Customs, Excise and Gold Tribunal - Mumbai
Kirloskar Oil Engines Ltd. vs Collector Of Central Excise on 18 March, 1993
Equivalent citations: 1993(42)ECC153, 1993ECR303(TRI.-MUMBAI), 1993(67)ELT412(TRI-MUMBAI)
ORDER R. Jayaraman, Member (T)
1. This is an appeal against the Order-in-Appeal No. P-27/92, dated 20-1-1992 passed by the Collector of Central Excise (Appeals), Pune.
2. The appellant is engaged in the manufacture of I.C. Engines and ;parts thereof such as plain shaft bearings. There is no dispute that final products manufactured are dutiable and in relation to the manufacture of the final products, they bring in duty-paid Bi-metal strips, in respect of which Modvat Credit is taken by the Appellants and utilise the credit towards payment of duty on the final products. However certain components (Plain shaft bearings) were cleared at 'Nil' rate of duty in terms of exemption under Notification 217/85 and 75/86, by following the Chapter X procedure. The Assistant Collector issued a demand for reversal of Modvat credit in respect of the duty credit involved on Bi-metal strips, which had been utilised in the manufacture of shaft bearings cleared at Nil rate of duty under the aforesaid exemption notification. In the adjudication proceedings, the Assistant Collector held that as per the provision of Rule 57C, credit can not be allowed on inputs used in the manufacture of final products, which are exempted. The Appellants went before the Collector (Appeals) by way of appeal, which was also rejected. Hence the present appeal before the Tribunal.
2A. The only issue to be decided in this case is whether credit of duty paid on inputs brought in under Rule 57A can be reversed, when certain final products, wherein such inputs have been used are cleared at 'Nil' rate of duty availing full exemption.
3. We heard the elaborate arguments of both the sides and also considered the citations made by each side. They are discussed at the relevant places in our findings below.
3.1 The first plea of the Counsel for the appellant is that Notification 217/85 is a conditional exemption and duty is payable on the goods cleared under Chapter X procedure, if they are not rewarehoused or were found to be utilised for purposes other than the specified use as per the Notification. Hence such goods can not be construed to be exempted goods or goods cleared at 'Nil' rate of duty in terms of Rule 57C of the Central Excise Rules. We find that Rule 57C does not talk of conditional or unconditional exemption. It refers to the final product, which is exempted from the "whole of the duty of excise" or chargeable to Nil rate of duty. There can not be any dispute that in this case the goods are cleared under a notification granting exemption of whole of duty leviable and not under partial duty exemption. Hence, on a strict conception of the said Rule, the distinction sought to be made on the basis of conditional exemption does not appeal to us. If this argument is to be accepted, we are of the view that Rule 57C should refer to goods, which are unconditionally exempted from the whole of duty. Such wordings could not be inserted on our own, when the said Rule only refers to wholly exempted goods. There are notifications which give exemption from the whole of duty leviable either conditionally or unconditionally. There are also notifications giving exemption for a part of the duty leviable. Such exemptions can also be subject to fulfilment of certain conditions or given unconditionally. Hence, the contra position to the 'Whole of the duty' can, in our view, only be "partially" and it cannot be taken to mean that Rule 57C refers only to an unconditional exemption notification. Hence we are not able to accept this plea.
3.2 Next argument advanced by Shri Kulkarni on behalf of the appellants is that if Modvat credit is compelled to be reversed in respect of the goods cleared under Chapter X procedure, and if later on such goods are subject to excise duty, no Modvat credit can be claimed in respect of such goods, on which duty has been paid subsequently. Thus the cascading effect in such cases would not be averted. The argument is based on situations where goods cleared under Chapter X procedure are diverted for other uses or misused by the receiver of the products. In such situations, the receiver of the final products can not expect to get Modvat benefit in respect of the inputs contained in such final products diverted. In any case, Modvat scheme is designed to confer benefit of duty credit in respect of inputs used only by the manufacturer in the final products cleared on payment of duty. When the final product is cleared free of whole of the duty leviable under an exemption notification, the scheme does not envisage subsidising the manufacturer of the final product by allowing credit of duty on inputs used therein. Hence we are not impressed by this argument as well.
3.3 Third argument of the Ld. Counsel for the Appellants is that even as per Rule 57C, no credit of duty paid on the inputs used in the manufacture of final product shall be allowed, if the final product is wholly exempted from duty, (emphasis supplied by the Counsel). Here at the time of allowing credit, it can not be anticipated that the inputs would be used on certain shaft bearings cleared under Chapter X procedure at 'Nil' rate of duty. Credit has been allowed in respect of final products, which are dutiable and major portion of these products are also cleared on payment of duty. The credit would be utilised only against duty payable on the specified final products and not for clearance of any other final products, not specified in the declaration. In this context, he seeks to rely on the decision of the South Regional Bench in the case of Collector of Central Excise v. Premier Tyres - 1992 (2) ETR 67] and the case of Sawoltam Ispat Ltd. - 1989 (41) E.L.T. 181. He also points out' that utilisation of credit can be for payment of duty on any of the final products in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed (Vide Rule 57F(3)(i) of the Central Excise Rules). There is no one to one corelation in utilisation. All the inputs were intended to be used in relation to the manufacture of shaft bearings and there is no dispute on this. Hence when credit of duty allowed is utilised in accordance with the Rule 57(3)(i), no objection can be taken to the effect that some final products cleared are wholly exempted.
3.4 As against this argument the Id. SDR refers to another decision of the South Regional Bench in this case of I.B.P. Co. Ltd. v. Collector of Central Excise - 1993 (21) ETR 250] and also East-Regional Bench's decision in East India Pharmaceutical [1991 (54) E.L.T. 355 (E.R.B.)]. He contends that if the interpretation placed in the case of Premier tyres is accepted, then Rule 57C would be rendered meaningless. Rule 57F(3) is to be read in conjuction with Rule 57C and not in isolation. When credit can not even be allowed for an exempted product under Rule 57C, it can not be utilised in terms of Rule 57F(3)(i).
4.1 On the case laws cited by both the sides, we have given serious consideration. Apart from these case laws, we also observe that the South Regional Bench in the case of Wipro Information Technology [1988 (33) E.L.T. 172] have taken a similar view in regard to utilisation of proforma credit under Rule 56A, where part of the final products manufactured out of inputs, were cleared as exempted goods. We also observe that Delhi High Court in the case of Good Year India Ltd. [1990 (49) E.L.T. 39 (Del.)] took a similar view in the context of Notification 201/79 in regard to utilisation of credit taken in RG 23 Part I. 4.2 However, the South Regional Bench in the case of I.B.P. Co. Ltd. has held that credit can not be taken and accumulated, when final products are removed under exemption to 100% export oriented unit. However, we find that in this case, all the removals of final products were made to 100% E.O.U. and were cleared duty free. But the assessee wanted to take credit of duty on inputs and accumulate for future duty-paid clearances of final products. The East Regional Bench in the case of East India Pharmaceuticals have taken the opposite view holding that it is necessary to read down Rule 57F(3) with Rule 57C and credit can not be utilised, if the final products are exempt and credit has to be reversed, if such inputs have gone into the manufacture of exempted final products, though specified in the Modvat declaration.
4.3 One of us (Shri Desai) sitting as a Single Member, has referred an identical issue to the President for placing before the larger Bench, (vide his Order No. 1560/92-WRB, dated 9-9-1992 in Appeal No. E/277/92 filed by M/s. Shah Foods Ltd.) 4.4 Though we are persuaded by the ratio of the judgment of Delhi High Court in the case of Good Year India, which was not considered by the East Regional Bench in the case of East India Pharmaceuticals, we find that the reasoning given by the East Regional Bench, with special emphasis on the significance of the term 'such inputs' figuring in Rule 57F(3)(i) and the need for reading the provisions of Rule 57F(3)(i) in conjuction with Rule 57C cannot be ignored. These aspects have not been considered by the Delhi High Court. Moreover the judgment of Delhi High Court is not directly on the interpretation of Rule 57C vis-a-vis Rule 57F(3)(i). Hence we deem it necessary to place the papers before the President, for constituting a larger Bench, for deciding on this question of law.
5. Before doing that, we would like to place on record some of our own views.
The entire Modvat scheme, as contained in Section AA of Chapter V of the Central Excise Rules, is a self-contained one, introduced mainly with a view to avert the cascading effect of input taxation. Hence the scheme envisages that duty paid on inputs allowed as credit is available for payment of duty on final products, manufactured out of such duty-paid inputs. If no duty is payable on final products, the question of allowing credit of duty paid on inputs cannot arise in such a scheme. This is the sum and substance of Rule 57C. When credit itself is not allowable, if the final products are exempted, how can the credit be utilised, when the final products go out duty free? The view taken in Premier Tyres case by the Southern Bench is that utilisation of credit allowed for the declared final products is only in respect of duty payable on the final products and not in respect of exempted products. Similar view is also found in the Delhi High Court judgment in the case of Good Year India. But it could still be open for argument on the ground that there is no need for availment of utilisation of duty credit on inputs in respect of clearances of exempted final products. Credit is needed to be utilised only in regard to clearances of dutiable final product. Hence when credit per se is not allowable in regard to clearance of exempted final products in terms of Rule 57C, such a credit initially allowed is an accumulation and has to be lapsed. Instead of allowing it to lapse, the same is accumulated and used as a subsidy over and above the duty credit on inputs used in the manufacture of final products cleared on payment of duty. Though one to one corelation is not prescribed under Rule 57F(3)(i), there appears to be a tacit requirement of reading Rule 57C into the provisions of Rule 57F(3)(i). This is the view taken by the East Regional Bench, which we also share to a certain extent.
6. Since the issue involves consideration of these points of law and the decisions for two Benches run somewhat contrary to each other, we consider it fit for placing before the larger Bench, for deciding on the following questions :
"Whether, in the context of the provisions of Rule 57C vis-a-vis Rule 57F(3)(i) of the Central Excise Rules, Modvat credit of duty paid on inputs used in the manufacture of declared final products, part of which are cleared free of the whole of duty of excise leviable thereon, in terms of an exemption Notification, could be disallowed by way of reversal of credit of duty on such inputs, which have been used in the manufacture of final products cleared free of duty?"
7. The registry is directed to send the appeal files and other connected records to the President for considering constitution of a larger Bench.
P.K. Desai, Member (J)
8. While concurring with the iews and endorsing the order that the matter be referred to the larger Bench for proper interpretation, when I have, sitting as a single member, vide Order No. 1560/92-WRB, dated 9-9-1992 in Appeal No. E/277/92, also referred identical point to the Larger Bench, highlighting two conflicting views of two Benches of the CEGAT, I deem it necessary and desirable, with a view to supplement what has been observed above, my views on the point.
9. The crux of the issue here is how various provisions of the Modvat scheme could be interpreted.
10. When however, an issue as to interpretation of any legislative provisions arises, the cardinal rule of interpretation is that the phraseology of the relevant provision has to be read in its simplest sense and given effect to and unless there is anything specific providing contrary, no single provision should be read in isolation and doctrine of harmonious construction should be applied, and further in case of any ambiguity, arising therefrom, reference can be made to the aims and objects of such a legislation, where the intention of the legislature in formulating such a legislation, could be ascertained for the purpose of giving such an interpretation which is in confirmity with the legislative intent.
11. MODVAT scheme has been precisely formulated to give relief against multi-stage levy of duty and avoid its cascading effect. The scheme can be stated to be an enlargement of the principles laid down in Rule 56A, about granting credit. The scheme finds its place in Rule 57A to Rule 57] of the Central Excise Rules. Highlighting only such provisions which appear relevant here, Rule 57C of the Rules makes it explicit that no credit of duty be allowed when the final product is wholly exempt from duty or chargeable to nil rate. The wordings are clear and unambiguous and leave no scope for any doubt or other interpretation. There does not exist any clause or proviso qualifying the said provisions. Thus a clear nexus is established between availment of credit and the durability of the final product. Neither this Rule, nor any other provision in the entire MODVAT Credit scheme, contemplate conferring any benefit other than what is ostensibly given and when the sole purpose is to avoid cascading effect, the consequential inference is that the benefit of availment of credit for duty paid on input could be availed of, if and only if, the final product manufactured therefrom suffers duty.
12. Rule 57F(3)(i) has to be read harmoniously with the other provisions, but even if read in isolation, makes no departure from the basic concept of the scheme. What it provides for, is instantaneous utilisation of credit and provides that one to one co-relation, vis-a-vis input and final product, is not called for. However, with provisions of Rule 57-I already existing and permitting issuance of direction as to reversal of or cash demand for, the credit "utilised", it can hardly stand to any reason that utilisation provided for in Rule 57F(3)(i) is irreversible. What the said Rule provides for is that the credit, as availed of, can be utilised against payment of duty of the final product, in or in relation to which such inputs are intended to be used. The only interpretation that appears in confirmity with the basic concept of the MODVAT Scheme, is that one need not wait for utilisation of the credit till the final product out of the concerned input is removed on payment of duty. It, nowhere, either expressly or impliedly, says that utilisation is irreversible notwithstanding whether the final product, when removed, does not suffer any duty. The facility in the said rule, has a nexus with utilisation of credit and not the availment thereof.
13. In the instant case, the final product has not suffered any duty. Removal by following procedure laid down in Chapter X cannot make any difference, and in that case we are inclined to endorse the view expressed by the East Regional Bench in East India Pharmaceutical Works Ltd. v. Collector of Central-Excise [1991 (54) E.L.T. 355].
14. A decision from the Delhi High Court in Good Year India v. Union of India [1990 (49) E.L.T. 39 (Del.)] is cited in relation to utilisation of credit, and being a decision from a High Court, should overweigh our personal view. However, here, there also exists a judgment from the Bombay High Court, impliedly endorsing to the view held by us. The Bombay High Court in Geoffrey Manners & Co. v. Union of India [1980 (6) E.L.T. 7 (Bom.)] were considering the provision of Rule 56A of the Rules, in relation to exemption notification dated 20-4-1961, whereby all chemical samples issued by manufacturers of P & P Medicines were exempted from payment of duty. The issue before the High Court was whether in that case, proforma credit could be availed of. The Hon'ble Court on appreciation of the statutory provisions, however negatived the contention that proforma credit vide Rule 56A could be availed of. Though the provisions dealt with by the Bombay High Court were of Rule 56A, with Modvat scheme having its nexus in the basic principles of said rule, and the situation being identical as the one here, the ratio of the said decision would stand attracted here, and as such, the views expressed by the Delhi High Court in Re : Good Year India (supra) come in conflict with the views of Bombay High Court, and give rise to an issue whether the said judgment could have a persuasive value for this Bench.
15. I therefore endorse the order as proposed by Brother R. Jayaraman, Member (Technical).