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PETITIONER: COLLECTOR OF CENTRAL EXCISE, PUNE ETC.  ETC.

       Vs.

RESPONDENT: DAI ICHI KARKARIA LTD.  ETC.  ETC

DATE OF JUDGMENT:       11/08/1999

BENCH: S.P.Bharucha, R.C.Lahoti, N.Santosh Gegde,

JUDGMENT:

     Bharucha, J.

     It  is  convenient  to  set out, at  the  outset,  the question involved in these appeals.

     The  manufacturer purchases raw material.  He uses the raw  material in the manufacture of an intermediate product. He  then uses the intermediate product in the manufacture of a  final  product.   The raw material and  the  intermediate product  are  liable to excise duty and they  are  specified goods for the purposes of the MODVAT scheme.  The assessable value of the intermediate product for the purposes of excise duty has, it is agreed in the instant case, to be determined on  the  basis of its cost.  In determining  the  assessable value  of  the  intermediate  product the cost  of  the  raw material has to be taken into account.  The question is:  is part  of the cost of the raw material the price paid by  the manufacturer  to its seller, as contended by the Revenue, or is  it  the price of the raw material less the  excise  duty thereon, which has been paid by the seller and for which the manufacturer  is entitled to credit under the MODVAT scheme, to  be  utilised  against  the payment  of  excise  duty  on products  manufactured  by him, including  the  intermediate product, as contended by the manufacturer.

     The Central Excise and Gold Control Appellate Tribunal decided     the     question    in     favour     of     the respondent-manufacturers  and the Revenue is in appeal.  The reasoning of the Tribunal is unclear and has not been relied upon by learned counsel for the manufacturers.  Broadly put, the  logic of its decision is this:  since the  manufacturer gets  credit for the amount of the excise duty that has been paid  on  the raw material, the amount of such  excise  duty cannot  be said to form a part of the cost that is  incurred by the manufacturer in procuring it.

     It  was argued on behalf of the manufacturers that the Revenue   itself  had  taken  a  stand  that  supported  the manufacturers  and that, therefore, it could not now urge to the  contrary.   The  learned   Attorney  General,  however, pointed out, with the reference to documents, that the stand of  the Revenue had been different at different times.   The divergent  stand  of  the Revenue at  different  times  only serves  to  illustrate  the   difficulty  in  answering  the

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question.

     In  the first appeal the manufacturer, M/s.  Dai  Ichi Karkaria  Ltd., purchases a raw material known as lab  for short,   it  uses  the  lab  in  the  manufacture  of   an intermediate  product,  surface active agent or  surfactant. It  uses  the  surfactant  in the  manufacture  of  a  final product,  emulsifer.   The  other  respondent  manufacturers purchase other raw materials, manufacture other intermediate products and use them in manufacturing other final products. We  are here concerned with the assessment for the  purposes of excise duty of the intermediate product.  For the sake of convenience,  therefore, we shall refer to the  intermediate product as the excisable product.

     To  understand  the contentions in the appeal,  it  is necessary  to  set  out the provisions of Section 4  of  the Central  Excises  and  Salt Act, 1944 (the Act)  and  some provisions of the Central Excise (Valuation) Rules, 1975.

     Section 4.  Valuation of excisable goods for purposes of  charging  of duty of excise - (1) Where under this  Act, the duty of excise is chargeable on any excisable goods with reference  to value, such value shall, subject to the  other provisions of this section, be deemed to be -

     (a)  the  normal  price thereof, that is to  say,  the price  at  which  such  goods are  ordinarily  sold  by  the assessee  to  a buyer in the course of wholesale  trade  for delivery  at the time and place of removal, where the  buyer is  not  a  related  person  and   the  price  is  the  sole consideration for the sale:

     Provided that -

     (i)  where, in accordance with the normal practice  of the  wholesale  trade in such goods, such goods are sold  by the  assessee  at different prices to different  classes  of buyers  (not  being related persons) each such price  shall, subject   to  the  existence  of  the  other   circumstances specified  in clause (a).  be deemed to be the normal  price of such goods in relation to each such class of buyers;

     (ii)  where such goods are sold by the assessee in the course of wholesale trade for delivery at the time and place of  removal  at the price fixed under any law for  the  time being in force or at a price, being the maximum, fixed under any  such  law, then, notwithstanding anything contained  in clause  (iii)  of  this proviso, the price  or  the  maximum price,  as the case may be, so fixed, shall, in relation  to the  goods  so  sold,  be  deemed to  be  the  normal  price thereof;

     (iii)  where  the assessee so arranges that the  goods are  generally  not sold by him in the course  of  wholesale trade  except  to  or through a related person,  the  normal price  of the goods sold by the assessee to or through  such related  persoan  shall be deemed to be the price  at  which they are ordinarily sold by the related person in the course of  wholesale trade at the time of removal, to dealers  (not being  related persons) or where such goods are not sold  to such  dealers, to dealers (being related persons), who  sell such goods in retail

     (b)  where  the  normal  price of such  goods  is  not

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ascertainable  for the reason, that such goods are not  sold or   for  any  other   reason,  the  nearest   ascertainable equivalent  thereof  determined  in such manner  as  may  be prescribed.

     (2)  Where,  in  relation to any excisable  goods  the price  thereof  for delivery at the place of removal is  not known  and the value thereof is determined with reference to the  price  for delivery at a place other than the place  of removal,  the  cost  of  transportation from  the  place  of removal to the place of delivery shall be excluded from such price.

     (3)  The provisions of this section shall not apply in respect  of any excisable goods for which a tariff value has been fixed under sub-section (2) of Section 3.

     (4) For the purposes of this Section, -

     (a)  Assessee means the person who is liable to  pay the duty of excise under this Act and includes his agent;

     (b) place of removal means -

     (i)  a  factory  or  any other place  or  premises  of production or manufacture of the excisable goods;  or

     (ii)  a  warehouse  or  any other  place  or  premises wherein  the  excisable  goods  have been  permitted  to  be deposited without payment of duty.

     from where such goods are removed;

     (c)   related  person  means  a  person  who  is  so associated  with  the  assessee  that  they  have  interest, directly  or  indirectly, in the business of each other  and includes a holding company, a subsidiary company, a relative and  a distributor of the assessee, and any  sub-distributor of such distributor.

     Explanation  -  In  this   clause  holding  company, subsidiary  company and relative have the same  meanings as in the Companies Act, 1956 (1 of 1956);

     (d) value, in relation to any excisable goods, -

     (i)  where  the  goods are delivered at  the  time  of removal  in  a packed condition, includes the cost  of  such packing except the cost of the packing which is of a durable nature and is returnable by the buyer to the assessee.

     Explanation  - In this sub-clause, packing means the wrapper,  container, bobbin, pirn, spool, reel or warp  beam or  any other thing in which or on which the excisable goods are wrapped, contained or wound;

     (ii)  does  not  include  the amount of  the  duty  of excise,  sales tax and other taxes, if any, payable on  such goods  and, subject to such rules as may be made, the  trade discount  (such discount not being refundable on any account whatsoever)  allowed in accordance with the normal  practice of  the wholesale trade at the time of removal in respect of such goods sold or contracted for sale.

     Explanation - For the purposes of this sub-clause, the

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amount  of the duty of excise payable on any excisable goods shall be the sum total of -

     (a) the effective duty of excise payable on such goods under this Act;  and

     (b)  the  aggregate of the effective duties of  excise payable  under other Central Acts, if any, providing for the levy of duties of excise on such goods.

     And  the effective duty of excise on such goods  under each Act referred to in clause (a) or clause (b) shall be -

     (i)  in a case where a notification or order providing for  any exemption (not being an exemption for giving credit with  respect to, [or reduction of duty of excise under such Act  on  such goods equal to, any duty of excise under  such Act,  or the additional duty under Section 3 of the  Customs Tariff  Act,  1975  (51 of 1975), already paid] on  the  raw material  or  component  parts  used in  the  production  or manufacture  of  such goods) from the duty of  excise  under such  Act is for the time being in force, the duty of excise computed  with reference to the rate specified in such  Act, in  respect of such goods as reduced so as to give full  and complete effect to such exemption;  and

     (ii)  in  any other case, the duty of excise  computed with  reference to the rate specified in such Act in respect of such goods.]

     (e)   wholesale  trade  means   sales  to   dealers, industrial  consumers,  Government,  local  authorities  and other  buyers,  who  or which  purchase  their  requirements otherwise than in retail.]

     Value  by reason of rule 2(c) of the Valuation Rules means the value under Section 4 of the Act.  Rules 3 and 6 of the Valuation Rules read thus:

     Rule 3.  The value of any exciseable goods shall, for the  purposes of clause (b) of sub-section (1) of Section  4 of  the  Act,  be  determined  by  the  proper  officer   in accordance with these rules.

     Rule  6.   If the value of the excisable goods  under assessment  cannot be determined under rule 4 or rule 5, and -

     (a)  where  such  goods are sold by  the  assessee  in retail, the value shall be based on the retial price of such goods  reduced by such amount as is necessary and reasonable in  the opinion of the proper officer to arrive at the price at  which  the  assessee would have sold such goods  in  the course  of wholesale trade to a person other than a  related person :

     [Provided that in determining the amount of reduction, due  regard  shall  be had to the nature  of  the  excisable goods,  the  trade  practice  in that  commodity  and  other relevant factors;]

     (b)  where  the  excisable goods are not sold  by  the assessee but are used or consumed by him or on his behalf in

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the  production or manufacture of other articles, the  value shall be based -

     (i)  on the value of the comparable goods produced  or manufactured by the assessee or by any other assessee:

     Provided that in determining the value under this sub- clause,  the  proper officer shall make such adjustments  as appear  to  him  reasonable, taking into  consideration  all relevant factors and, in particular, the difference, if any, in  the material characteristics of the goods to be assessed and of the comparable goods;

     (ii)  If  the  value cannot be determined  under  sub- clause  (I),  on  the  cost  of  production  or  manufacture including  profits,  if any, which the assessee  would  have normally earned on the sale of such goods;

     (c)  where the assessee so arranges that the excisable goods  are  generally  not  sold by him  in  the  course  of wholesale  trade  except to or through a related person  and the  value  cannot be determined under clause (iii)  of  the proviso to clause (a) of sub-section (1) of Section 4 of the Act, the value of the goods so sold shall be determined.

     (i)  in a case where the assessee sells the goods to a related person who sells such goods in retail, in the manner specified in clause (a) of this rule;

     (ii)  in  a case where a related person does not  sell the  goods but uses or consumes such goods in the production or manufacture of other articles, in the manner specified in clause (b) of this rule;

     (iii) in a case where a related person sells the goods in  the  course  of wholesale trade to  buyers,  other  than dealers  and  related persons, and the class to  which  such buyers  belong is known at the time of removal, on the basis of  the price at which the goods are ordinarily sold by  the related person to such class of buyers.

     The learned Attorney General submitted that, by reason of  the  Explanation to Section 4(4)(d)(ii) of the Act,  the credit  under  the MODVAT scheme taken by the  manufacturer, equal  to the excise duty paid on the raw material, was  not to  be  taken into account to reduce the price paid  by  the manufacturer  to  the seller of the raw material;  in  other words,  the price paid by the manufacturer to the seller  of the  raw  material was part of its cost to the  manufacturer and  it  had  to  be taken into  account  in  computing  the assessable value of the excisable product.

     To  examine  the  correctness of  the  submission,  an analysis of Section 4 of the Act and the Valuation Rules, to the  extent relevant, has to be made.  Section 4 deals  with the  valuation  of excisable goods which are  chargeable  to excise duty with reference to their value.  The valuation is to be based ordinarily on the price thereof, that is to say, the  price at which the excisable goods are ordinarily  sold by  the  manufacturer  to  a buyer.  It  is  only  when  the valuation  cannot  be  so made that the  closest  equivalent

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thereof has to be determined, in the manner prescribed under the  Valuation  Rules.   Value  for the  purposes  of  the Valuation  Rules means the value under Section 4 of the Act. It  is  to be determined, ordinarily, under Rules 4  and  5. Rule  6 comes into play when the valuation of the  excisable goods  under  assessment cannot be so determined.  When  the excisable goods are not sold by the assessee but are used or consumed  by  him in the manufacture of other  products,  as here,  the value is to be based upon the value of comparable goods  manufactured by the manufacturer, and, if that cannot be done, on the cost of production or manufacture including profits,  if  any,  which the assessee would  have  normally earned  on the sale of such goods It is common ground  that the  value of the excisable goods in the instant case has to be  determined  on the cost of their manufacture,  including profits.  Sub-section (4) of Section 4 defines certain words for the purposes of this section.  It defines  Value in relation  to  any  excisable  goods.  It says,  so  far  is relevant  here,  that the value of excisable goods does  not include  the  amount of the duty of excise payable  on  such goods.   The Explanation thereto says that, for the purposes of  the  sub-clause,  the amount of excise duty  payable  on excisable  goods  is the sum total of the  effective  excise duty payable thereon under the Act plus the aggregate of the effective  excise duties payable thereon under other Central excise   statutes.   By  reason  of   clause  (i)   of   the Explanation,  where  there is an exemption notification  or order giving an exemption in respect of the excisable goods it  shall  be given effect to and the excise  duty  leviable under  the concerned Central excise statute shall be reduced to  the extent of such exemption, provided such notification or  order is not one for giving credit with respect to,  or reduction  of  duty of excise under such Act on  such  goods equal  to  any  duty  of  excise  under  such  Act,  or  the additional  duty under Section 3 of the Customs Tariff  Act, 1975,  already  paid on the raw material or component  parts used in the production or manufacture of such goods.

     It  is,  therefore,  only  a  notification  or   order relating  to  the  excisable goods that gives  an  exemption equal  to the excise duty already paid on raw material  used therein  that  is  not  to be taken  into  account  for  the purposes  of  computing the effective duty on the  excisable product.   We are not here concerned with a notification  or order;   the  MODVAT scheme is a part of the Central  Excise Rules.   Secondly, it is nobodys case that the credit  that each  of the respondent-manufacturers takes on its excisable product is equal to the excise duty paid on the raw material used  therein.   The  Explanation   to  Section  4(4)(d)(ii) cannot, therefore, assist the Revenues case.

     The learned Attorney General drew our attention to the judgment  of  this  Court in M/s.  Kirloskar  Brothers  Ltd. ,Dewas  (M.P.)  Vs.   Union of India & Ors., [1992  (2)  SCC 658], and Collector of Central Excise, Bangalore Vs.  Mysore Paper  Mills  Ltd.,  [1997 (7) SCC 64].   Neither  of  these judgments  dealt with the Explanation to Section 4(4)(d)(ii) of  the  Act or the provisions of the MODVAT  scheme.   They are, therefore, of little assistance.

     The  learned Attorney General brought to our attention the  judgment  of  the Tribunal in Collector of  C.Ex.   vs. Incab Industries, [1990 (45) ELT 342], adopting it as a part of  his argument.  The Tribunal read the Rules pertaining to the  MODVAT  scheme  and  found it to  be  clear  that  the

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manufacturer  is allowed to utilise the duty paid on  inputs by  deducting  the same from the duty payable on  the  final product  but  subject to following the procedure  under  the Rules.   It added, It is no doubt true that it will result in  reduction in the cost of final product to the extent  of the  credit  but  it  does   not  automatically  reduce  the assessable  value  which is to be determined  in  accordance with  Section  4.  Assessable value is to be  determined  in accordance  with Section 4 of the Act only and MODVAT credit has  no  direct  impact on the assessable value.  We  shall examine  the Rules pertaining to the MODVAT scheme ourselves but  we note the finding of the Tribunal that MODVAT  credit results  in  the  reduction  of the cost  of  the  excisable product to the extent of the credit.

     The  learned Attorney General cited the judgment of  a learned  Single  Judge of the Allahabad High Court in  Super Cassettes  Industries Ltd.  vs.  Union of India, [1997  (94) ELT  302].  The learned Judge found no warrant for the  view that  MODVAT credit once availed of by making the  necessary entries  was  irrevocable.  He held that there could  be  no final  credit until the inputs were used and excise duty  on the  final  product  was paid or the inputs  were  otherwise disposed of.

     Before  we  look at the Rules relating to  the  MODVAT scheme  we  must  set  out the submissions  of  the  learned Attorney  General in this regard.  He submitted that the raw material  suffered  excise duty legally and  factually.   If there  had  been  no MODVAT scheme excise duty  on  the  raw material  would be included in the cost of production of the excisable  product.   The MODVAT scheme did not  alter  this fundamental  position.  By virtue of it the cost of the  raw material  was  not reduced.  The MODVAT scheme  resulted  in reducing the excise duty on the excisable product.  It was a separate  and  special  facility  that  had  the  effect  of reducing  the excise duty incidence on the excisable product and   had  no  bearing  in   determining  the  cost  of  its production.   The credit of excise duty on the raw  material in  the  register maintained for MODVAT purposes was only  a book  entry  which  might be utilised later for  payment  of excise  duty  on the excisable product.  In other words,  it matured  when  the  excisable product was removed  from  the factory and the stage for payment of excise duty thereon was reached.  Actually, credit was taken, that is, availed of or utilised,  at  the  time  of the removal  of  the  excisable product.   Consequently,  the  cost  of  production  of  the excisable  product  was  not reduced by the  amount  of  the MODVAT  credit  on  the  raw material.   The  credit  was  a contingent  credit.   It might be disallowed  under  certain circumstances.   It  could  not be withdrawn like  a  credit amount in a bank account.  The manufacturer did not have any indefeasible  right or title to it.  The rules pertaining to the  MODVAT  scheme made it clear that MODVAT credit was  in the nature of a set off or an adjustment.

     There  is  no doubt that, were it not for  the  MODVAT scheme  and the credit available on the excise duty paid  on the raw material thereunder, the excise duty paid on the raw material  would  be a factor in determining the cost of  the excisable  product.   The  question is :   does  the  MODVAT scheme make a difference?

     The  Central Excise Rules, in Chapter V AA, deal  with The credit of duty paid on excisable goods used as inputs.

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The  relevant Rules are Rule 57A to Rule 57J.  Sub rule  (1) of Rule 57A reads thus :

     (1)  The  provisions of this section shall  apply  to such  finished  excisable goods (hereinafter referred to  as the  final  products), as the Central Government  may,  by notification  in  the  Official  Gazette,  specify  in  this behalf,  for  the purpose of allowing credit of any duty  of excise or the additional duty under Section 3 of the Customs Tariff  Act,  1975 (51 of 1975), as may be specified in  the said notification (hereinafter referred to as the specified duty)  paid  on  the goods used in or in  relation  to  the manufacture  of the said final products [whether directly or indirectly  and  whether contained in the final  product  or not]  (hereinafter  referred  to  as the  input)  and  for utilising  the credit so allowed towards payment of duty  of excise leviable on the final products, whether under the Act or  under  any  other Act, as may be specified in  the  said notification,  subject to the provisions of this section and the conditions and restrictions that may be specified in the notification :

     Provided  that the Central Government may specify  the goods  or classes of goods in respect of which the credit of specified duty may be restricted."

     Rule 57C states that no credit of duty paid on a final product  may be allowed if the final product is exempt  from the  whole  of  the  excise  duty  leviable  thereon  or  is chargeable  to  a nil rate of duty.  Rule 57D says that  the credit of duty allowed in respect of any inputs shall not be denied  or  varied on the ground that part of the inputs  is contained  in any waste, refuse, or by-product arising  from the  manufacture of the final product or on the ground  that any  intermediate product has come into existence during the course  of  the production of the final product.   Rule  57E says that if the duty paid on any inputs on which credit has been  allowed  is  varied subsequently, the  credit  allowed shall  be  varied  accordingly by adjustment of  the  credit account or, if adjustment is not possible for any reason, by cash  recovery from or, as the case may be, by refund to the manufacturer availing of the credit.  Rule 57F(1) reads thus :  The inputs in respect of which a credit of duty has been allowed under rule 57A -

     (i) may be used in, or in relation to, the manufacture of  final  products for which such inputs have been  brought into the factory;  or

     (ii)  shall be removed, after intimating the Assistant Commissioner  of  Central  Excise having  jurisdiction  over factory  and  obtaining a dated acknowledgement of the  same from  the  factory for home consumption or for export  under bond.

     Provided  that  where the inputs are removed from  the factory  for homes consumption on payment of duty of excise, such duty excise shall be the amount of credit that has been availed in respect of such inputs under rule 57A.

     Rule  57G provides that the manufacturer intending  to take  credit of duty paid on inputs must file a  declaration with  the concerned excise officer indicating what the final

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products  are  that are manufactured in its factory and  the inputs   intended  to  be  used   therein  and   obtain   an acknowledgement thereof.  The manufacturer, having filed the declaration  and  obtained  the  acknowledgement,  can  take credit for the duty on the inputs received by him.  Rule 57I provides  for  the recovery of credit wrongly availed of  or utilised  in an irregular manner.  The manufacturer is  then required  to show cause why he should not be disallowed such credit,  or, if it has utilised it, why its value should not be  recovered  from him.  After considering the  reply,  the concerned   excise   officer  is   empowered  to  make   the appropriate order in such terms.

     It  is clear from these Rules, as we read them, that a manufacturer  obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product  immediately it makes the requisite declaration  and obtains  an acknowledgement thereof.  It is entitled to  use the  credit  at any time thereafter when making  payment  of excise duty on the excisable product.  There is no provision in  the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised,  has to be paid for.  We are here really concerned with  credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or  otherwise unless the manufacturer itself chooses not  to use  the raw material in its excisable product.  The  credit is,  therefore, indefeasible.  It should also be noted  that there  is  no co-relation of the raw material and the  final product;   that  is  to say, it is not as if credit  can  be taken  only  on a final product that is manufactured out  of the  particular raw material to which the credit is related. The  credit may be taken against the excise duty on a  final product  manufactured  on  the  very  day  that  it  becomes available.

     It  is,  therefore, that in the case of Eicher  Motors Ltd.   vs.  Union of India [1999(106) ELT 3] this Court said that  a  credit under the MODVAT scheme was as good as  tax paid.

     With  this in mind, we must now determine whether  the excise duty paid on the raw material should form part of the cost  of  the excisable product for the purposes of  Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules?

     Learned counsel for the respondents drew our attention to  the  judgment of this Court in Challapalli  Sugars  Ltd. vs.   Commissioner of Income-Tax, A.P., [1975 (98) ITR 167]. The  Court  was  concerned with written down  value.   The written  down  value  had to be taken  into  consideration while  considering  the question of deduction on account  of depreciation  and  development rebate under the  Income  Tax Act.   Written down value depended upon the actual  cost of the assets to the assessee.  The expression actual cost had  not  been defined in the Income Tax Act, 1922  and  the question   was   whether  the   interest  paid  before   the commencement  of  production on the amount borrowed for  the acquisition  and  installation  of the plant  and  machinery could be considered to be a part of the actual cost of the assets to the assessee.  As the expression actual cost had not  been defined, this Court was of the view that it should be  construed  in the sense which no commercial  man  would misunderstand.   For this purpose, it would be necessary  to

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ascertain  the  connotation  of   the  above  expression  in accordance  with the normal rules of accountancy  prevailing in  commerce and industry. Having considered  authoritative books  in  this  regard, this Court said that  the  accepted accountancy  rule  for determining the cost of fixed  assets was  to  include  all expenditure necessary  to  bring  such assets  into existence and to put them in working condition. That  rule of accountancy had to be adopted for  determining the  actual  cost  of  the assets in the  absence  of  any statutory definition or other indication to the contrary.

     The  learned Attorney General submitted that judgments relating  to  the  Income Tax Act or other statutes  had  no relevance  while  considering  a   provision  in  an  excise statute.   There  can be no doubt about the  correctness  of this  proposition, but the Challapalli Sugars Ltd.  judgment is  one  in which the meaning of actual cost, not  defined under  the  Income  Tax  Act,  1922,  was  considered.   For ascertaining  what  actual cost was in the  circumstances, this  Court referred to accepted accountancy rules and  said that  they should be adopted and that the expression actual value  should be construed in a sense which commercial  men would  understand.  The judgment in Challapalli Sugars  Ltd. is  relevant  to  the instant case where we have  to  put  a meaning  to the word cost which is not defined in the Act. The  meaning  we  give should be such as  accords  with  the meaning that a man of business put upon it, and for so doing established accountancy practice would be relevant.

     Learned  counsel for the Respondents made reference to the Guidance Note on accounting treatment for MODVAT as on 16th  March,  1995  issued  by the  Institute  of  Chartered Accountants of India.  The Guidance Note deals (in paragraph 6)  with Accounting treatment in case of inputs used in for relation  to  manufacture of final products.  It  states  : In  the light of the above, it may be stated that MODVAT is a  procedure whereby the manufacturer can utilise credit for specified  duty  on  inputs against duty  payable  on  final products.   Duty credit taken on inputs is of the nature  of set-off  available against the payment of excise duty on the final  products.   There  are  two  alternative  methods  of treatment of MODVAT credit in accounts :

     (a)  Specified duty paid on inputs may be debited to a separate  account,  e.g., MODVAT Credit Receivable  (Inputs) Account.   As  and when MODVAT credit is  actually  utilised against   payment   of  excise   duty  on  final   products, appropriate  accounting  entries will be required to  adjust the  excise  duty  paid  out  of  MODVAT  Credit  Receivable (Inputs)   Account   to    the    account   maintained   for payment/provision for excise duty on final product.  In this case,  the  purchase cost of the inputs would be net of  the specified  duty  on inputs.  Therefore, the inputs  consumed and  the inventory of inputs would be valued on the basis of purchase  cost  net  of the specified duty on  inputs.   The debit  balance in MODVAT Credit Receivable (Inputs)  Account should   be  shown  on  the   assets  side  under  the  head advances.

     (b)  In the second alternative, the cost of inputs may be  recorded  at  the  total amount  paid  to  the  supplier inclusive  of  the specified duty on inputs.  To the  extent the  MODVAT credit is utilised for payment of excise duty on final  products, the amount could be credited to a  separate account,  e.g.,  MODVAT Credit Availed Account.  Out of  the

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MODVAT  Credit Availed Account, the amount of MODVAT  credit availed in respect of consumption of inputs would be reduced from  the total cost of inputs consumed.  The balance amount standing  to  the  credit of MODVAT Credit  Availed  Account representing  MODVAT credit in respect of input not consumed but  lying  in stock could be shown in the balance sheet  as deduction from the value of inventory.

     (Emphasis  supplied)  The   learned  Attorney  General referred  to an extract from a compendium of Guidance  Notes of  the said Institute as revised upto 31st March, 1990.  It states  :  Where excise duty is paid on excisable goods and such  goods  are subsequently utilised in the  manufacturing process  the duty paid on such goods become a  manufacturing cost  and  must  be  included in the valuation  of  work  in progress  or  finished  goods arising  from  the  subsequent processing  of  such  goods. It is not clear  whether  this Guidance  Note was issued in relation to excise duty paid on an input under the MODVAT scheme.

     We  think  it  is  appropriate that the  cost  of  the excisable  product for the purposes of assessment of  excise duty  under  Section 4(1)(b) of the Act read with Rule 6  of the  Valuation  Rules  should  be reckoned as  it  would  be reckoned  by a man of commerce.  We think that such  realism must  inform the meaning that the Courts give to words of  a commercial  nature, like cost, which are not defined in  the statutes  which  use them.  A man of commerce would, in  our view,  look  at the matter thus :  I paid Rs.100/-  to  the seller of the raw material as the price thereof.  The seller of  the  raw  material had paid Rs.10/- as the  excise  duty thereon.  Consequent upon purchasing the raw material and by virtue  of the MODVAT scheme, I have become entitled to  the credit  of  Rs.10/-  with  the excise  authorities  and  can utilise  this  credit when I pay excise duty on my  finished product.   The  real cost of the raw material (exclusive  of freight,  insurance  and  the  like) to  me  is,  therefore, Rs.90/-.  In reckoning the cost of the final product I would include  Rs.90/-  on this account. This, in real terms,  is the  cost  of  the  raw   material  (exclusive  of  freight, insurance  and the like) and it is this, in our view,  which should  properly  be included in computing the cost  of  the excisable product.

     The view we take about the cost of the raw material is borne  out  by the Guidance Note of the Indian Institute  of Chartered  Accountants, and there can be no doubt that  this Institute  is an authoritative body in the matter of  laying down accountancy standards.

     To  answer the question involved in these appeals,  in determining  the cost of an excisable product covered by the MODVAT  scheme  under Section 4(1)(b) of the Act  read  with Rule  6  of the Valuation Rules the excise duty paid on  raw material  also  covered  by the MODVAT scheme is not  to  be included.

     The appeals are dismissed.

     Refunds, if any, shall be made subject to the law.

     No order as to costs.

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