2003 (3) TMI 570 - AT - Central Excise

Summary

Issues:
1. Duty demand on diverted supply to Indian Navy and confiscation of property.
2. Applicability of Rule 57CC to the appellants' case.
3. Interpretation of Rule 57CC regarding duty on exempted and export products.
4. Reversal of Modvat credit and its impact on duty liability.

Issue 1:
The appellants manufactured underwater batteries for the Indian Navy and Algerian Navy. The supply to the Indian Navy was exempted under Notification No. 64/95-C.E., while the export to Algeria was not dutiable. However, due to the cancellation of an order, a battery meant for export was supplied to the Indian Navy. The Central Excise authorities seized documents, issued show cause notices, and demanded duty, penalty, interest, and imposed fines. The appellants argued that as they made no clearances for home consumption and the diverted supply to the Indian Navy was bona fide with reversed input duty credit, there was no cause of action against them.

Issue 2:
The Commissioner of Central Excise contended that Rule 57CC applied to the appellants as they manufactured both exempted and dutiable products. The Commissioner argued that duty was payable on exempted goods supplied to the Indian Navy. However, the Tribunal found that sub-rule (6) of Rule 57CC exempted final products exported under bond, which applied to the appellants' case. The Tribunal noted that the appellants had not made any other dutiable clearances for home consumption, and the only domestic supply was to the exempted Indian Navy. Therefore, Rule 57CC did not apply to the appellants.

Issue 3:
The Tribunal referenced the case law and held that once Modvat credit is reversed, the assessee cannot be deemed to have taken credit for duty on inputs used in exempted products. The appellants had reversed the credit before any departmental action, explaining their actions convincingly. The credit was initially taken for batteries meant for export but diverted to the Indian Navy. The appellants had not utilized the credit, informed the authorities, and were engaged in production for export and supply to the Indian Navy only. The Tribunal found the duty demand, penalties, and confiscation unsustainable under the rules.

Judgment:
The Tribunal set aside the impugned order entirely, allowing the appeal with consequential relief. The appellants were absolved of the duty demand, penalties, and confiscation, as the actions taken by the authorities were found to be unjustified based on the circumstances and legal provisions discussed during the proceedings.