2007 (8) TMI 10 - SC - Central Excise

Modvat / Cenvat availed on inputs. Some input transferred to sister unit as stock transfer. (which is not sale). Tribunal has held that since there is no sale, Modvat is not required to reversed. SC has reversed the decision of the Tribunal and held that on even on stock transfer, Modvat is required to be reversed.

Issues Involved:
1. Applicability of Rule 57CC of the Central Excise Rules, 1944 in the absence of a sale.
2. Determination of duty payable on stock transfers.
3. Invocation of the extended period of limitation under Section 11A of the Central Excise Act, 1944.
4. Applicability of Rule 6(b)(i) and Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.
5. Validity of show cause notices and the foundation for levy and recovery of duty.

Issue-wise Detailed Analysis:

1. Applicability of Rule 57CC of the Central Excise Rules, 1944 in the absence of a sale:
The primary issue was whether Rule 57CC would apply in the case of stock transfers where no sale occurred. The assessee contended that Rule 57CC was inapplicable as there was no sale involved in the stock transfer of pulp to its sister unit. The Supreme Court held that Rule 57CC, which deals with the adjustment of credit on inputs used in the manufacture of exempted final products, applies irrespective of whether there is a sale. The rule requires a manufacturer to pay a presumptive amount equal to eight percent of the price of the exempted final product at the time of clearance from the factory, even in the case of stock transfers.

2. Determination of duty payable on stock transfers:
The Department argued that the assessee should have considered the selling price of pulp sold by the sister units in other states for the reversal of MODVAT credit. The Supreme Court clarified that Rule 57CC requires the payment of a presumptive amount of eight percent of the price of the exempted goods, which includes stock transfers. The valuation should be based on the price at which such goods are ordinarily sold by the manufacturer from the depot or other premises if not sold at the factory gate.

3. Invocation of the extended period of limitation under Section 11A of the Central Excise Act, 1944:
The Department issued three show cause notices, with the first invoking the extended period of limitation. The Supreme Court referred to the precedent set in the case of M/s Continental Foundation Joint Venture Sholding v. CCE, Chandigarh-I, which held that the extended period of limitation cannot be invoked in the absence of suppression, fraud, or collusion. The Court concluded that the Department was not entitled to invoke the extended period of limitation for the first show cause notice dated 21.5.1999, as there was no willful suppression by the assessee.

4. Applicability of Rule 6(b)(i) and Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975:
The Supreme Court emphasized that the adjudicating authority needs to determine whether all requisite elements of costing, such as wages and profits, were considered by the assessee under Rule 6(b)(ii). The Court remitted the matter to the Commissioner of Central Excise to decide the applicability of Rule 6(b)(i) and Rule 6(b)(ii) in accordance with the law.

5. Validity of show cause notices and the foundation for levy and recovery of duty:
The Supreme Court reiterated that a show cause notice constitutes the foundation for the levy and recovery of duty, penalty, and interest. The Court set aside the first show cause notice dated 21.5.1999 as time-barred but remitted the second and third show cause notices to the Commissioner for determination. The Court clarified that Rule 7 of the Valuation Rules, 1975, could not be invoked as it was not mentioned in the show cause notices.

Conclusion:
The Supreme Court partly allowed the civil appeal filed by the Department, setting aside the impugned judgment of the Tribunal, which had held that Rule 57CC was not applicable due to the absence of a sale. The Court remitted the second and third show cause notices to the Commissioner for determination in line with the principles laid down in the judgment. The first show cause notice was struck down as time-barred. The appeal was partly allowed with no order as to costs.

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