2011 (7) TMI 90 - HC - Central Excise

Classification - Notification No.4/97-CE dated 01.03.1997 - Rule 57CC (9) of the Central Excise Rules, 1944 - The finished goods and raw material found in excess of the quantity shown in the stock registers were seized by the revenue - By virtue of the said show cause notice, the respondent/assessee was called upon to respond as to why Central Excise Duty amounting to Rs.7,69,90,751/- ought not to be imposed on the alleged ground of diverting raw material / inputs on which modvat has been availed for the purposes of manufacturing goods cleared at nil rate of duty under the aforementioned exemption notification - assessee cannot seek modvat credit on inputs and have that credit adjusted against duty payable against finished goods and, at the same time, utilize those very inputs, on which modvat credit had been claimed for manufacture of finished goods by having them cleared under an exemption notification providing for a nil rate of duty - The authorities below have merely examined the issue from the point of view of the interpretation which according to them, had to be laid on Rule 57 CC (9) - A bare perusal of the show cause notice would show that it is replete with allegations that respondent/assessee diverted modvatable inputs in manufacture of exempted finished goods - Appeal is allowed by way of remand

Issues Involved:
1. Whether the Central Excise and Gold Appellate Tribunal (CEGAT) was correct in holding that exemption under Notification No. 4/97-CE dated 01.03.1997 was available to the manufacturer when statutory provisions contained in Rule 57CC (9) of the Central Excise Rules, 1944 were not followed by the party.

Issue-Wise Detailed Analysis:

1. Background and Facts:
- The respondent/assessee was engaged in the manufacture of plastic articles and availed Modvat Credit under Rule 57A of the Central Excise Rules, 1944 for its raw materials.
- The respondent/assessee paid duty on some finished goods and sought adjustment of duty paid on inputs via the Modvat route, while other finished goods were cleared under an exemption notification prescribing a "nil" rate of duty.
- The respondent/assessee operated four manufacturing units and three godowns, with a raid conducted by the Directorate of Anti Evasion (DGAE) revealing discrepancies in stock and raw materials.
- A show cause notice was issued, alleging diversion of modvatable inputs for manufacturing exempted goods and proposing imposition of duty, interest, penalties, and confiscation of goods.

2. Statements and Evidence:
- Statements from officers of the respondent/assessee indicated that modvatable inputs were used for manufacturing exempted goods, with no separate storage of raw materials.
- The Commissioner, in an order-in-original dated 19/21.07.2000, sustained the respondent/assessee's submission that there had been no diversion of raw materials/inputs for manufacturing exempted goods, dropping proceedings but imposing a penalty and confiscation of certain raw materials.
- The revenue and the respondent/assessee both filed appeals before the Tribunal, which dismissed both appeals.

3. Tribunal's Decision and Revenue's Argument:
- The Tribunal concluded that the requirement of maintaining a "separate inventory" did not include separate storage, which the revenue contested.
- The revenue argued that Rule 57CC (9) required separate storage of inputs on which modvat had been claimed and those cleared under the exemption notification.
- The revenue emphasized the statements of the respondent/assessee's officers, indicating diversion of modvatable inputs for manufacturing exempted goods.

4. Respondent/Assessee's Argument:
- The respondent/assessee argued that there was no legal requirement for separate storage of inputs, only separate inventory and accounts.
- The respondent/assessee relied on the Supreme Court judgment in Chandrapur Magnet Wires (P) Ltd., which allowed reversal of modvat credit for inputs used in exempted goods.

5. Court's Analysis:
- The court examined the relevant terms of the exemption notification and Rule 57CC (9), concluding that "separate inventory" could include separate storage.
- The court emphasized that the purpose of Rule 57CC (9) was to facilitate claiming the benefit of the exemption notification without seeking modvat credit on inputs.
- The court found that the authorities below failed to determine the exact extent of diversion of modvatable inputs for manufacturing exempted goods, and thus failed to discharge the onus in that regard.

6. Conclusion and Remand:
- The court set aside the Tribunal's judgment and remanded the matter to the Commissioner to determine the exact extent of diversion of modvatable inputs by the respondent/assessee in manufacturing goods cleared under the exemption notification.
- The Commissioner was directed to complete this exercise within three months, providing an opportunity for both the respondent/assessee and the revenue to present their cases.

7. Final Directive:
- The reference was answered accordingly, with the matter remanded for further determination of the extent of diversion of modvatable inputs.

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