordingly pray before this Honour to drop all further proceedings initiated in the notice. In order to explain the matter in person, the noticee may please be accorded with an opportunity of personal hearing.

9.0

The noticee would like to submit that they have retained M/s.

Swamy Associates, Consultants having their office at Flat No.307, Block-B, Sri Sai Land Mark, Street No.8, Habsiguda, Hyderabad-500 007 (Tel: 6552 6879; Fax:4220 9452 and E-mail : mail@swamyassociates.com) to represent their case and a Vakalat executed to this extent is enclosed to this reply. Accordingly, the noticee request that a copy of all communications, orders may please be endorsed to their Consultants to take appropriate action.

Thanking you, Yours truly,

12

BEFORE THE ADDITIONAL COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, HYDERABAD III COMISSIONERATE, HYDERABAD. VAKALAT
In the matter relating to Show Cause Notice in O.R.No.15/2008-

Hyd.III-Adjn., dated 29.06.2009.

Noticee: M/s. Sri Rama Engineering Company, Survey No.329, Manchal

Road, Ibrahimpatnam, R.R. District.

I / We, M/s. Sri Rama Engineering Company, Survey No.329, Manchal Road, Ibrahimpatnam, R.R. District, do hereby appoint and retain the following advocates / consultants of M/s. Swamy Associates Advocates Consultant S. Jaikumar, G. Natarajan, A.P. Ravi, R. Subramanya, Karthikeyan & S. Yogalakshmi P. Dwarakanath & K.S. Ramesh M.

to appear for me / us in the above said original / miscellaneous petition and to submit any written or oral submissions, conduct and prosecute or defend the same an all proceedings that may be taken in respect of any application for execution of any decree or order passed therein. I / We empower my / our Advocate to appear in all miscellaneous proceedings in the above suit or matter till all decree or orders are fully satisfied or adjusted and in all matters thereto whether in suit, inter-locutory application, executive petitions and applications in execution till they are finally disposed of, before the Commissioner / Hon'ble Tribunal and to obtain the return of documents and draw moneys that might by payable to me / us in the said suit or matter. He / They is / are also authorised to depute other counsel to act on his / their behalf. Dated this 18th day of February,2010. Signature of the Executant (with seal)

We hereby agree to represent the above appellant, in the above said proceedings. Certified that the consultants named above, have worked in the department of Central Excise as Inspectors / Superintendents of Central Excise, for more than 10 years and they are entitled to act as a representative in terms of Rule 12(e) of the Central Excise (Appeals) Rules, 2001 read with Section 35 Q of the Central Excise Act, 1944 and Rule 9(e) of the Customs (Appeals) Rules, 1982 read with Section 146 A of the Customs Act, 1962. For Swamy Associates,

(P.Dwarakanath, Consultant) Address for communication Swamy Associates, Flat No.307, Block B, Sri Sai Land Mark, Street No.8, Habsiguda, Hyderabad-500 007