Customs, Excise and Gold Tribunal - Mumbai
Reliance Industries Ltd. vs Commissioner Of C. Ex. on 4 February, 1997
Equivalent citations: 1997(93)ELT213(TRI-MUMBAI)
ORDER G.N. Srinivasan, Member (J)
1. This is an appeal filed by the appellants against the decision of the Commissioner, Mumbai-III rendered on 10-9-1996 in Order 212/96-Commr. whereby he disallowed credit of Mod-vat amounting to Rs. 4,20,65,399/- on three inputs furnace oil, low sulphur heavy stock and light diesel oil which were used in the manufacture of steam which in turn was used in the manufacture of declared final product. By the said order he also levied a penalty of Rs. 1,00,00,000/- under Rule 173Q of the C. Excise Rules.
2. The appellants are, inter alia, engaged in the manufacture of various final products such as polyester, polymer chips, Polyester Filament yarn, partially origented yarn and other products.
3. The appellants have availed of the benefit of the Modvat credit on the inputs like furnace oil, low sulphur heavy stock and light diesel oil in terms of Rule 57A of the Central Excise Rules for the period from November, 1994 to April, 1995. The aforesaid three inputs are used in the manufacture of final product and in the course of such use, steam emerges at the intermediate stage which is further used by the applicants within the factory for the manufacture of declared final product. The aforesaid three items are also used as fuel directly in the fire heaters for heating DOWTHERM.
4. A show cause notice was issued on 15-5-1995 proposing to deny Modvat credit for the period from November, 1994 to April, 1995 on the said three items used in above manner. Show cause notice read inter alia as under :-
"M/s. Reliance Industries has availed Modvat credit on the inputs as shown in the Annexure A as these inputs are used in the manufacture of items falling under Heading No. 28 Which is exempted from payment of central excise duty or chargeable to NIL rate of duty as per Notification No. 217/86-CE., dated 2-4-1986 and 67/95, dated 16-3-1995.
Whereas it also appears that Reliance Industries Ltd. has filed declaration under Rule 57G for taking Modvat credit in respect of inputs viz. Light Diesel Oil, Furnace Oil and Low sulphur Heavy Stock for manufacture of excisable goods falling under Heading Nos. 27, 29, 38, 54 and 55. On verification, it is noticed that these inputs are actually used in the manufacture of steam falling under Heading No. 28. Steam is fully exempted from payment of Central Excise duty vide Notification No. 271/86, dated 2-4-1986 and 67/95, dated 16-3-1995. Thus it is very clear that party has not declared steam as a product and taken the Modvat credit on the inputs used in the production of steam wilfully and unlawfully".
5. The appellants filed a reply, dated 22-6-1995 explaining as to how the inputs have been used in or in relation to manufacture of the final products by utilising these three items of inputs as fuel, producing the steam at the intermediate stage and that the same steam is used entirely within the factory of production for the manufacture of the declared final product. They relied on some judgements of Supreme Court in East End Paper Industries Ltd. - 1989 (43) E.L.T. 201, J.K. Cotton Spinning & Weaving Mill Co. Ltd. -16 STC 563 and Ballarpur Industries -1989 (43) E.L.T. 804 (S.C.) and the Ashwin Vanaspathy Industries Pvt. Ltd.-1994 (70) E.L.T. 754 (Tribunal) and Bharatiya Electric Ltd. - 1995 (77) E.L.T. 289 (Tribunal).
6. The adjudicating authority has held as follows :-
"I have carefully gone through the case records, the assessee's written and oral submissions. I find that the main issue involved in the case relates to admissibility of Modvat credit under Rule 57A on inputs i.e. furnace oil, light diesel oil and low sulphur heavy stock used in the final product i.e. steam which is exempt from Central Excise duty."
"I now take up the matter for detailed discussion on its merits. Rule 57A of the Central Excise Rules providing for Modvat credit reads as follows" :-
Rule 57A(1) extracted.
"The explanation to the Rule 57A(1) was amended under Notification 4/94-C.E. (N.T.), dated 1-3-1994, by virtue of which, among others, Clause (c) was inserted in the Explanation. As per this clause 'inputs used as fuel' came to be included within the Modvat scheme. Simultaneously, a fresh Notification 5/94-C.E. (N.T.), dated 1-3-1994 was issued under Rule 57A which included Chapter 27 (excepting a few sub-heading of chapter ) of the Central Excise Tariff under list of inputs. Chapter 27 pertains to mineral fuels and similar products. In pursuance of these amendments, the assessee started availing of duty period on Chapter 27 products like light diesel oil, low sulphur heavy stock and furnace oil".
"The words and phrases "subject to the provisions of this section" in Rule 57A are significant for appreciating the scope of this provision. A glimpse of other provisions of this section (that of Section AA of Chapter V of Central Excise Rule, 1944), both as prevailing during the material time and thereafter, would reveal that under Notification No. 17/95-C.E. (N.T.), dated 18-5-1995. I also find benefits envisaged under the said notification would be available with perspective effect and not retrospective."
"After careful examination of the facts and circumstances of the present proceedings, I therefore, find that the credit of duty paid on imports, mainly the three inputs used as fuel for generation of steam which in turn was used for manufacture of final products by the assessee within the factory of production will not be available for period November, 1994 to April, 1995. Accordingly I find that Modvat credit amounting Rs. 4,20,25,399/- has been wrongly availed and utilised and the same is liable to denied and recovered from the assessee held accordingly."
"As for imposition of penalty, I find that the assessee had pleaded that Modvat credit is admissible to them in terms of the provisions of Rule 57(D)(2) and they had also filed declaration to the proper officer. However, in view of the discussion in the foregoing paras the assessee become eligible for the Modvat credit in respect of inputs used for general of steam with effect from 18-5-1995 vide Notification No. 17/95, dated 18-5-1995 vide Notification No. 17/95, dated 18-5-1995. Issue of the notification clearly shows that the Modvat credit on inputs under dispute was not available despite the provisions under Rule 57D(2). Therefore, the contravention of the above said provision is established. However, considering the fact that the case involves interpretation of law and mala fide intention on the part of the assessee is not fully established. Hence a lenient view was taken and penalty of 1 crore was levied ". Hence the present appeal."
7. Ld. Counsel Shri V. Sridharan would contend that the denial of Modvat credit to the appellants on the inputs used in producing steam which is further used in the manufacture of the final product Polyester Polymer chips and Polyester Filament yarn etc. by the Collector was wrong. He explained that the department's case according to the law is that the steam itself is a final product produced by the appellants by using these items of fuel. Steam which is used captively for further production is exempt under Notification 217/86 hence Modvat credit has been denied. He strenuously argued that steam was an intermediate product even if exempt the Modvat credit or the input used in the manufacture of final product declared cannot be denied, because of the provisions of Rule 57D(2) of the C. Excise Rules which protects such duty credit. He relied on the judgement of the Tribunal in Hardillia Chemicals Ltd. v. C.C. Ex., Bombay (Order No. 556/96-C) in which, it was held that the 'phenolic residue' used in the manufacture of steam, which is exempt is still eligible for Modvat credit in the use of the final product 'Phenol and Acetone'.
In the said judgment, the Tribunal followed the judgment of Tribunal in the case of Vam Organic Chemicals - 1989 (39) E.L.T. 72 (Tribunal). He would state that in Hardillia Chemical case supra the Tribunal also relied on the judgment of the Supreme Court in the case of Indian Farmers Co-operative Ltd. v. C.C. Ex., Ahmedabad - 1996 (15) RLT 498 wherein it was held that Ammonia used in water treatment, steam generation, inert gas generation and effluent treatment plants are to be treated as used in the manufacture of fertiliser were entitled to be fit of Notification 187/61. Shri Sridharan would also urge us to follow the judgment of the Tribunal in the case of Ashwin Vanaspathi Industrial (P) Ltd. v. Collector of Central Excise - 1990 (70) E.L.T. 754 (Tribunal) where Tribunal held that any distinct excisable goods which may come into existence in the course of manufacture of the final product has to be taken as an intermediate product and even if that excisable product is exempt from payment of duty under Rule 57D(2). Tribunal had held in that case also that the input used therefor remains eligible to get Modvat credit. He also invited our attention to the decision of the Tribunal in the case of C.C. Ex., Pune v. Sandvik Asia - Order No. 1411/96-WRB, dated 23-4-1996 passed by a Single Member. He also invited our attention to the provisions of (i) Rule 57D and Rule 57A as amended on 16-3-1995 (ii) the Modvat Rule as on 15-3-1995 to argue that inputs used as a fuel is entitled to be credit. He would strenuously urge that the third proviso to Rule 57D as amended on 18-5-1995 would ensure to the benefit of the appellants as the inputs have been utilised in the generation steam which was used in the manufacture of final product during period from November, 1994 to May, 1995. He would also invite our attention to the decision of the Supreme Court in ITO, Kanpur v. Mani Ram - AIR 1969 SC 543 for the proposition that the beliefs or assumption of those who frame Acts of Parliament cannot make the law. He also invited our attention to the observation Kanga and Palkhivala's The Law and Practice of Income Tax, Eighth Edition, Page 773 for the proposition that the Court must disregard any assumption of the legislature as to the prevailing law, if it is mistaken, though the result might be that the legislature provision cannot be given effect to the intended by parliament" the beliefs or assumptions of these frame Acts of Parliament cannot make law".
8. Shri V.K. Puri SDR would argue in reply that Rule 57C bars giving Modvat credit to the case where final product is exempt from duty. In this case he would say that the 3 inputs have gone into the manufacture of steam which is exempt from duty and there can therefore be no Modvat credit on the imports. He would also argue that the Notification 17/95 has to be read in a harmonious way along with other provision. He would also urge that the proviso to Rule 57D(2) introduced in 18-5-1995 clearly indicated that prior to that date steam was not eligible for Modvat.
9. We have carefully considered the rival submissions made before us by both parties. The appellant in this case filed declarations under 57G on 20th May, 1995, mentioning the inputs furnace oil, light diesel oil, low sulphur heavy stock for purpose of manufacture of the various final products without mentioning steam as an intermediate product in columns relating to intermediate product in the said form. Hence it is clear that the three inputs have been used to manufacture steam which has been again used in the main stream of process of manufacture of final products. The show cause notice would challenge the correctness of the appellants of taking the Modvat credit. Shri Sridharan's assessment of the department's case indicated by us in the earlier portion of the order is correct, as it will be clear from the text of the show cause notice reflected in the earlier part of this order. Steam is one of the items mentioned in Modvat scheme for eligibility or input duty credit.
10. Let us examine the question with reference to the decided cases. In the case of Hardillia Chemicals Ltd. v. Collector of C.Ex. Pune, by Order No. 556/96 in Appeal 3709/90-C the Tribunal was concerned with the question of eligibility of phenolic residue used in the manufacture of Pherwal and Acetonic (final products) to the benefit of Notification 217/86, dated 2-4-1986. The benefit of Modvat credit has been denied on the ground that phenolic residue is used in the manufacture of steam which is a final product and which is exempt from duty. The Tribunal following decision :- (a) Tribunal decision in the case of Vam Organic Chemicals -1989 (39) E.L.T. 72 (Tribunal) and (b) the Supreme Court in the case of IFFCO v. C.C. Ex. -1996 (86) E.L.T. 177 had held that Modvat credit cart be given to input phenolic residue which manufactures steam, which is exempt under Notification 217/86 and which is used in the manufacture of final products phenol aceton. Here in the instant case before us, the 3 inputs have been used in producing steam which in turn was used in the main stream of manufacture or declared final products. Hence in our view this case in squarely applicable to the facts of the case.
11. In the case of C.C.Ex., Pune v. Sandvik Asia - Order No. 1411/96-WRB Ld. Single Member of the Tribunal has beld as follows :-
"On hearing the arguments of Shri Puri Ld. DR I find that it is not disputed that steam by itself is to be treated as final product in such circumstances. There is no dispute that steam is captively used in the manufacture of final products is in the line of manufacture of the final product. In the circumstances benefit of Rule 57D would be available, if the inputs are used in the manufacture of intermediate product in the line of manufacture and not withstanding that such intermediate product happen to be exempted, provided the intermediate product is also figuring in the modvat notification. There is no dispute that steam is figuring in the modvat notification. Hence, benefit of Rule 57D would be available in such a case even prior to amendment of Rule 57D. Hence I do not find any reason to interfere with the order of the Commissioner (Appeals). The appeal from the revenue is rejected".
12. The facts in the instant appeal under consideration and the judgment referred to above are identical. When the inputs produce the intermediate product in the line of manufacture of final product benefit of Modvat credit cannot be denied. This is the effect of the order with which we cannot but agree, which we do whole heartedly.
13. No doubt the show cause notice extracted earlier has proceeded on the basis that for intermediate product steam has been produced by the inputs for which credit has been claimed. In the impugned order at page 4 of the same it was found as follows :-
"After careful examination of the facts and circumstances of the present proceedings, I therefore, find that the credit of duty paid on inputs, namely the said three inputs used as fuel for generation of stream which in turn was used for manufacture of final products by the assessee within the factory of production, will not be available for the period November, 1994 to April, 1995".
Then the case of the appellants squarely falls within Rule 57D(2) of the C. Excise Rules. Therefore, this is what it has been argued by Shri Sridharan with which we agree. In the Sandvik Asia Ltd.'s case supra Ld. Single Member of the Tribunal has also held in favour of the assessee in the same manner. In this point also appellant suceeds.
One more point needs mention - if the credit can be taken for such inputs after April, 1995, then how can the same be denied earlier? It is because (a) there is no change in the manner of production of final product after April, 1995 and (b) there was no such ground made out in the show cause notice. In all the adjudication proceedings under Central Excise Act the initiation of proceedings are made by issue of show cause notice clearly mentioning the grounds/basis. If the show cause notice does not mention the same, how can the adjudicating authority come to the conclusion against the assessee on that basis. This will go beyond the show cause notice. It was nobody's case that the assessee appellant has changed the manner or method or production. Hence in this point also the assessee appellant succeeds.
14. As far as other points argued by Shri Sridharan Ld. Counsel for appellant and Sri V.K. Puri Ld. SDR about interpretation of statutes, Mani Ram's case denied by the Supreme Court, Kanga & Palkhivala's observation, in our view it is unnecessary to deal with the same in the facts and circumstances of the appeal.
15. Since we are setting aside the impugned order and levy of duty as wrong in law, the levy of penalty on the appellants does not survive as it is also held to be wrong in law. Appeal allowed.