1991 (2) TMI 235 - AT - Central Excise

Summary

Issues:
Whether manufacturers of package tea are eligible for MODVAT Credit for inputs used in the manufacture of paper bags used for packing tea.

Analysis:
The appeal in this case challenges the decision of the Collector of Central Excise (Appeals), Madras, regarding the eligibility of MODVAT Credit for manufacturers of package tea in relation to the inputs used for paper bags used in packing tea. The lower authority held that credits on inputs used in the manufacture of paper bags cannot be allowed as the impugned product, i.e., paper bags, are considered finished products and not intermediate products. The appellant argued that paper bags should be treated as an intermediate product, citing a previous decision by the Bench. The respondent contended that since paper bags are exempt from duty and considered final products, MODVAT Credit should not be available.

Upon considering the submissions, the Tribunal analyzed the relevant rules. Rule 57C states that MODVAT Credit is not available if inputs are used for manufacturing a final product exempt from duty. Rule 57D allows credit for specified duty on inputs even if intermediate products are exempt from duty. The Tribunal observed that the final product for the appellants is package tea, which comes into existence only after tea is put in the paper bags. Therefore, the formation of paper bags is a step in the manufacturing process of the final product, making paper bags an intermediate product. Consequently, the appellants are eligible for MODVAT Credit under Rule 57D(2), and the appeal was allowed.

The Tribunal also noted a potential anomaly in the MODVAT Credit system. If a manufacturer purchases paper bags from outside, they would not be eligible for MODVAT Credit for inputs used in the paper bags since the supplier of exempted final products is not eligible for MODVAT Credit. This creates a disparity between manufacturers who make paper bags themselves and those who purchase them. The Tribunal acknowledged this discrepancy but stated that it is inherent in the application of Rules 57C and 57D to different categories of package tea manufacturers.