1996 (2) TMI 298 - AT - Central Excise

Summary

Issues Involved:

1. Admissibility of Modvat credit on inputs used in the manufacture of steam.
2. Interpretation of Rule 57A and Rule 57D of the Central Excise Rules.
3. Imposition of penalty under Rule 173Q of the Central Excise Rules.

Detailed Analysis:

1. Admissibility of Modvat Credit on Inputs Used in the Manufacture of Steam:

The appellants contested the denial of Modvat credit on inputs (furnace oil, low sulphur heavy stock, and light diesel oil) used to produce steam, which was further utilized in manufacturing final products. The Commissioner disallowed the credit on the grounds that steam, an intermediate product, is exempt from Central Excise duty. The appellants argued that steam, although exempt, is an intermediate product used in the manufacturing process, and thus, Modvat credit should be allowed under Rule 57D(2) of the Central Excise Rules. They cited previous judgments, including Hardillia Chemicals Ltd. v. C.C. Ex., Bombay and Indian Farmers Co-operative Ltd. v. C.C. Ex., Ahmedabad, to support their claim that inputs used in the manufacture of an exempt intermediate product are still eligible for Modvat credit.

2. Interpretation of Rule 57A and Rule 57D of the Central Excise Rules:

The adjudicating authority emphasized the significance of the phrase "subject to the provisions of this section" in Rule 57A and referred to Notification 17/95-C.E. (N.T.), which clarified that Modvat credit on inputs used for generating steam was only available prospectively from 18-5-1995. The appellants, however, argued that the amendments to Rule 57D and Rule 57A, which included inputs used as fuel within the Modvat scheme, should apply to their case. They contended that the legislative intent, as clarified in the amendments, supported their eligibility for Modvat credit during the disputed period.

3. Imposition of Penalty under Rule 173Q of the Central Excise Rules:

The Commissioner imposed a penalty of Rs. 1 crore on the appellants, citing contravention of Rule 57D(2) and the absence of mala fide intention. The appellants argued that since they had filed the necessary declarations and believed they were eligible for Modvat credit, the penalty was unwarranted. The adjudicating authority acknowledged the interpretative nature of the case but upheld the penalty. However, the appellate tribunal, upon setting aside the impugned order, also nullified the penalty, deeming it incorrect in law.

Conclusion:

The appellate tribunal concluded that the appellants were entitled to Modvat credit on the inputs used to generate steam, which was an intermediate product in the manufacturing process of the final products. The tribunal referenced previous judgments and interpretations of Rule 57D(2) to affirm that the credit could not be denied even if the intermediate product (steam) was exempt from duty. Consequently, the tribunal set aside the impugned order and the penalty, allowing the appeal in favor of the appellants.