The Bombay High Court (Aurangabad Bench) clarified that the operations of testing and pairing of the smart cards sent to the Set Top Box manufacturer would be covered under the phrase ‘further processing, testing or any other purpose’, and hence, Cenvat Credit availed by Dish TV at the time of clearance of the smart card to the Set Top Box manufacturer (Trend Electronics) is not liable for reversal under Rule 3(5) of Cenvat Credit Rules, 2004.
The Court emphasised that the basic objective behind allowing Cenvat Credit on inputs, input services or capital goods is to provide instant credit of duties/taxes paid thereon and consequential reduction in the cost. If the Cenvat credit availed on inputs or capital goods is not used for the intended purpose, then to counteract such eventualities, an embargo has also been created in the statute for not extending the benefit of the Cenvat facility.
Thus, the Court pointed out that Rule 2(n) has to be read in conjunction with Rule 4(5)(a) (i) of the Cenvat Credit Rules, 2004, and ‘Job work’ per se, may or may not lead to manufacture. But the usage of Rule 4(5)(a) is wide enough to cover any activity carried on the input by the job worker, and in those cases, the Cenvat credit on inputs need not be reversed under Rule 3(5) of the Cenvat Credit Rules, 2004.
The Division Bench comprising Justice Vibha Kankanwadi and Justice Hiten S. Venegavkar observed that though the smart cards were imported, they were not inserted in the Set Top Boxes as such, and they were required to be given for processing to Trend Electronics, which did not carry any manufacturing activities as regards the smart cards received from the respondent, rather, they simply paired the bar code of the smart card with that of Set Top Box.
The Bench explained that Rule 2(n) of the Cenvat Credit Rules, 2004, prescribes “job work”, which means processing or working upon of raw material or semi-finished goods supplied to the job worker, to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process.
Thus, the testing and pairing were done by Trend Electronics only with a view to finding whether they are suitable for the customer, i.e., the end user, and there is no manufacturing activity carried out by Trend Electronics, added the Bench.
Briefly, the respondent, Dish TV India Limited (formerly known as M/s. Videocon D2H Limited), was providing broadcasting services to their customers, and to complete the Conditional Access System (CAS), procured Set Top Boxes (STB) domestically in India. However, the respondent imported ‘smart cards’ from the overseas supplier, and availed Cenvat Credit on the CVD amount paid on the said imported smart cards. Further, the respondent was sending smart cards free of cost to the manufacturer of the Set Top Box, namely M/s. Trend Electronics Limited on delivery challans.
On inquiry about the removal of smart cards free of cost, it was told that smart cards were inserted in Set Top Boxes manufactured by Trend Electronics, and thereafter, the respondent was purchasing the said Set Top Boxes from Trend Electronics Limited. The Department, however, found that the respondent was availing Cenvat Credit on the smart cards, and after that, they were removing them for use in the manufacture of Set Top Boxes and not for job work. Therefore, the Cenvat Credit availed by the respondent on smart cards was not admissible to them.
As the respondent did not reverse the Cenvat Credit availed by them at the time of clearance of the smart card to Trend Electronics Limited under Rule 3(5) of Cenvat Credit Rules, 2004, which was to the tune of Rs. 42.19 Crores. The Department therefore issued a show cause notice proposing a demand along with interest and penalty. The CESTAT, however, quashed the show-cause notice.
Appearances:
Advocate D.S. Ladda, for the Appellant/ Revenue
Advocates A.R. Madhav Rao, Mukund Rao, and Krishna Rao, for the Respondent/ Taxpayer
