Customs, Excise and Gold Tribunal - Mumbai
Bajaj Auto Ltd. vs Collector Of Central Excise on 11 October, 1993
Equivalent citations: 1993(44)ECC286
ORDER
R. Jayaraman, Member
1. This is an appeal against the order in appeal No. P-33/93 dated 10.2.93 passed by the C.C.E. (Appeals) Pune.
2. The only issue involved in this appeal is regarding the eligibility of Modvat credit in respect of tool kit marketed along with the two wheelers/three wheelers and whose value is included in the value of these vehicles. The Department issued show cause notices reportedly within the normal period of limitation, alleging that the tool kits are not inputs used in or in relation to the manufacture of vehicles and it is sent, as they are, with the vehicles. They cannot be construed to have been used in or in relation to the manufacture of vehicles. The mere inclusion of value of tool kits with value of the vehicles does not render the tool kit eligible for Modvat credit. The vehicle is not incomplete, without putting the tool kit in the vehicle. The lower authorities have denied the Modvat benefit relying on the decision of the South Regional Bench in Sundaram Clayton v. C.C.E. and C.C.E. v. Larsen Toubro Ltd.-- .
3. The present appeal is against the said decision. The Id. advocate mainly seeks to rely on the following propositions:-
(i) As per the Apex Court's decision, in East End Paper Industries , it is laid down that anything that enters into and forms part manufacturing process or is required to make the article marketable must be construed to be raw material or component part of the end product. Vehicles cannot be cleared for the road without tool kit and spare wheel. This is the requirement of the Bombay Motor Vehicle Rules 1989 (vide Rule 191 of the Rules). Even now, spare wheel is allowed the benefit of Modvat by the Dept. as O.E. equipment. But objection is taken only with regard to tool kit. Viewed in the context of Apex Court's observation, both tool kit and spare wheel supplied alongwith vehicles to make it marketable at the factory gate, should be construed as components and is to be given Modvat benefit.
(ii) He also contends that the value of any article for purposes of assessment to duty is the price payable on the article by an independent buyer at the factory gate. Since vehicle is cleared with tool kit and delivered at the factory gate to any buyer only with the tool kit as per statutory requirement cited above, its value is to be included in the price of the vehicle. Hence it becomes a component of value in the context of the Supreme Court decision in Bombay Tyre International
(iii) He also seeks to rely on the contra decision of ERB in the case of Telco-- and another order of Collector(A) on the same issue in their favour. He also points out that even the Board had given instructions for allowing Modvat credit to tool kits, if their value is included in the value of vehicles and presumably because of the decision of the South Regional Bench, the Board seem to have withdrawn their earlier instructions.
(iv) He also seeks to rely on the observation contained in para 12 of this Bench's order in the case of appeal by M/s. Jayshree Industries and others reported in 1993 (45) ECR 185 to plead that this Bench have also concurred with the view of the E.R.B. in Telco case--1991(32) ECR 165, wherein the Board's earlier clarification has been accepted.
4. Shri Mondal, in reply, mainly urged the following points to support the orders the authorities below:-
(i) No doubt, the Board's earlier clarification allowed Modvat credit on tool kits, if their value is included in the value of the vehicles; but when the proper legal interpretation on this was given by the South Regional Bench, while considering the appeal filed in the case of Larsen Toubro, the Board have since withdrawn their earlier clarification. Hence the Bench should not be influenced by the Board's earlier clarification, which seems to have weighed with the East Regional Bench in the case of Telco. The legal provisions are to be considered independent of Board's earlier clarification.
(ii) Referring to the decision of the South Regional Bench in the cases of Sundaram Clayton and Larsen Toubro, he pointed out that the decisions of the South Regional Bench is directly on the issue. The South Regional Bench have strictly gone in terms or Rule 57-A and have held that the tool kits cannot be construed to be an item used in or in relation to the manufacture of the final product. This is the dividing line laid down by the legislature. The judicial interpretation can only be to see whether the case falls within the right side of the line or not. In this case, it is nobody's claim that the tool kit is used anywhere in the manufacture of vehicle or used in relation to its manufacture. It is a bought out item and supplied along with the vehicle for operational need of the vehicle on the road. Hence it cannot be said to have been anywhere used in or in relation to the manufacture of the vehicle. This is what has been correctly appreciated by the South Regional Bench, which should be accepted. The observation made by this Bench in Jayashree Industries case are obiter and have not taken into consideration all the facts involved in the issue. Hence, this Bench can independently examine the legal position without being influenced by their obiter observations.
(iii) Eligibility for Modvat credit is to be decided only in accordance with the provisions of the rules contained in Section AA of Chapter V of the said Rules and not governed by the provisions of Section 4 of the C.Ex. Act. Determination of value for purposes of assessment of duty on the article is to be done under Section 4 of the C.Ex. Act; but when it comes to the question of determining the eligibility for Modvat credit on an item, the question to be asked is whether it is used in or in relation to the manufacture of the final product and not the question as to whether the value of the item is included in the value of the final product. Hence, going by the provision of Rule 57-A and in the context of the admitted position, the appellants cannot claim Modvat benefit.
(iv) The Supreme Court's decision in East End Paper Industries has been sought to be applied wrongly. In that case, the issue related to wrapper paper used for packing other varieties of paper which was treated as component, because it is used as a packaging material and forming part of the marketable paper. Likewise, in the case of Jay Engineering Works 1989 (20) ECR 137 (SC), the issue relates to name plates affixed to electric fans and the Apex Court took note of the statutory requirement for marketing the fans and held it as a component. These cases are distinguishable. Here, the bought out tool kits are placed in the vehicle and sent along with the vehicle for operational need of the vehicle. No evidencees have been brought out that they are a 'must' for marketing at the factory gate, excepting citing Bombay Motor Vehicle Rules, laying down conditions for plying the vehicles.
(v) The term 'manufacture' under Section 2(f) of the C.Ex. Act includes any process incidental or ancillary to the completion of the manufactured product. Hence it cannot include placing of bought-out tool kit in a vehicle (which is already complete) to be removed from a factory.
(vi) He also draws our attention to the decision of the Tribunal in the case of Rock Drill (I) Ltd. v. CCE, Jaipur 1993 (48) ECR 320 (Trib) to urge that the eligibility of credit is to be considered within the dividing line laid down under Rule 57-A, by the legislature.
5.1 After hearing the equally attractive arguments from both the sides, we find that there already exists two different decisions--one in favour of revenue by S.R.B and another in favour of assessee by ERB based on Board's earlier clarification. Our observations obiter in Jayashree Industries case seem to favour Board's earlier clarification and the East Regional Bench's decision in Telco case. Hence, at the outset, we find that in all fairness to both the sides, the issue is to be placed before the Larger Bench, for resolving the conflicting views of different Benches.
5.2 While doing so, we are to set our views on the arguments place before us and leave the final decision to the larger Bench.
5.3 We agree with the Id. advocate that we have expressed an opinion in favour of Telco case based on the Board's clarification given earlier allowing modvat benefit on tool kit supplied with motor vehicles.
Our observations in obiter contained in para 12.1 of the order in the case of Jayshree Industries 1993 (45) ECR 185 are reproduced below for ready reference:-
12.1 Board's and Departmental Clarifications:
We were informed that for the sake of ensuing uniformity, the Board have identified certain inputs as eligible and certain others as not eligible. This is available in Madhya Pradesh Collectorate Trade Notice 62/91 dated 7.6.1991 reproduced in one of the issues of Excise Law Times, referred to by the Id. Advocate. On seeing this list, we find items like tool kit, jack assembly, spare wheel supplied with motor vehicles, whose value is included in the assessable value of the motor vehicle, are declared to be eligible inputs. On the question of eligibility of Modvat credit on tool kits for scooters, the South Regional Bench of the Tribunal in the case of Sundaram Clayton 1989 (24) ECR 99 (Cegat SRB) held that the Modvat credit is not admissible. The reasoning given is that tool kit is not an integral part of scooter and it is not required in or in relation to the manufacture of scooter and scooter cannot be construed as unfinished without tool kit. However, we find that the decision of the Apex Court (supra) were not cited before them nor they were considered. The East Regional Bench of the Tribunal in the case of Telco--1991 (32) ECR 165 (Cegat-ERB), however allowed Modvat credit for tool kit and jack assembly, accepting the Board's clarification as within the framework of law. We are inclined to accept the view of the East Regional Bench for the reason that if the items are essentially supplied for the running of the vehicle and this is the pattern of marketing at the factory gate, they would have to be construed as eligible components, in terms of the Apex Court's decision. That appears to be the probable reason, why the Department in the aforesaid Trade Notice, have also construed labels, stickers, nameplates affixed to the final products as eligible inputs.
5.4. The main consideration, which prompted us for making the above observations are the Apex Court's observation in the cases of East End Paper Industries and M/s. Jay Engineering Works Ltd.
(i) The Apex Court, while considering the eligibility of wrapper paper for packing other varieties of paper for proforma credit, have made the following observations:- (24 ECC 375 at p.379, para 7) To be able to be marketed or to be marketable, it appears to us, in the light of the facts in the appeals, that it was essential requirement to be goods to be wrapped in paper. Anything required to make the goods marketable must form part of the manufacture and any raw material or any materials used for the same would be component part of the end product.
(emphasis supplied)
(ii) In the case of Jay Engineering Works, ECR C 1325 SC the Apex Court observed thus--(19 ECC 189 at p.191, para 9) in our opinion, the Tribunal was right in arriving at the conclusion that name plate was not a piece of decoration. Without the name plate, the electric fans as such, could not be marketed; and that the dealer was entitled to the benefit of notification No. 201/79 for the purpose of obtaining proforma credit. Fans, with name plates have certain value, which the fans without name plates, did not have. If that be so, then the value added for the accretion of name plate was entitled to proforma credit in terms of the said notification. It is true that an electric fan may perform its essential function without affixation of the name plate, but that is not enough. Electric fans do not become marketable products without affixation of name plates.
(emphasis supplied ) 5.5. But then Shri Mondal seeks to distinguish these cases on facts. While we agree with him that in the case of East End Paper Industries, the issue before the Apex Court was eligibility of proforma credit for packing paper and in the case of Jay Engineering Works, it is the eligibility of set off benefit in terms of Notification 201/79 for name plate affixed to fan (being treated as component of the fan), the issue before us in this appeal is eligibility of Modvat credit for an item, which does not go either as a packing material or as an affixed component. In that sense, the facts are somewhat different. We can agree to this extent with Shri Mondal. But the principle of law set out in the observation of the Apex Court in dealing with such cases cannot be lost sight of by us. They are identifiable as below:--
(i) The item should be necessary for making the final product marketable or to be marketed at the factory.
(ii) Even if the final product can function without that item, if it is marketed with that, the value added for the accretion of the item to the final product should be given set off.
If we view this case in the context of the above proposition of law set down by the Apex Court, we find that there is no dispute that the tool kit is marketed with motor vehicle, while clearing from their factory. Though its use is for operational need of the vehicle, its presence in the vehicle for plying on the road is prescribed in the Motor Vehicle Rules. Moreover, though the tools are not necessary for the running of the vehicle, they are necessary for attending to any emergency repair of the vehicle, which the vehicle may develop on the road. Hence it is claimed to be invariably supplied with the vehicle by the vehicle manufacturer, before putting the vehicle on the road. Thus it becomes an O.E part as in the case of spare wheels; we are informed that there is no dispute in giving Modvat credit in respect of spare wheels supplied with the vehicle, treating it as an 'O.E. part'. In our view, the same logic would apply in the case of tool kit also, since tools supplied are specific for operating on the type of vehicle supplied. The tool kit for a particular type of vehicle may not suit for another type of vehicle. Hence, it would appear to us that it is esoteric to a particular type of vehicle. When the vehicle is marketed with such a tool kit for meeting the operational need of the vehicle, can we discard it as not necessary for marketing the vehicle at the factory? It is not a complimentary gift sent with the vehicle. In our view, it would appear to come within the criterion laid down by the Apex Court. Another criterion laid down by the Supreme Court is that even if the final product can function without the item, if that final product is marketed with that item, value accretion thereof has to be given set off. This criterion seems to emphasize on the value addition concept, even though Notification 201/79 was not based on the concept of value addition. Hence, when we consider Rule 57-A, which the Honbl. Finance Minister, while introducing these rules in 1986 Budget, clearly indicated as a scheme of 'Modified value added tax' system, the concept of value addition acquires more significance. It would appear to us that anything which goes to add to the value addition of the final product at the factory gate (with exceptions like machines, machinery, equipments etc. specifically excluded), has to be given the benefit; Otherwise the duty incidence on the value component going into the value of the final product will get stuck and the object of averting the cascading of the tax on such an item would not materialise.
5.6. But them Shri Mondal made a valid point that placing of tools in a kit and putting it in the vehicle supplied at the factory gate cannot be construed to be a process incidental or completion to the manufacture of motor vehicle. But we don't dispute this proposition. We are to observe that the dividing line between affixing a name plate to an electric fan and packing a tool kit specifically needed for operational need of a motor vehicle on road is rather thin. Judged by the principle set down by the Apex court, it would appear to us that anything which goes into making the product marketable at the factory gate and results in its value addition, should get the set off. Going by this principle, such items, which are packed for operational use of the final product and its value is included in the value of the final product, would have to be given credit. Moreover, the vehicles cannot ply on the road without provision of tool kit and sparewheel as per Bombay Motor Vehicle Rules.
5.7. A similar view taken by us, while deciding an appeal filed by M/s Heat Well Pharmaceutical (vide our Order No. 1857/93-WRB dt.1.10.93). The issue dealt with in that case relates to the eligibility of Modvat credit on duty paid on plastic droppers, which are packed in carton, along with the sealed bottle containing paediatric drops. At the point of usage, pilfer proof cap is removed and cap-cum-dropper is fixed to the bottle and required dosage as indicated in the dropper is administered to the child. The issues raised therein were somewhat similar. Hence we would deem it proper to extract some of our findings in that order.
After hearing the equally attractive arguments from both the sides, we would prefer to look at the issue from a slightly different angle. We agree with Shri Mondal that dropper cannot be said to be used in the manufacture of paediatric drops; because the drops manufactured are put up in sealed bottles and could be marketed as such. But can we say that it is not used in relation to the manufacture of paediatric drops marketed at the factory gate? The terms 'in relation to' has a wider connotation and is not restricted to the physical presence of the input in the final product nor is it to be confined to usage only in the process of manufacture prior to the emergence of the final product. It can even be posterior to the emergence of the final product, but before marketing at the factory gate. The final product in this case is 'paediatric drops'. The very name suggests that it is to be administered in drops of prescribed quantity--The Collector (Appeals) feels that the can be achieved by dropping it in a measuring glass, independently procured by the buyer. We agree that it is possible. But when a facility in the form of a dropper is supplied alongwith the medicine for proper administration of the dosages, can we discard it as an optional accessary? If it were so, their value need not be included. The fact that its value is included and is marketed at the factory gate, packed in a carton alongwith dropper as part of the bottle of medicine is not in dispute. Both the sides agree to treat it as part of paediatric drops cleared from the factory for purposes of valuation of the final product. Shri Naik has shown before us that the cost of dropper is included for arriving at the maximum retail price declared under the Drugs (Price Control) Order.
Under Section 4 of the Central Excises Act, value of the goods is the price at which the goods are ordinarily sold at the factory gate. Here, the value component of dropper is added to the value of paediatric drops for purpose of levy of Central Excise duty on the final product. The Apex Court in the case of East End Paper Industries held that anything which goes to render the goods marketable at the factory can be regarded as component. Though we might agree with Shri Mondal that paediatric drops may be marketed without dropper, but when they are actually marketed with dropper and their value is added to the value of the final product, can we reject it as an optional accessary for purposes of Modvat benefit?
Dropper is connected with the adminstration of prescribed dosages of drops and it is not a complementary gift given alongwith the bottles of drops. In a sense, as functionally designed, it is an attachable component of the bottle containing drops. Hence, even otherwise, it can be construed as an attachable component of the bottle but supplied separately. If we choose to call it an optional accessary and not a component, corollary of this proposition would lead to exclude the value thereof, being only an optional accessary. If the value of the dropper is not included, then there can be no case for allowing modvat credit for dropper. But when its value is included and is marketed at the factory gate only in the form of a pack with bottle of drops and dropper, it has to be construed as a component of the final product, more so because it is construed as a component for purposes of valuation of the final product. Hence, in such cases, the pertinent question to be asked is whether the value of the item supplied with the final product is included in the value of the final product. We consider this question relevant in the context of the objective of the Modvat scheme.
A question may be raised that Rule 57-A is to be considered de hors Section 4. We have thought of this but we find that the concept of value addition is built in the scheme. Modvat scheme, as the Hon'ble Finance Minister referred to in his Budget Speech, is a modified form of value added tax system. It is essentially a system based on the concept of value addition at the manufacturing stage. Whatever goes into the making of the value of the final product as delivered at the factory gets and on which value, Central Excise duty is levied, would therefore be relevant for consideration. Because, credit of duty paid on inputs is to be utilised towards the duty payable on the final product, calculated on the assessable value of the final product, in the form in which it is cleared at the factory gate. If the value of the dropper goes into the value of the pack of medicine cleared at the factory gate, the duty suffered on dropper would get stuck to the final product, leading to cascading effect of the input duty on dropper, if the duty is not given credit. If we view the issue from this angle, we are to construe the dropper as a component, whose value is included in the value of the final product. Hence, modvat credit of duty paid on dropper would be eligible.
The Modvat (Modified value Added Tax) Scheme, has been introduced as an alternative to the VAT (Value Added Tax) which could not be brought on account of some constitutional impediments arising out of apportionment of tax collection powers between the Union Government and the State Government, has its nexus, besides streamlining the tax structure and making the revenue collection easy, to evading cascading effect on the price structure of a commodity manufactured, where the ultimate beneficiary is the consumer.
Clear indications are available from the entire Modvat Scheme, and from the provisions of Rule 57A itself that the availment of credit has a direct nexus with the assessable value. This is evident from exclusion Clause (iii) Rule 57-A, where, in reference to the packaging material, it is provided that the credit benefit would not be available, if the value of the packaging material is not included in the assessable value.
With the basic concept of Modvat being averting of cascading effect, and when the value of whatever goes with the final product marketed at the factory gate, being the criteria in ascertaining the assessable value, and when the value of the dropper is included in the assessable value of the paediatric drops under consideration, there could be no reason to deny the credit for the same. If that is not done, the very object of averting cascading effect is frustrated, and the effect could be that the customer would either be required to pay more, or would be deprived of having measuring dropper alongwith the drops.
6. Now the main question left by us for decision by the Larger bench is whether our view based on our interpretation of the decision of the Apex court in East End Paper Industries and Jay Engineering Works and laying emphasis on the concept of value addition built in the Modvat Scheme, is on the right side of the statutory line down under Rule 57A or we have crossed the "Lakshman Reka" needing to be corrected.
7. With the above observations, we direct the Registry to place the papers in this appeal before the President for constituting a larger Bench to consider the following points specifically and thereafter decide on the appeal finally.
(i) Whether in the context of the principles laid down by the Apex Court in the cases of East End Paper Industries and Jay Engineering Works (supra) and also in view of the concept of value addition at the manufacturing stage referred to as 'Modvat' by the Hon'ble Finance Minister, while introducing the Rules for the first time in 1986 Budget, will it be permissible to hold the dividing line set out in Rule 57-A de hors the concept of value addition to the final product marketed at the factory gate?
(ii) Whether it is permissible to construe an item like tool kit, (which is not subject to any process in the line of manufacture of vehicle but is marketed with the vehicle at the factory gate for meeting the safety requirements of the vehicle on the road as is statutorily required as eligible input used in or in relation to manufacture of the motor vehicle as laid down in Rule 57-A?