2005 (2) TMI 141 - SC - Central Excise

Demand and penalty - Revenue neutrality - whether the appellant- assessee was entitled to pay duty on inputs which had been declared to be duty free and then claimed Modvat credit in respect of the goods manufactured out of the such inputs which themselves were also exempted from duty - Held that - appellant had in fact paid the duty on the procured components for the junior tractors and that the credit was not reversed ultimately when the junior tractors were cleared. That the appellant had violated the provisions of Rule 57C and 57F of the Central Excise Rules is also not questioned - duty demanded by the respondent as well as penalty for availing credit were valid - Decided in favour of assessee.

Summary

Issues:
Appellant's entitlement to pay duty on exempted inputs and claim Modvat credit post 3-4-86; Compliance with excise rules by the appellant; Validity of duty demand and penalty for availing credit.

Analysis:
The judgment concerns the appellant's entitlement to pay duty on inputs declared duty-free post 3-4-86 and claim Modvat credit for goods manufactured from such inputs. The appellant contended that due to difficulty in segregating duty-paid items from duty-free items, they continued the practice of paying duty and reversing credit upon clearance despite the exemption granted. The Collector initially allowed this practice but later rejected it, requiring the appellant to segregate inputs. The appellant subsequently complied with this requirement. It was undisputed that the appellant paid duty on procured components for junior tractors and violated Central Excise Rules 57C and 57F by not reversing the credit upon clearance.

In a similar case, the Court had allowed an assessee to avail credit at the time of product clearance, considering it revenue-neutral. However, the respondent department argued that condoning such violations might set a wrong precedent. The Court clarified that the appellant would be liable to pay penalties for the admitted violations. The Tribunal upheld the duty demand and penalty for credit availing. The Court set aside the Tribunal's decision on duty demand while upholding it on penalty, emphasizing the appellant's liability for penalties as per rules.

In conclusion, the Court disposed of the appeals without costs, emphasizing the appellant's liability for penalties despite setting aside the duty demand decision. The judgment underscores the importance of compliance with excise rules, even in situations where practical difficulties exist in segregating duty-paid and duty-free items, and highlights the consequences of violations despite revenue-neutrality considerations.