2015 (2) TMI 186 - HC - Central Excise

Cenvat / MODVAT Credit - Non receipt of goods from Job Worker within 180 days - Whether Rule 57F (4) of the Central Excise Rules is mandatory or directory - Held that - Inputs on which credit has been taken may be used in or in relation to the manufacture of final products. The inputs may be removed for home consumption or for export under bond. By sub-Rule (3) all removals of inputs for home consumption shall be made on payment of duty equal to the amount of credit availed in respect of such inputs and under the cover of invoice prescribed under Rule 52A - By Rule 57F (4) the inputs are permitted to be removed or after they have been partially processed by the manufacturer of the final products to a place outside his factory under the cover of a challan specified in this behalf by the Central Board of Excise and Customs, for the purposes of test, repair, refining, re-conditioning or carrying out any other operation necessary for the manufacture of the final products or for manufacture of intermediate products necessary for the manufacture of final products and return the same to the factory within 180 days for further use in the manufacture of the final product or removing after payment of duty for home consumption or for removing the same without payment of duty to a unit in a free trade zone or to a hundred per cent export oriented undertaking. They could also be removed under bond for export. By sub-rule (12), (13) and (14) there are further stipulations and upto sub-rule (21), if all these sub-rules are read together and harmoniously as has been done by the Tribunal, then, no other view of the matter is possible. It is not a mandate flowing from the Rules that if the inputs or partially processed inputs are not received within 180 days in the factory of the manufacturer, then, he be disallowed the Cenvat credit and in totality. The Rules provide for situations under which, if the goods are not received back within 180 days, the credit can be adjusted. The proportionate credit can be denied and by calling upon the manufacturer to debit the account. All this would indicate as to how the makers and framers of the Rule did not intend to deny MODVAT credit simply because the inputs were not received after processing or job work within 180 days. The period of 180 days cannot be held to be mandatory. In the given facts and circumstances and going by the language of the Rule, both Commissioner (Appeals) and the Tribunal were right in concluding that the period is not mandatory. The Tribunal s reasoning at page 55of the paper book is in consonance with the language of the Rule and the sub-rules. In these circumstances, the demand made could not have been sustained. - Decided against Revenue.

Summary

Issues Involved:
1. Whether Rule 57F (4) of the Central Excise Rules is mandatory or directory?
2. Validity of the show cause notice.
3. Limitation period for the demand.
4. Merits of the MODVAT credit denial.

Issue-wise Detailed Analysis:

1. Whether Rule 57F (4) of the Central Excise Rules is mandatory or directory?
The central issue in this appeal is whether Rule 57F (4) of the Central Excise Rules, which mandates that inputs sent to job workers must be received back within 180 days to avail MODVAT credit, is mandatory or directory. The Revenue argued that the 180-day period is mandatory, and non-compliance should result in the denial of MODVAT credit. The Tribunal, however, concluded that the period is not mandatory but a procedural requirement. The Tribunal reasoned that the delay in receiving goods after job work is a procedural infirmity and should not result in the denial of legitimate credit. This interpretation aligns with the language of the Rule and its sub-rules, which allow for credit adjustment if goods are received after 180 days. The Tribunal's view was upheld, stating that the substantial question of law must be answered against the Revenue and in favor of the Respondent-Assessee.

2. Validity of the show cause notice:
The Respondent contended that the show cause notice issued on 1st May 2001 was without jurisdiction and void ab initio, as the MODVAT Rules had been replaced by Cenvat Credit Rules. The Tribunal did not specifically address this issue in detail, as the primary focus was on the interpretation of Rule 57F (4). However, the Tribunal's decision to uphold the Commissioner (Appeals)'s order implicitly suggests that the show cause notice was not considered void ab initio.

3. Limitation period for the demand:
The Respondent also argued that the demand was barred by limitation. The Tribunal did not delve deeply into this argument, as the primary issue of whether Rule 57F (4) was mandatory or directory was sufficient to decide the case. The Tribunal's decision to uphold the Commissioner (Appeals)'s order suggests that the limitation argument was not found compelling enough to overturn the demand.

4. Merits of the MODVAT credit denial:
On the merits, the Tribunal found that the Respondent had complied with the substantive provisions of the MODVAT Rules by availing credit only after receiving the goods back from the job worker, albeit after the stipulated 180 days. The Tribunal noted that the receipt of goods and the credit taken were duly recorded in statutory records and submitted to the Department. The Tribunal concluded that the delay in receiving goods was a procedural issue and should not result in the denial of legitimate credit. The Tribunal's reasoning was that the Rules did not intend to deny credit solely due to procedural delays, and proportionate credit adjustment was permissible.

Conclusion:
The Tribunal's decision was upheld by the High Court, which agreed that Rule 57F (4) is not mandatory but directory. The High Court emphasized that the Rules provide for credit adjustment if goods are received after 180 days, and the intent was not to deny MODVAT credit for procedural delays. The appeal was dismissed, and the substantial question of law was answered in favor of the Respondent-Assessee.