1993 (8) TMI 189 - AT - Central Excise

Issues Involved:
1. Admissibility of Modvat credit when goods manufactured using Modvat inputs are transferred to another unit for further manufacture of dutiable final products.

Summary:

Issue 1: Admissibility of Modvat Credit

2.2 The issue common to all the three appeals can be briefly stated as below:

The appellants M/s. Bajaj Tempo are manufacturer of Motor Vehicles. They have more than one manufacturing unit. They receive inputs under Modvat scheme in respect of materials, which they utilise in the manufacture of Motor Vehicle parts and I.C. Engines. These motor vehicle parts and I.C. Engines are partly utilised in the further manufacture of motor vehicles in the same factory and partly sent under Chapter X Procedure for further utilisation in the manufacture of motor vehicles in another unit belonging to the appellants, in terms of exemption Notice 217/86 dated 2-4-1986 as amended by Notification 97/89 dated 1-3-1989.

2.4 In the case of both the appellants, Department took objection that the products cleared from their factory under Chapter X procedure in terms of Notification 217/86 are exempted and hence in terms of Rule 57C of the Central Excise Rules, Modvat Credit taken in respect of duty paid on inputs utilised in the manufacture of these products cleared outside to another unit of theirs for further manufacture, is not admissible; because the goods cleared are final products and they are cleared at 'nil' rate of duty by availing exemption under Notification 217/86 and hence in terms of Rule 57C of the Central Excise Rules, modvat credit is not admissible. In view of this objection, Modvat credit taken on inputs utilised in the products cleared in terms of Notification 217/86 for captive consumption in another unit of the appellants was ordered to be reversed. The orders passed by the Assistant Collector were appealed against, before the Collector (Appeals), Pune who has rejected their appeals. Hence these three appeals are before us.

2.5 The issue involved in all the three appeals is whether Modvat credit can be denied, when goods manufactured utilising Modvat inputs in their factories but transferred to their another unit for further manufacture of dutiable final products in the said other unit.

Undisputed Facts:

3. The following facts emerge undisputed in all the three cases during the hearing:

(i) Inputs are received on filing declaration for utilisation of the declared final products, which per se are dutiable and duty in the normal course would have been paid in terms of Rules 9 & 49 of the Central Excise Rules, before their clearance for further manufacture either in the same unit or for removal outside to another unit for further manufacture of dutiable final products but for the exemption under Notification 217/86 as amended by Notification 97/89, dated 1-3-1989.

(ii) If these products are cleared otherwise than under Notification 217/86 (e.g. if I.C. Engines or motor vehicle parts are cleared as spares outside or the copper wire, copper sheets etc. are cleared to another manufacturer or for use otherwise), they are to pay duty at the appropriate rate, before such clearance.

(iii) The final products, namely motor vehicle manufactured in the other unit of M/s. Bajaj Tempo utilising the I.C. engines or motor vehicle parts and the final products such as wire mesh manufactured by the other unit of M/s. Swil Ltd. utilising copper wires etc. are dutiable and are cleared only on payment of appropriate duty.

(iv) Prior to the amending Notification 97/89, dated 1-3-1989, these products were cleared on payment of duty on their removal to their other units and Modvat credit of duty paid on these products was taken in the other unit and utilised for payment of duty on the final products manufactured in their other unit.

Arguments:

4.1 The main thrust of the arguments of the ld. Counsel Shri C.S. Lodha is as below:

(i) The terms inputs, intermediate products, final products are dependent on the level of manufacture undertaken by the manufacturer. What is input for one factory may be a final product produced in another factory. What is intermediate product in one factory may be a final product or input in another factory. There is no definition given either in Notification 217/86 or in Rule 57A as to what is an input or final product. If excisable goods are received for further manufacture of excisable goods, they are referred to as inputs and products occurring at intermediate stage in the line of manufacture are intermediate products.

(ii) Rule 57C stands attracted, where final product manufactured out of Modvat inputs is exempt from the whole of duty of excise leviable thereon or is chargeable to 'nil' rate of duty. No doubt Notification 217/86 is an exemption notification, granting exemption to products manufactured (referred to as inputs) consumed captively in further manufacture of dutiable products in the same factory or in another factory belonging to the same assessee, provided the final product manufactured out of such products are dutiable and are cleared on payment of duty. Such an exemption only contemplates postponing recovery of duty on the goods produced in the factory (referred to as inputs) to the stage of clearance of finished goods manufactured out of such input products either in the same factory or another factory belonging to the same assessee. This exemption cannot be equated with other exemptions, where products manufactured per se are exempted from the whole of duty of excises either conditionally or unconditionally. The question to be looked into is whether removal under Chapter X procedure is by way of granting duty remission on these products for their use as such or where they are used for further manufacture of final product and such final product manufactured out of such products attracts any duty. Only in the case of such exemption granting remission of duty, Rule 57C can be construed to apply. He referred to the following case laws to urge this point that in these cases, the same question has been raised and where it is established that further use in the manufacture of dutiable final products, credit or exemption given was not disturbed.

1984 (17) E.L.T. 166 - Hindustan Lever

1987 (32) E.L.T. 579 - Collector v. Madras Rubber Factory

1989 (40) E.L.T. 287 - Collector v. Jayant Oil Factory

1990 (50) E.L.T. 482 - M.R.F. Ltd. v. Collector

(iii) He seeks to point out that the decision taken in the case of M/s. Kirloskar Oil Engines Ltd. - 1993 (67) E.L.T. 412 (Tribunal) = 1993 (42) E.C.C. 153 (WRB) for referring the issue to a larger Bench is clearly distinguishable. In that case, the goods manufactured by the appellants were cleared under Chapter X procedure in terms of exemption Notification 217/85, dated 8-10-1985, where the part of I.C. engines are exempted from duty and there is no requirement to the effect that these parts should be utilised for further manufacture of dutiable I.C. engines. Many types of I.C. engines are wholly exempted and irrespective of the usage of the I.C. Engine parts even in exempted engines, the exemption Notification 217/85 is applicable. The exemption wholly remits the duty of I.C. Engine parts on condition that they are used either in the factory of production or elsewhere in the manufacture of diesel oil operated I.C. engines. It is not conditionally dependent on whether such I.C. engines are to be cleared on payment of duty. Hence this Bench was justified in taking the view that the I.C. Engine parts are exempted thereby attracting Rule 57C of the Central Excise Rules. In the case of Notification 217/86, it is only postponement of recovery of duty to the final stage of clearance of motor vehicles in the other factory. Hence the case is distinguishable.

(iv) Even in the above case of Kirloskar Oil Engines, this Bench has taken note of the position that the other Benches of the Tribunal and Delhi High Court have taken a view that reversal of credit taken for utilisation against dutiable final products is not permissible, merely because certain final products manufactured therefrom are cleared subsequently under exemption. They have held that since there is no one to one correlation and credit has been taken and utilised only against dutiable final products, reversal is not permissible, merely because certain final products are cleared under exemption. This Bench has differed from that view, drawing its support from the decision of the Bombay High Court and referred the issue to the larger Bench. But since the case of Kirloskar Oil Engines is clearly distinguishable as indicated above, he would not press for the arguments based on the decision of other Benches and Delhi High Court, since the issue can be independently decided, on its own, in this case.

(v) He also points out that while the scheme of Modvat to avert cascading effect of input taxation, Notification 217/86 is to avert scriptory work and payment of duty at each stage of manufacture and take credit at each stage for utilisation in the further stage of manufacture in the same factory or in another factory of the same manufacturer. Prior to amendment of Notification 217/86 by Notification 97/89 effective from 1-3-1989, they cleared I.C. Engines and M. V. Parts on payment of duty and took the credit of this duty in their other factory for utilisation towards the payment of duty on motor vehicles. Even now they can do this, in which case the credit is available throughout. The amendment dated 1-3-1989 is on account of representations made to the Government for averting payment of duty at each stage and scriptory work, by prescribing in bond procedure for movement of these goods to another unit of the same assessee, so that they can be utilised in further manufacture of dutiable final products. Hence, a beneficial provision introduced by this amendment cannot be construed to have taken away the existing benefit of Modvat Credit on these inputs. Such an interpretation would frustrate not only the Modvat Scheme but also the objective behind Notification 217/86. Law has to be construed for furthering the objective and not to frustrate the objective. In this context, he referred to the decision of the Apex Court reported in AIR 1986 SC 1499 -M/s. Girdharilal & Sons v. Balbirnath Mathur and Others and AIR 1992 SC 1846 in the case of Administrator, Municipal Corporation, Bilaspur v. Daltaraya Dahankar.

(vi) Finally he submits that Rule 57D(2) is to be construed applicable in this case in the context of Notification 217/86, by giving an extended meaning to the 'factory of production'.

4.2 Shri B.N. Rangwani, the ld. Consultant for the other appellant, mainly pointed out that Notification 217/86 refers to exemption of products (referred to in this Notification as 'inputs') used in further manufacture of final products either within the same factory or in another factory of the same assessee. The inputs and final products figuring in the schedule to Notification 217/86 are the same as the ones notified under Notification issued under Rule 57A. The main condition is that these products (inputs) have to be used in the final products, which are to be cleared on payment of duty. If the final products manufactured using Modvat inputs, are exempted or cleared at Nil rate of duty, the exemption will

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