1997 (7) TMI 396 - AT - Central Excise

Summary

Issues:
Denial of Modvat credit on liquid oxygen used as input for 'oxygen in cylinders'.

Detailed Analysis:

Manufacturing Process and Modvat Credit History:
The appellants are involved in manufacturing liquid oxygen and oxygen gas in cylinders. They filed a Modvat declaration in 1986 for availing credit on liquid oxygen. A show cause notice was issued in 1988 to disallow the credit, but it was later dropped by the Assistant Collector in 1990. The dispute in the present proceeding concerns the denial of Modvat credit on the final product made through RG 23A Part II during July 1990 to February 1991. The department contended that the appellants used both bought-out liquid oxygen and plant-made liquid oxygen, leading to denial of Modvat credit.

Adjudication Process and Dispute Resolution:
The Assistant Collector confirmed the demand in 1992, which was upheld by the Collector (Appeals) after remand. The denial was based on the argument that oxygen in cylinders was manufactured from two different sources, making Modvat credit inapplicable. The appellants argued that there was no direct correlation between inputs and outputs in the Modvat scheme and that they were entitled to use the credit on the final product. They also highlighted the manufacturing process involving compress air, liquified air, and liquid oxygen.

Legal Arguments and Counterarguments:
The appellants' advocate argued that the denial of Modvat credit was unjustified, emphasizing the manufacturing process and the accumulation of credit due to the department's embargo. He contended that oxygen in cylinders was always made from liquid oxygen, not directly from air. The JDR countered by asserting that even if a part of the oxygen in cylinders was from plant-made liquid oxygen, Modvat credit should only apply to the duty-paid portion. The JDR also dismissed the relevance of accumulated credit and distinguished the appellants' cited cases.

Judgment and Conclusion:
The tribunal found that the appellants manufactured oxygen in cylinders from both duty-paid and plant-made liquid oxygen. It clarified that the manufacturing process involved various excisable commodities before producing liquid oxygen, which was used to make oxygen in cylinders. The tribunal emphasized the lack of a direct relationship between inputs and outputs in the Modvat scheme. It concluded that the appellants were entitled to utilize the Modvat credit even if the inputs were not immediately used. The tribunal allowed the appeal, noting that the denial of Modvat credit was unjustified due to the department's embargo. The issue of the demand being time-barred was not addressed due to the appeal's merit-based success.