Customs, Excise and Gold Tribunal - Delhi
Lupin Laboratories Ltd. vs Collector Of Central Excise on 7 April, 1993
Equivalent citations: 1993ECR50(TRI.-DELHI), 1994(71)ELT914(TRI-DEL)
ORDER Jyoti Balasundaram, Member (J)
1. The issue for determination in the above appeal is the eligibility to Modvat credit of "7ADCA" used as an input in the manufacture of the final products Cephalexin and Cefadroxil manufactured by the appellants herein - according to the Department, the appellants had wrongly availed of credit of Rs. 79,38,597.50 on various items which were not used in or in relation to the manufacture of the final products Cephalexin and Cephadroxil by wrongly declaring these items, Penicillin G.K. etc. in their Rule 57G declaration as inputs for the purpose of manufacture of their final products while these were raw materials/inputs for raw material known as "7ADCA" manufactured at their Ankleshwar factory.
2. The appellant is a deemed public limited company within the meaning of the Companies Act, 1956 engaged in the manufacture of bulk drugs including Ethambutol Hydrochloride, Rifampicin, Trimethohprim etc. For the said purpose the appellant has, among others, a factory at Mandideep, in Raisen District, Madhya Pradesh and a factory at Ankleshwar in Gujarat, both holding Central Excise licences. At the Ankleshwar factory, the appellant manufactures 7ADCA which is an antibiotic and an intermediate product for Cephalexin. 7ADCA is also classified under Chapter 29. The process of manufacture of 7AD CA is as follows :-
3. At Mandideep, the appellant manufactures Cephalexin/Cefadroxil, which are antibiotics (Chapter 29). The process of manufacture is as follows :
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4. On 23-6-1988, prior to commencement of the manufacturing activity, the appellant wrote to the Superintendent, Central Excise, Bhopal informing him that the appellant proposed to start production of Cephalexin in the first week of August, 1988 and, therefore, the excise licence may be issued. The appellant also furnished the details of raw materials and manufacturing process as well as final products. The appellant also made a request for guidance since the appellant and its officials were new in the field of excise (Page 48 of paper book). On 26th July 1988, the appellant made an application in AL 4 with other documents (Page 52). The appellant by its letter dated 30th July 1988 submitted the flow chart in respect of manufacturing process of Cephalexin. On 2-8-1988, a licence was issued to the appellant in L 4 for manufacture of an antibiotic, Cephalexin (Page 80-81). On 23-8-1988 the appellant addressed a communication to the Superintendent informing that the appellant will be manufacturing Cephalexin from Penidllin-G which will be partly imported and partly procured indigenously. This raw material shall be sent to the appellant's factory at Ankleshwar for conversion of Penicillin-G into an intermediate product 7ADCA. The appellant also informed that the said intermediate product will be received by the appellant at its factory at Mandideep for further processing and production of Cephalexin. The appellant specifically informed the authorities that it shall take the credit of duty allowed in respect of inputs under Rule 57F(2) and specifically requested for permission of converting Penicillin-G into an intermediate product, 7ADCA at its plant at Ankleshwar before bringing to its plant at Mandideep (Page 82) reproduced below:
4.1 On 25-8-1988, the appellant filed a declaration under Rule 57G for availing of the credit of duty paid on various inputs under Rule 57A. (Page 83).
5. If the appellant had one composite factory for manufacture of 7ADCA as well as Cephalexin, the appellant would have received all the raw materials at such location, taken modvat credit and utilised such credit while paying duty on Cephalexin. However, in view of geographical separation of locations it was agreed between the two factories that Ankleshwar factory will manufacture 7ADCA out of the raw materials supplied by Mandideep factory and return 7ADCA so manufactured to Mandideep for use in the manufacture of Cephalexin. Excise law recognises such an eventuality of geographical separation of two factories and has made provisions to the effect that as long as both factories are owned by one company or as long as undertaking is given by the unit getting the job-work done that duty will be paid by that unit, avail-ment of modvat credit will be allowed treating both the units as one. In compliance with this the appellant furnished an undertaking on 8-9-1988 under Notification No. 214/86 dated 25-3-1986 to the central excise authorities at Baroda (Page 92 of paper book) and made an application on 6-8-1988 under Rule 57F(2) (Page 87). The undertaking is reproduced hereunder :
* * * * * * It was submitted to the authorities that the raw materials will be sent directly to Ankleshwar where they would be processed into 7ADCA and the 7ADCA so manufactured shall be received at Mandideep where it would be used in the manufacture of Cephalexin/Cefadroxil.
5.1 In the application under Rule 57F(2) the appellant described the manufacturing process and submitted that Penicillin G, one of the main raw materials, would be used in the manufacture of 7ADCA. The credit in respect of the raw materials so received at Ankleshwar was taken at Mandideep only after 7ADCA was received at Mandideep. The procedure required to be followed by the appellant was specifically discussed by the appellant's representatives with the jurisdictional Superintendent/Assistant Collector as averred by Shri Shrivastava, Manager, Administration and P.R. in his affidavit dated 31-1-1991 (Pages 128-131) and not controverted by the Department.
6. On 8-9-1988, the appellant addressed a letter to the Assistant Collector informing that Penicillin-G was an imported item which was received by the appellant at the port of Bombay and the material was to be transported from Bombay to Mandideep and again from Mandideep to Ankleshwar it would result in avoidable transportation cost. The Assistant Collector was, therefore, requested to grant permission to transport the raw material, Penicillin-G directly from Bombay to Ankleshwar. The appellant undertook to produce all the relevant documents as may be desired by the authorities. On 15-9-1988, the appellant addressed another letter to the Assistant Collector declaring that the appellant will be sending Penicillin-G directly from Bombay to Ankleshwar and that the resultant 7ADCA falling under sub-heading 2941.90 will be brought to Mandideep for manufacture of the final product, namely Cephalexin. On 19-9-1988, the Superintendent, Central Excise, Bhopal required the appellant to produce permission under Rule 57F(2) from the Assistant Collector, Central Excise, Ankleshwar. He also required the appellant to amend the application in column 5 in view of direct transportation of raw materials to Ankleshwar.
7. On 20-9-1988, the appellant replied to the Superintendent informing him that the appellant shall initially bring the inputs to Mandideep until the permission for direct transportation of inputs is granted by the Assistant Collector, Central Excise, Bhopal. The appellant also submitted the modified application and furnished details of processes which 7ADCA would be subjected to, after receipt at Mandideep. The appellant again furnished an undertaking under Notification No. 214/86 as directed. The appellant also addressed a letter to the Superintendent on 21-8-1988 informing him that the appellant shall be sending penicillin GK to Ankleshwar for production of 7ADCA and that the 7ADCA so produced will be brought back into the factory at Mandideep for use in the manufacture of final products Cephalexin/Cefadroxil. The appellant also informed him that both, the inputs as well as final products, fall under sub-heading 2941.90. The appellant again requested for grant of permission under Rule 57F(2). On 22-9-1988 the appellant addressed a letter to the Superintendent informing him that the inputs will be sent directly to the factory at Ankleshwar and that the application under Rule 57F(2) may be treated as having been amended accordingly.
8. On 22-9-1988, the Assistant Collector issued permission under Rule 57F(2) permitting direct transport of inputs to Ankleshwar to produce 7ADCA and to receive 7ADCA at Mandideep for use in or in relation to the manufacture of final products, the details whereof were already submitted by the appellant to the excise authorities (Page 103 reproduced below) * * * * * *
9. On 28-9-1988, the appellant submitted a declaration under Rule 57G for availing of the credit of duty paid on inputs which were proposed to be used at Ankleshwar for conversion of Penicillin G to 7ADCA under Rule 57F(2).
On 10-2-1988 the appellant informed the Superintendent that the commercial production of Cephalexin has started with effect from the same date.
10. On 4-1-1989, the appellant addressed a letter to the Superintendent with a copy to the Assistant Collector, Central Excise, Bhopal detailing therein various raw materials which would be sent for conversion into 7ADCA directly from various suppliers to its Ankleshwar factory without bringing them to the factory at Mandideep and the said letter specifically requested the authorities to guide regarding the records to be maintained by the appellant, the records required to be maintained by the job worker at Ankleshwar and the documents which should accompany the material from supplier to job worker and from job-worker to the appellant. A specific request was made in the said letter to let the appellant know of the procedure for taking modvat credit by the appellant on the material sent directly by the supplier to the job worker's factory at Ankleshwar.
11. On 13-2-1989 the appellant addressed a letter to the Assistant Collector, Central Excise, Bhopal with a copy to the Superintendent drawing his attention to earlier communications in which the raw materials were declared for manufacture of 7ADCA from penicillin GK. The Assistant Collector was informed that 7ADCA was also an intermediate product for other products, Cephalexin and Cefadroxil and that the appellant shall be using 7ADCA for the manufacture of all the two final products viz. Cephalexin and Cefadroxil. The consumption figures of 7ADCA and D-Alpha PGCIHC1 per kg. of Cephalexin were also furnished to the Department on 17-2-1989. On 22-5-1989 list of per kg. consumption of raw materials for manufacture of 7ADCA from Penicillin GK was also furnished.
12. On 29-5-1989, the Assistant Collector was specifically requested to endorse the items declared by the appellant in the permission dated 19-9-1988 for conversion of Penicillin-G into 7ADCA under Rule 57F(2), and it was confirmed by the Department during discussions with the appellant's Manager that there was no need for a formal endorsement in view of the permission having been granted and that the Department had made a note of the said request. Further communication was exchanged with the Superintendent subsequently.
13. The Collector, Central Excise, Indore issued a show-cause notice proposing disallowance of modvat credit of Rs. 79,38,597.50 utilized wrongly by the appellant during the period January 1989-August 1990 proposing its recovery under Rule 57-1 and withdrawal of facility granted under Rule 57F(2) and also proposing penal action. A detailed reply was submitted on 31-1-1991. The impugned order was passed on 10-6-1991 confirming the demand under the extended period of limitation, imposing a penalty of Rs. 5 lakhs and withdrawing Rule 57F(2) permission. The Collector held as follows :
* * * * * * Hence, this appeal.
14. We have heard Shri C.S. Lodha, learned Counsel and Shri Bhartiya, learned DR, weighed their submissions and carefully perused the records.
15. We see great force in learned Counsel's submissions that there was no question of any wrong availment of modvat credit as alleged during the period January 1989 to August 1990. The appellant had fully submitted all the details to the authorities and sought their guidance from time to time. The appellant had made an application for permission under Rule 57F(2) which was granted. The appellant had furnished an undertaking under Notificaton No. 214/86. The appellant had complied with all the procedural formalities. The entirety of raw materials was used in the manufacture of 7ADCA and the entirety of 7ADCA manufactured by the appellant was used in the manufacture of final dutiable products. In view of the above, there was neither any justification for invoking the extended period of limitation alleging suppression of facts nor was there any justification for denial of the credit. There was a series of communications between the appellant and the Central Excise authorities of Bhopal which clearly demonstrated that the Central Excise Officers were kept fully informed and at every stage the Department was aware of the process of manufacture, raw materials required for such manufacture and the fact that 7ADCA will be manufactured at its unit at Ankleshwar by using various declared raw materials and the entire procedure was agreed to by the department and the appellant acted in accordance with the said procedure.
15.1 Appropriate declarations were filed with the Department well before the commencement of the activity, these declarations were accepted, permission under Rule 57F2 was sought and granted, list of all the raw materials directly sent to Ankleshwar was filed with the Department, the Department was requested to amend the permission dated 22-9-1988 in case they so desired and the entirety of the quantity of the raw materials declared by the appellant was, in fact, used in the manufacture of the intermediate product, 7ADCA and 7ADCA so manufactured was transported to Mandideep where it was further used in the manufacture of final product, viz. Cephalexin which was cleared on payment of duty of excise.
15.2 If the appellant were to carry out the activity of manufacture of Cephalexin from the starting stage of Penicillin G in its factory at Mandideep there would have been no difficulty because the appellant would have declared Penicillin G and various other raw materials as inputs, availed of the credit of duty paid thereon and utilised such credit while paying duty on Cephalexin. There is no dispute that in such cases the raw materials which would be accepted as inputs will be various raw materials used in the manufacture of intermediate product, 7ADCA which in turn would be used in the manufacture of Cephalexin. However, since Mandideep factory of the appellant did not have the facility to manufacture 7ADCA the appellant sent all the raw materials first to its factory at Ankleshwar directly so that the said factory could manufacture the intermediate product, 7ADCA which could then be sent to its factory at Mandideep. There is no justification for denying the credit because it was not in dispute that the entirety of the raw materials was, in fact, used in the manufacture of final dutiable product. The appellant had filed before the Collector a certificate from the Chartered Accountant certifying that the total quantity of raw materials received at Ankleshwar was used in the manufacture of 7ADCA which, in turn, was used in the manufacture of Cephalexin at Mandideep. Every ounce of the material was thus fully accounted for.
15.3 The allegation of evasion of payment of duty cannot be sustained for the simple reason that instead of following the procedure under Rule 57F(2) it would have been perfectly open to the appellant - in the alternative - to avail of the credit of the duty paid on various raw materials at Ankleshwar factory (after utilising the said credit) and avail of the credit of duty paid on 7ADCA at the time of receipt of 7ADCA at Mandideep and utilise such credit while paying duty on Cephalexin. In such an event also the net revenue receipt would have been the duty paid on Cephalexin less credits availed of on raw materials at Ankleshwar.
16. The appellant had filed a declaration with the authorities declaring that it will be manufacturing Cephalexin using various raw materials which were declared in terms of Rule 57G. The appellant had also declared and sought permission of the authorities that the main raw material, namely, Penicillin G which is imported will be sent directly to Ankleshwar factory and the permission was granted by the authorities. Later, in respect of other raw materials the appellant informed the authorities and sought their guidance whether any specific amendment was required in the original permission for sending other raw materials directly to Ankleshwar factory. The authorities confirmed to the appellant that in view of the permission already granted, no such amendment was necessary. In view of this, the appellant received all the raw materials at Ankleshwar, used these raw materials in the manufacture of 7ADCA, moved such 7ADCA with proper documents to Mandideep, used such 7ADCA in the manufacture of Cephalexin at Mandideep and cleared Cephalexin on payment of duty of excise. The credit in respect of various raw materials received by the appellant at Ankleshwar was taken by the appellant only when 7ADCA manufactured at Ankleshwar was received by the Mandideep factory. Only on such receipt of raw materials accompanied with original gate passes for each raw material evidencing payment of duty, the credit was taken.
17. We also agree with the learned Counsel that in terms of clause 2 of Notification No. 214/86 there was no requirement to seek any permission at all from the authorities. Relevant extract from the Notification is reproduced below:
17.1 Since the appellant had filed the declaration the appellant was legally entitled to send the raw materials to Ankleshwar factory and avail of the credit in respect of such raw materials when 7ADCA manufactured by the appellant at its Ankleshwar factory from such raw materials was received by the appellant at its Mandideep factory.
18. In our view the modvat scheme permits a manufacturer/assessee to send the raw materials directly to a job-worker, have the raw materials converted into intermediate product and receive such intermediate product in his factory for further conversion into final product. In such cases, even if the intermediate product is a finished product by itself it will not make any difference as long as the said intermediate product is used as an input in the manufacture of final product by the principal manufacturer. The Collector has seriously erred in observing that since 7ADCA itself was a final product the benefit of Rule 57F(2) cannot be extended.
18.1 It is not necessary for a manufacturer assessee to convert the raw materials directly into final product and the benefit of exemption/modvat credit availment could not be denied merely because the raw materials were first converted into an intermediate product and were then used in the manufacture of final product. Since there was no requirement to use raw materials directly in the manufacture of final product the denial of modvat credit by the Collector was clearly uncalled for and contrary to judicial pronouncements which has settled this position beyond any pale of doubt. Failure to appreciate this has vitiated the impugned order which deserves to be quashed and set aside.
19. In the present case the Mandideep factory of the appellant was the manufacturer of the final product and insofar as the said factory was concerned 7ADCA was an intermediate product and had to be so regarded. The fact whether 7ADCA is dutiable, marketable or otherwise is of no relevance at all. What is of relevance is determination of the question whether cycle of conversion of raw materials into final product has been completed and whether the manufacturer is in a position to demonstrate that the entirety of the raw materials has been used for the purposes for which they were brought and that it is possible for the manufacturer to co-relate the raw materials with the final product.
19.1 We, therefore, hold that there was no violation of Rule 57F(2) which postulates that a manufacturer assessee engaged in the manufacture of final product can send the raw materials directly to a job-worker, request such job-worker to convert the raw materials into an intermediate product and then receive such intermediate product in his factory for manufacture of final dutiable products. In such an event, it is open to the manufacturer to avail of the credit of duty of excise paid on raw materials received by him for being sent to the job worker (in respect of which no modvat credit is availed of) for conversion into intermediate product and which are then received by the manufacturer in his factory for conversion into final product.
20. We are unable to accept the contention of the learned DR that the requirements of Trade Notice 38/86 fulfilment of which was a condition for the grant of permission under Rule 57F(2), have not been complied with. The learned DR's contention that challans for movement of goods from one processor/job worker to another processor (job worker under Rule 57F(2) and/or Notification 214/86-CE) as prescribed in Annexure II to the Trade Notice, has not been issued, is not correct. The Deputy General Manager (Works) of the appellant has stated on 27-7-1990 that Rule 57F(2) challans in respect of inputs utilised for manufacture of 7ADCA in Ankleshwar are received in Mandideep with duty paying documents and on that basis, credit is taken at Mandideep directly in RG 23A Part 2 [Page 216 Annexure F(1) to the show cause notice]. The appellants are also maintaining RG I records for finished goods, GP I, GP-2 for issue of finished goods, RG 23 Part I & II with reference to material received by Mandideep Unit. Stock account of "inputs" for use in relation to 7ADCA in form RG-23A Part I for material sent/received by Ankleshwar Unit is also maintained at Ankleshwar. Shri Jaywant, Works Manager at Ankleshwar has also stated on 21-8-1990 that 57F(2) challans are prepared (Page 226 - Annexure G to show cause notice). We are also satisfied on perusing the registers produced before us that all registers are being maintained and that the procedural requirements of Annexure IV & V of maintenance of accounts of removal of inputs or partially processed goods under Rule 57F(2) and/or Notification No. 214/86 both by the parent factory and the job worker have been substantially complied with.
21. It is well settled by a series of decisions of the Hon'ble Supreme Court, various High Courts and the Tribunal that what is relevant is substantial compliance with the provisions of law and as long as a manufacturer has substantially complied with the law, the benefit in accordance with law cannot be denied for non-observance of technical requirement. In the case of Maschmeijer Aromatics reported in 1990 (46) E.L.T. 395 the Tribunal has held that the scheme of modvat has been introduced with a view to lessen the burden on assessees by allowing credit of duty on inputs and so long as such credit was available and the inputs have actually been used for the declared finished product, benefit of concession should not be denied and to deny benefit for procedural lapse would be to defeat the purpose of the rule providing for substantive relief by way of provisions of credit of duty on inputs to reduce the financial burden on a manufacturer. In the case of M.R.F. Ltd. v. Collector of Central Excise reported in 1990 (50) E.l.T. 546 the Tribunal has held that the benefit cannot be denied when procedural requirements have been substantially complied with. In the case of Mangalore Chemicals and Fertilizers 1991 (55) E.L.T. 437, the Hon'ble Supreme Court has held that non-observance of a procedural condition of a technical nature can be condoned. In the present case, substantive relief of modvat credit is sought to be denied on a technical ground viz. that permission of the Assistant Collector was not specifically sought for removing raw materials directly to Ankleshwar. It is not disputed that such permission is not required to be obtained under any Rule and it is further not disputed that if such permission is applied for, it is by and large granted in view of trade notices, permitting receipt of raw materials directly by job workers to prevent unnecessary cross-movement of goods. We, therefore, hold that the appellants are entitled to the benefit of modvat credit of Rs. 79,38,597.50. For the same reason, we also set aside the penalty imposed by the adjudicating authority.
22. In the result the impugned order is set aside and the appeal allowed with consequential relief.