1995 (4) TMI 170 - AT - Central Excise

Issues Involved:
1. Applicability of Rule 57-C regarding Modvat Credit on inputs when the final product is exempt from duty.
2. Interpretation and application of Rule 57-I for recovery of Modvat Credit.
3. Legal correctness of credit taken and utilized before opting for exemption.
4. Relevance of previous Tribunal and High Court decisions to the present case.

Detailed Analysis:

1. Applicability of Rule 57-C regarding Modvat Credit on inputs when the final product is exempt from duty:
The core issue revolves around the interpretation of Rule 57-C, which stipulates that no credit of specified duty paid on inputs used in the manufacture of a final product shall be allowed if the final product is exempt from the whole of the duty of excise or chargeable to nil rate of duty. The Collector (Appeals) emphasized that the underlying principle of the Modvat Scheme is that the credit of duty paid on inputs is to be utilized for the payment of duty on the final product. Therefore, if the final product is cleared at nil rate of duty, the Modvat Credit taken on inputs must be reversed.

2. Interpretation and application of Rule 57-I for recovery of Modvat Credit:
The appellants argued that Rule 57-I provides for recovery of only such credit which had been irregularly taken or availed. They contended that the credit was correctly taken and utilized during the financial year 1988-89 when the final products were cleared on payment of duty. The Department, however, maintained that once the final product is exempt from duty, the credit taken on inputs used in the manufacture of such exempt final products becomes inadmissible and must be recovered under Rule 57-I.

3. Legal correctness of credit taken and utilized before opting for exemption:
The appellants claimed that the credit was taken and utilized correctly during the period when the final products were cleared on payment of duty. They argued that there was no one-to-one correlation between inputs and final products and that Rule 57-C should be read with sub-rule 4(i) of Rule 57F, which allows the credit of duty on inputs to be utilized towards payment of duty on any final product. The Department countered that the credit taken on inputs must be reversed if the final products are subsequently cleared without payment of duty under an exemption notification.

4. Relevance of previous Tribunal and High Court decisions to the present case:
The Tribunal's decision in the Kirloskar Oil Engines case was cited, where it was held that credit of duty paid on inputs must be disallowed if the final products become exempt from duty. The decision emphasized that the liberal treatment of allowing credit on receipt of inputs without strict correlation to the final products must be read in conjunction with Rule 57-C. The Tribunal also considered the decisions in Sawottam Ispat (P) Ltd. and Wipro Information Technology, but found them not directly applicable to the present case. The East India Pharmaceutical Works Ltd. case was deemed more relevant, supporting the view that if the final products are exempt from duty, the credit taken on inputs must be disallowed.

Conclusion and Referral to Larger Bench:
The Tribunal concluded that Rule 57-C was correctly applied by the authorities below. It was held that the purpose of Modvat Credit is to avoid the cascading effect of duty paid on inputs, and if the final products are cleared free of duty, the credit taken on inputs has no role to play. However, the Tribunal acknowledged the complexity of the issue, particularly regarding the applicability of Rule 57-I for recovery of credit. Consequently, the matter was referred to the Honourable President for constituting a Larger Bench to decide whether the disallowance and recovery of Modvat Credit can be regulated under Rule 57-C without applying Rule 57-I, or whether such cases must be decided with reference to Rule 57-I only.

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