Customs, Excise and Gold Tribunal - Mumbai
Bharat Gears Ltd. vs Commissioner Of Central Excise & ... on 12 March, 2003
ORDER G.N. Srinivasan, Member (J)
1. This is an appeal filed by the assessee against the decision made by the Commissioner of Central Excise (Appeals) Mumbai in Order AB(344)53/M-VI/2000 dt. 22.09.01 wherein he confirmed Order in Original passed by the adjudicating authority denying the Modvat Credit of L.P.G. and L.D.O used in the manufacture of final product Automative gears, which is ultimately cleared under Rule 57F(4) procedure or under notification No. 241/86-CE dt. 1.03.86 at 'NIL' rate of duty.
2. Appellants are engaged in the manufacture, interalia of automotive gears falling under Chapters 84 and 87 of the Central Excise Tariff Act, 1985. In addition to manufacturing automotive gears on their own account, the appellants also undertake manufacture of such automotive gears on job work basis. Job work is carried out in two ways:
a. The customers supply the forgings under the provisions of Rule 57F(4) of the Central Excise Rules as existed then. The Appellants manufactured the gears and returned the same to the respective customers following the prescribed procedure in the said Rules.
b. The customers supply their forgings but they do not follow the procedure prescribed under Rule 57F(4). The Appellants clear the goods on payment of duty as in respect of their own products.
3. In either of the categories the customers only supply the forgings. The consumables and other inputs which are necessary in or in relation to the manufacture of such finished automotive gears were provided by the Appellants in the course of manufacture in their own factory.
4. The Appellants have made necessary declaration under Rule 57G in respect of inputs that are used in or in relation to the manufacture of final product. The forgings are subjected to Isothermal Annealing Process in the furnaces. These furnaces use light diesel oil as fuel in the process of forgings. When the forgings are subjected to Annealing cycle, it achieves microstructure that helps in machining of the forgings such as Turning/Gear Cutting/Drilling/Milling/Reaming. The other processes are also undertaken and they return it to the suppliers of the forgings after finishing the process. Question is whether they are entitled to Modvat credit in respect of inputs used by them namely light diesel oil which is used as fuel to process forgings because the assessee is acting as job worker as well as Primary manufacturer when it manufactures the final product namely Automatic Gear. The Show Cause Notice was given on 24.06.99 charging the appellants for wrong availment of Modvat credit of the tune of Rs. 11,91,756/- seeking to deny the same. The A.C. did not agree with the contentions raised by the assessee, confirmed the demand. The Commissioner (Appeals) by the Order-In-Appeal confirmed the Order-In-Original.
5. In the appeal memorandum, under the caption, "Statement of Facts", the manufacturing process is described in para 3 of the same which reads as under:
"The forgings are subjected to Isothermal Annealing process in the furnaces. These furnaces use light diesel oil as fuel in the process of forgings. When the forgings are subjected to Annealing cycle, it achieves microstructure which helps in machining of the forgings such as Turning/Gear Cutting/Drilling/Milling/Reaming. The annealed forgings are turned and gear cut in various special purpose machines.
The next process is Heat Treatment:
For crown wheels, the appellants use continuous type gas Carbonizing furnaces, whereas for gears and shafts, batch type furnaces known as "Sealed Quench Furnaces" are used.
In both the furnaces, LPG is used as fuel. LPG is also as fuel. LPG is also fed in to the gas generators and cracked into what is known as "Endo Gas". The Endo Gas is then fed to the Heat Treatment Furnaces, for carbonizing hardening of the gears in the furnace.
The gears are properly arranged on the special fixtures made of HRS (Heat Resitant Steel) casting. Ni Hard grade, which can withstand high austenitising temperature in the furnaces.
The hardened gears are subjected to finishing operation such as cylindrical grinding, bore grinding, spline grinding etc. as applicable based on product drawing specifications.
The crown wheel and pinions are finished by a process called lapping. This is the finishing operations, here crown wheel and pinion as a pair is meshed and run under load. The special compound is prepared by mixing Silicon Powder in an oil and poured on to the pair in a closed chamber.
The pair rotates under load and few microns are removed from mating flanks, which improves the rolling condition of the pair.
Some of the customers specify phosphating and or short peening as a special process to be carried out at final stage. Shot peening is carried out in a special purpose machine using special grade steel shots; which impinge on the tooth flanks and impart the compressive stresses in the tooth fillet areas, thereby improving the fatigue life of gears in bending.
Phosphating is carried out using special phosphating chemicals in a special set up, where Manganese Phospate layer of 3-4 microns is provided on gear profiles.
This helps in providing lubrication to the gears during "running in" period for first 500-1000 Km, when vehicle is new.
The gears are inspected and sent to the Finished Goods Stores for packing. For each type of gears, a separate instruction sheet is prepared to give details of type of rust preventive oil that should be used and type of boxes to be used for packing the gears.
6. In para 4 of the statement of facts, it is described as follows.
Thus various inputs as well as fuels are used in the process of manufacture of the said automotive gears. The furnaces are common, which run continuously, whether it is for the manufacture of automotive gears of the Appellants' own or for the manufacture of gears received by them on job work basis.
7. The contention of the appellants in the grounds of appeal amongst other things is that the final product is subject to payment of duty. Rule 57F(4) of the Central Excise Rules is a specific provision which does not involve duty being discharged on the products manufactured by the job worker. However, this does not result in a situation where provisions of Rule 57C is attracted in these type of cases. It is argued that the inputs are equated to the provisions of Rule 57G to Rule 57C. It is specifically argued in the grounds of appeal that Rule 57C was not invoked in the Show Cause Notice, therefore, the impugned order is bad in law. Further, it is argued that Chapter V-AA of the Central Excise Rules, there is no concept of "Modvat Assessee". Such a distinction between the"assessee" and the "modvat assessee" has no validity in law. Shri Ravindran, Ld. Counsel for the appellants places before us judgment of tribunal in the case of Jindal Polymers v. C.C.E., Meerut III reported in 2001(43) RLT 680. We have considered the rival submissions of the Ld. D.R. has reiterated the reasons mentioned in the impugned order.
8. We have considered the pleas made by the appellants which is described in Para 3 of the statement of facts. In the Show Cause Notice dated 20.08.99, it has been specifically stated as follows:
The said assessee are engaged in the manufacture of goods falling under Ch. 87, 84 and 73 of the CETA, 1985. They are also undertaking processing/manufacturing on job work basis. From the records such as R.G. 23A Pt.I and Pt. II maintained by the said assessee, it has been noticed that the said assessee are availing credit of duty paid on L.P.G. L.D.O. and other inputs to be used in the manufacture of their final products. The said assessee have declared their final products as per their declarations filed from time to time. It has been further noticed during the visit to their factory on 25.09.1998 that they were engaged in the processing of raw materials supplied by others under the provisions of Rule 57F(4) Notfn. No. 214/86 dt. 01.03.1986 as amended. it was also seen that the main process involved on working upon the raw materials supplied by others is forging, machining etc. The assessee receive the raw materials in the form of forgings of iron and steel falling under Ch. 72 of the C.E.T.A.., 1985.Thereafter, these forgings are subjected to the process of turning, machining, heat treatment and lubrication etc. In the factory premises of the said assessee they have installed furnaces for heating the processed goods. These furnaces are working on L.P.G./L.D.O. The said assessee have not installed any separate storage tanks for the storage of inputs used for the heat treatment to be given to the goods processed on job-work basis and goods processed on their own account separately. Similarly, the said assessee have no separate furnaces for the proceeding of goods received from others and for the processing of goods on their own account. It also had been found that these furnaces run continuously round the clock and therefore the consumption of L.P.G. /L.D.O (declared input) is continuous without any interruption. It was also seen that on working upon the raw materials supplied by others for processing on job-work basis, the suppliers are not supplying inputs namely L.P.G./ L.D.O. along with their other raw materials. The raw materials supplied by the others are subjected to the processes such as turning, machining etc and thereafter there resultant product is subject to heat treatment, lubrication and after lubrication, the product is tested, packed and returned back to the principal manufacturer under the provisions of Rule 57F(4)/57 J of the Central Excises Rules 1944 read with Notfn. No. 214/86 dt. 01.03.1968. The said assessee are also using, in addition to the inputs namely L.P.G. L.D.O. other inputs such as Phosphating Chemicals, Packing materials, Steel Shots, Cosmoline 945, Silicon Powder and Oils etc. (hereinafter referred to as the "said other inputs") for the completion of the requirement of principal manufacture i.e. the job supplier. The said other inputs on which the said assessee are availing credit of duty paid are used in the processing of goods for others on job-work basis.
The provisions of Sub-rule (1) of the Central Excise Rules, 1944 says that "the provisions of this section shall apply to such finished excisable goods (hereinafter, in this section, referred to as final products) as the Central Government, by Notfn. In thr Official Gazette, specify in this behalf for the purpose of allowing credit of any duty of excise as may be specified in the said Notfn. (hereinafter in this section referred to as the specified duty) paid on the goods used in the manufacture of the said final products (hereinafter, in this section referred to as the inputs)". Sub-rule (1) of Rule 57G of the Central Excise Rules, 1944 says that every manufacturer intending to take credit of duty paid on inputs under Rule 57A or 57B of the central Excise Rules, 1944 shall file a decleration with the Assistant Commissioner of Central Excise having jurisdiction over his facory indicating the description of final product manufactured in his factory and the inputs intended to be used in the said final product and other such information as the said Assitant Commissioner may require and obtain a dated acknowledgement of the said decleration. Thus, both these provisions say and prescribe the condition that the inputs on which credit of duty paid is availed shall be used in the manufacture of final product in his factory. The said assessee have not consumed the input namely L.P.G. /L.D.O. and the said other inputs for the manufacture of their final products in the factory. The said assessee consumed the inputs namely L.P.G. /L.D.O. and the said other inputs for the processing of the raw materials or inputs received from others on job-work basis under the provisions of Rule 57F(4) read with Notfn. No. 217/86 dt. 01.03.1986 (as amended) which were not their final products and hence the credit availed on the total quantity of inputs namely L.P.G./L.D.O. and the said other inputs involving amount of credit to a tune of Rs. 11,91,756/- (Rupees Eleven Lacs Ninety One Thousand Seven Hundred Fifty Six only) as detailed in Annexure-A to this notice is in contravention of Sub-rule 1 of Rule 57A read with Sub-rule 1 of Rule 57G of the Central Excise Rules, 1944 and therefore the entire amount of Rs. 11,91,756/- (Rupees Eleven Lacs Ninety One Thousand Seven Hundred Fifty Six only) is inadmissible.
9. The process of the manufacturing is mentioned in reply to show cause notice in letter dated 20.08.99. It has been specifically stated as follows.
1.1 "In our registered factory at Mumbra, we manufacture Automotive gears falling under heading 8708.00 and other goods. We manufacture in our factory Automotive Gears on our own account as well as on job work basis out of the principal raw material viz. Forgings supplied by the customers. The manufacture of Automotive Gears undertaken by us on job work falls under the following two categories:
(a) Manufacture of finished Automotive Gears out of Forgings supplied by the customers under the provisions of Rule 57F(4) or Rule 57J read with notification No. 214/86 dt.
01.03.1986, in which case, the Gears manufactured on job work are returned to the respective customers without payment of duty, but duty is being paid by the customers.
(b) Manufacture of finished Automotive Gears out of Forgings supplied by the customers without following the procedure under Rule 57F(4)/57J, in which case the Gears manufactured are cleared to the respective customers on payment of appropriate duty.
As already stated above, in both the categories of job work, the customers supply only the principal raw material viz. Forgings. Since it is neither feasible nor practical for the customers to supply the fuel i.e. LDO and LPG and other consumables required to be used in or in relation to the manufacture of the Gears, such as phospating chemicals, Cosmoline-945 (Rust Preventive), Silicon powder, Oils (Lubricating Oils, Cutting Oils, Quenching Oils, Hydraulic Oils etc.) Steel shorts and Packing materials (HMHD bags, LDP caps, Metal strappings), etc. these are used for our common stores on which we have availed Modvat Credit under Rule 57A on following the prescribed procedure. In both types of job work, Gears are manufactured by us in completely finished form just as our own declared final product. Accordingly, the final product viz. Automotive Gears mentioned in the declaration filed by us under Rule 57G(1) covers the Gears manufactured on job work basis. It therefore follows that the inputs in question have been actually used in or in relation to the manufacture of final product in our factory, as declared by us under Sub-rule (1) of Rule 57G. Therefore the allegation that the inputs in question were not used by us in the declared final product manufactured in our factory is not sustainable."
10. When we look into the show cause notice it does not allege that there is violation of Rule 57C of the Central Excise Rules. We agree with the view of the contention raised by the Ld. Counsel for the appellant that application of Rule 57C in this case is wrong.
11. Moreover in the judgment of the Tribunal in the case of Jindal Polymers case supra where in similar situation Modvat Credit has been granted to the Job Worker, Provisions of Rule 57C of the Central Excise Rules has been explained by the Tribunal in the case of Bajaj Tempo reported in 1994 (69) ELT 122.
12. We extract from the decision of the Bajaj Tempo. It is held that the Job worker is entitled to claim modvat credit.
In the said case at paragraph 6.3 it is stated as follows.
6.3 Now, we look at Rule 57C. As per this Rule, no credit on inputs should be allowed, if the final product is exempt for the whole of the duty of excise leviable thereon or is chargeable to 'nil' rate of duty. What would be the consequence in a situation as is seen in the cases before us, when Rule 57C is applied in the manner as pleaded by J.D.R. ? To illustrate, taking the case of Bajaj Tempo, they bring duty paid steel materials from outside declaring them to be inputs for the product 'Motor Vehicle Parts' or 'I.C. Engine' and take Modvat credit. But these motor vehicle parts or I.C. Engines manufactured in their Pune factory are themselves inputs for the further manufacture of Motor vehicle in their factory at Pune as well as in another factory belonging to them, where such motor vehicle parts/I.C. Engines are cleared under Notification 217/86. In such a situation, if motor vehicle the ultimate final product is cleared free of duty, the consequence would be to deny the exemption availed of in respect of M.V. parts or I.C. engines. Thus duty payable on such motor vehicle parts or I.C. engines used in the manufacture of exempted Motor Vehicles is required to be paid at the time of clearance of exempted motor vehicle. This is what Notification 217/86 envisages. As regards Modvat credit taken on steel materials, if Rule 57C is applied at the stage of clearance of motor vehicle parts or I.C. engines on the ground that they are exempted, it would amount to denial of Modvat credit otherwise available on the steel materials used in the manufacture of motor vehicles, since the steel materials also are eligible inputs for the motor vehicle. Whether such a denial is permissible? This is the hot question debated before us, which is to be considered.
7.1 First we consider this question from the pleadings made by the Id. JDR and the objections taken by the department. Going by these objections, if we order reversal of credit taken on basic input materials in terms of Rule 57C, then they have the choice to clear the M.V. parts or I.C. engines or copper wires/rods etc. on payment of duty, in which case they can take credit of the duty paid on these items in the other factory and utilise the same for payment of duty on Motor vehicles or wire mesh as the case may be. No objection can be taken on this, as agreed to by the Id. JDR. Thus, by sending the same inputs under Chapter X procedure in terms of Notification 217/86 they cannot be visualised as having agreed to forego this credit on basic input materials, nor can the Notification 217/86 or Rule 57C be construed to force such a situation on them. This is evident from the scheme of Modvat and also from Notification 217/86 as discussed below.
7.2 Under the Modvat scheme, credit of duty paid on notified inputs is to be given for payment of duty on the notified final products, if such inputs are used in or in relation to the manufacture of final products and such inputs are not hit by explanation to Rule 57A. This same concept is clearly discernible in Notification 217/86. This notification is mainly intended to avert payment of duty at each intermediate stage and take credit of such duty at each subsequent stage, starting from the basic materials, turning out components and finally ending with the ultimate final product. Such a vertical integration of production line can be in one and the same factory or spread over two or more factories of the same manufacturer. In such cases Notification 217/86 can be availed. They also can take Modvat credit on primary inputs used in the manufacture of secondary inputs (M.V. parts, I.C. engines) so long as the final product namely Motor vehicle pays duty. Hence, we are to agree with the Id. Counsel Shri Lodha that Notification 217/86 stands on a different footing, when it comes for consideration for purposes of applying Rule 57C. It is not like any other exemption, where intention is to forego the levy on the products cleared from the factory.
7.3 But the Id. JDR points out the decision of this Bench in Kirloskar Oil Engines - 1993 (67) E.L.T. 412 (Tri.) = 1993 (42) ECC 153 (WRB). We have carefully looked in that decision. That case related to clearances of diesel engine parts free of duty in terms of Notification 217/85 under Chapter X procedure for use elsewhere in the manufacture of I.C. engines. It is not a case, where the assessees cleared the goods to another factory belonging to them, where dutiable engines were manufactured from those parts and such engines cleared on payment of duty. It was a case of clearance of the parts of I.C. engines to various other manufacturers, many of whom used these parts for manufacture of exempted I.C. engines. It was never claimed before us in that case that the parts of engines were utilised only in assembly of dutiable I.C. engines. In the circumstances, the present issues were never before us for consideration in that case. The main point pleaded in that case was that they had taken credit on inputs and utilised the inputs in the manufacture of I.C. engine parts as per declaration filed and hence subsequent reversal of credit is not permissible under Rule 57C read with Rule 57-I. A part from the fact that the case of Kirloskar Oil Engines is clearly distinguishable on facts, even as a proposition of law. Exemption Notification 217/85 is not on par with Notification 217/86. The latter notification is esoteric to Modvat scheme and is entirely based on that concept, whereas Notification 217/85 is a notification foregoing revenue on I.C. engine parts used in I.C. Engines irrespective of whether they are dutiable or exempted.
7.6 Hence, the scope of Rule 57C in a situation like the present one, is to be construed in the context of the Modvat scheme and not to destroy that concept. Any interpretation in such a situation has to be to give effect to Notification 217/86 and not to take away the benefit of averting duty payment at each stage in the line of production. Hence, a mechanical application of Rule 57C, is to be avoided, since it destroys the very benefit, which is otherwise available under the scheme right from stage one to the final stage. In the case of disintegrated production, credit is available from stage one by paying duty at each finished stage and taking credit of such duty in the other units down the line, whereas in the case of vertically integrated production units the same benefit is sought to be conferred by averting payment of duty at each stage and postponing the availment of credit to the final stage of manufacture. This is now, we could interpret the provisions of Rule 57C in the context of Notification 217/86. Any other interpretation will frustrate the object of the scheme, apart from leading to discrimination between vertically integrated production line and laterally disintegrated production amongst different units.
13. The decision of the Tribunal in Bajaj Tempo has been followed in Jindal polymers 2001(43) RLT 680 and Ashok Organic Industries Ltd. v. CCE, Vadodara, Appeal 244/96 Order CII 2297/WZB/2001 dated 3/9/2001 where in a similar situation it was held that job Worker is entitled to Modvat Credit. We follow both the decisions in this instant case. It is to be held that when a manufacturer produces as a job worker out of raw material given by the principal manufacturer a product or undertakes certain process on such raw materials then it is considered as an intermediate product. Rule 57C of the C.Ex. Rules will not come into play in that circumstances. But such a job worker manufacturers the same product which he manufactured for the principal manufacturer, out of the raw materials procured by him, (Jobworker) and if such a product is exempted from duty, then provisions of Rule 57C will come into play. That Rule will not apply to the intermediate product. In this appeal, job worker has manufactured intermediate product and returned to the principal manufacturer, hence he cannot be denied the credit.
14. We allow the appeal of the assessee and set aside the impugned order, with consequential benefit according to law.