1997 (9) TMI 517 - AT - Central Excise

Summary

Issues Involved:
1. Eligibility of the respondents to Modvat credit on perfumed sandalwood oil.
2. Applicability of the extended period of limitation for recovery of Modvat credit.

Detailed Analysis:

1. Eligibility of the respondents to Modvat credit on perfumed sandalwood oil:

The Revenue appealed against the Collector of Central Excise, Kanpur's order, which dropped the demand for reversal of Modvat credit of Rs. 89,61,986/- on perfumed sandalwood oil used in manufacturing pan masala. The primary contention was whether the perfumed sandalwood oil, classified under sub-heading 3302.90, qualifies as an intermediate product used in the manufacture of pan masala, the final product under sub-heading 2106.11.

The respondents declared sandalwood oil as an input for pan masala manufacturing under Rule 57G of the Central Excise Rules, 1944. The sandalwood oil was sent to job workers, who processed it into a "mixture of odoriferous substance" and returned it for use in pan masala production. The Department argued that since the sandalwood oil's original properties were altered, resulting in a new product (perfumed sandalwood oil), it should be considered a final product and not an intermediate product.

The adjudicating authority concluded that perfumed sandalwood oil, despite being a finished product, was an intermediate product used in the manufacture of pan masala. This conclusion was based on several Tribunal orders, including the Larger Bench decision in Ashwin Vanaspati v. CCE, which held that intermediate products arising during the manufacturing process should be considered as such even if they are exempt from duty. The Tribunal reaffirmed that the entire Modvat scheme should be viewed holistically, and intermediate products should be understood in context.

The Tribunal also referenced other cases, such as Bhartiya Electric Steel Co. Ltd. v. CCE and Maruti Udyog Ltd. v. CCE, which supported the notion that intermediate products used in the manufacture of final products are eligible for Modvat credit. The Tribunal rejected the Revenue's reliance on outdated decisions and upheld the Collector's finding that the respondents were entitled to Modvat credit on sandalwood oil.

2. Applicability of the extended period of limitation for recovery of Modvat credit:

The Collector found that the respondents had filed the necessary Modvat declarations, maintained statutory records, and applied for permission under Rule 57F(2) for removing duty-paid sandalwood oil to job workers. Despite reminders, no permission was granted, but the respondents continued their operations, filing RT 12 returns with all relevant documents, which were assessed without objections.

The Department issued a show cause notice for recovery of Modvat credit, invoking the extended period of limitation under Rule 57-I of the Central Excise Rules read with Section 11A of the Central Excise Act, 1944, alleging suppression of facts. However, the Collector held that there was no suppression or misstatement of facts, as the respondents' actions were transparent and documented.

The Tribunal agreed with the Collector's finding that the extended period of limitation was not applicable, as the respondents had not suppressed any material facts or committed fraud. The demand was time-barred as the notice was issued beyond the six-month period.

Conclusion:

The Tribunal upheld the Collector's order, confirming that the respondents were entitled to credit of duty paid on sandalwood oil towards payment of duty on pan masala. The demand for recovery of Modvat credit was time-barred, and the appeal was rejected, with cross objections disposed of accordingly.