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PETITIONER: H.M.M. LIMITED

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE, NEW DELHI

DATE OF JUDGMENT:       11/10/1996

BENCH: B.P.JEEVAN REDDY, SUHAS C. SEN

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T B.P. JEEVAN REDDY.J.      This appeal preferred against the judgment of the CEGAT involves the  interpretation of Notification No.210 of 1979- CE dated  4.6.1979, issued  by the  Central Government under Rule 8 of the Central Excise Rules.      The appellant-assessee  is engaged  in the manufacture, inter alia,  of "Horlicks"  falling under Tariff item 1-B of the Schedule  to the Central Excises and Salt Act.  It has a factory   at    Rajahmundry   (Bommur)   for   manufacturing "Horlicks".   The entire  stock of  Horlicks manufactured at Rajahmundry is,  however, not  cleared/removed after  paying the duty  at Rajahmundry.   Only a portion of the production is  put   in  unit   containers/packages  and   cleared   at Rajahmundry after  paying the  duty while  the bulk  of  the production is  sent to the appellant’s factories situated at different places  in India  in bulk  containers.  There, the Horlicks is  put in  unit  containers/packages  and  cleared after paying the duty.      For  the   purpose  of   manufacturing  Horlicks,   the appellant purchases  barley malt  which was  dutiable  under Tariff Items 68.      On June  4, 1979,  the Central  Government  issued  the aforesaid  notification  (No.201  of  1979)  exempting  "all excisable goods  ........on which  the  duty  of  excise  is leviable and  in the  manufacture of which any goods falling under Item  No.68 of  the  First  Schedule  to  the  Central Excises and  Salt Act, 1944 have been used, as raw materials or component  parts (hereinafter  referred as  "the inputs") from so  mush of  the duty  of excise leviable thereon as is equivalent to  the  duty  of  excise  already  paid  on  the inputs."  Controversy   has  arisen   with  respect  to  the application of  the said  notification and  it is  this: the appellant says  that it  is entitled  to take  credit of the entire duty  paid on barley malt against the duty payable on the Horlicks  cleared at  Rajahmundry,  notwithstanding  the fact that  the entire  quantity of Horlicks manufactured out of  the   said  barley   malt  is   not  cleared/removed  at Rajahmundry by  paying the  duty.   On the  other hand,  the Revenue says  that the  appellant is entitled to take credit

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at Rajahmundry  only of  the portion  of duty paid on inputs (barley malt) as is proportionate to the Horlicks cleared on paying the  duty vis-a-vis  the total  quantity of  Horlicks manufactured out  of the  said barley  malt.    The  Revenue further says that there is no provision and the appellant is not entitled  to transfer  the credit to its other factories from where  the goods  are cleared  on payment of duty.  The controversy between  the parties  can be  best understood by taking an illustration (unrelated to the actual facts of the case):   the manufacture  (respondent) purchases 100 tons of barley malt on which the duty paid is Rs.10,000/-.  By using the  said   100  tons   of  barley   malt,  the   respondent manufactures one thousand tons of Horlicks.  Out of this one thousand tons,  it clears  250 tons  of  Horlicks  from  the Rajahmundry factory  on paying duty.  The remaining 750 tons is sent  to the factory situated at Bangalore without paying duty under  a bond.   The 750 tons is put in unit containers and packages at the Bangalore factory and cleared from there on payment  of excise  duty.  According to the appellant, he is  entitled   to  take   credit  for  the  entire  duty  of Rs.10,000/- (paid  on 100  tons of  barley malt) from out of the duty  payable on  250  tons  of  Horlicks  cleared  from Rajahmundry factory, whereas according to the Revenue, since the quantity  cleared at  Rajahmundry on  payment of duty is only 1/4th of the total quantity manufactured using 100 tons of barley  malt, the appellant is entitled to take credit of only Rs.2,500/-  against the  duty payable  at  Rajahmundry. Revenue also  says that  the respondent  is not  entitled to take credit of b balance of Rs.7,500/- (duty paid on 75 tons of barley  malt) from  out of  the duty  paid on 750 tons at Bangalore.  The question is who is right?      Notification No.201 of 1979, insofar as it is relevant, reads:      "In   exercise    of   the   powers      conferred by sub-rule (1) of rule 8      of the  Central Excise Rules, 1944,      and   in    supersession   of   the      notification of  the Government  of      India in  the Ministry  of  Finance      India in  the Ministry  of  Finance      (Department of Revenue) No. 178/77-      Central  Excises,  dated  the  18th      June, 1977,  the Central Government      hereby exempts  all excisable goods      (hereinafter referred  as "the said      goods"),  on   which  the  duty  of      excise  is   leviable  and  in  the      manufacture  of   which  any  goods      falling under  Item  No.68  of  the      First  Schedule    to  the  Central      Excises and  Salt Act,  1944 (1  of      1944)  have   been  used,   as  raw      materials   or    component   parts      (hereinafter   referred   as   "the      inputs", from  so much  of the duty      of excise  leviable thereon  as  is      equivalent to  the duty  of  excise      already paid on the inputs:           Provided  that  the  procedure      set out  in the  Appendix  to  this      notification is followed:           Provided further  that nothing      contained  in   this   notification      shall apply to the said goods which      are exempted  from the whole of the

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    duty of  excise leviable thereon or      are chargeable to nil rate of duty:      ...................................                 APPENDIX           1. A  manufacturer of the said      goods shall  give a  declaration to      the   Superintendent   of   Central      Excise having jurisdiction over his      factory,   indicating    the   full      description  of   the  said   goods      intended to  be manufactured in his      factory and the full description of      the inputs  intended to  be used in      the manufacture of each of the said      goods.           9.(a) The credit ofduty taken      in respect  of any  inputs  may  be      utilised towards payment of duty on      any said  goods for the manufacture      of which  such inputs were declared      by the  manufacturer to  be brought      into the  factory,  or  where  such      inputs are cleared from the factory      as such, on such inputs.           (b) No  part  of  such  credit      shall be  utilised save as provided      in clause  (a) or shall be refunded      in cash or by cheque.           10.(a)  If   the  manufacturer      desires to  discontinue availing of      the  exemption  contained  in  this      notification, he  shall give to the      proper officer  seven days  advance      notice of his intention to do so.           (b) The  proper officer shall,      on   receipt    of   such   notice,      ascertain the  stock of  the inputs      in respect of which credit has been      taken and which-           (i)   are   lying   with   the           manufacture,  whether  in  the           store   room    or   in    the           manufacturing room, and           (ii) have been utilized in the           manufacture of  the said goods           but such  goods have  not  yet           been removed from the factory.           (c) The  total stock of inputs      so ascertained shall be assessed to      duty and the manufacturer shall pay      the duty  forthwith on receipt of a      written  demand   from  the  proper      officer.           11. On an application from the      manufacturer of the said goods, the      Collector  of  Central  Excise  may      permit a  manufacturer to  transfer      the  unutilized   credit   in   his      account in  Form R.B.23 in Appendix      I to the Central Excise Rules, 1944      or the  stock of the inputs as such      or in process on account of -           (i) shifting  of the  plant or           factory,  belonging   to   the           manufacturer to another site;

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         (ii) merger  of  the  factory;           within another factory;           (iii) transfer  of business of           the  manufacturer  to  another           manufacturer;           Provided that the manufacturer      is  availing   of   the   exemption      granted under  this notification in      respect of the factory to which the      credit or stock is transferred."                         (emphasis added)      The first  proviso to  the notification  lays down that the procedure  set out  in the Appendix to the notification will have  to be followed for availing of the credit for the duty paid  on the  inputs. The  Appendix provides that +the manufacturer  will+have   to  give   a  declaration  to  the Superintendent of  Central Excise  having jurisdiction  over his factory giving full description of the goods intended to be manufactured  in his  factory as well as full description of the inputs intended to be used in the manufacture of such goods (Rule 1). The manufacturer may take credit ofthe duty already paid  on the  inputs which are received by him after submitting the  declaration  and  utilise  such  credit  for payment of duty of excise on the said goods (Rule 2).      These rules  do not  specifically  lay  down  that  the credit of  duty taken  by the  manufacturer must  be  setoff against the  duty payable on the goods actually manufactured utilising these inputs. The manufacturer is entitled to take credit of  the duty already paid on the inputs as soon as he receives the inputs and submits the necessary declaration to the Excise  Officer. He  is, thereafter, entitled to utilise the credit  for payment  o  duty  of  excise  on  the  goods manufactured by  him. The  rules do  not require  any  exact correlation between the inputs and the finished products for claiming credit for the duty paid on the inputs. It is not a condition  precedent   for   claiming   set-off   that   the manufacturer must prove that-      (a) the credit was taken in respect      of inputs; and that      (b) these very inputs were utilised      in the  manufacture of the goods on      which duty is payable.      Rule 2  merely provides  that the manufacturer may take credit of  the duty  already paid  on the inputs and utilise such  credit   for  payment   of  duty   of  excise  on  the manufactured goods. The exact correlation of inputs with the manufacture of the goods is not contemplated by this rule.      The position  is put  beyond doubt  by Rule  10 set out hereinabove which provides that if the manufacturer does not want to  continue with  the system  of  clearance  of  goods provided in  the notification, he will have to give a notice to the  proper officer  to that  effect. The  proper officer will ascertain  that stock  of inputs  in respect  of  which credit has  been taken  but were  lying  unutilized  in  the store-room or  in the manufacturing room. The proper officer shall also  ascertain the inputs which have been utilised in the manufacture  of the  goods but  had not yet been cleared from the  factory. The  total stock  of such goods has to be assessed to  duty and  the manufacturer will have to pay the duty forthwith  on receipt  of a  written  demand  from  the proper officer.  This rule  became necessary  because it  is permissible to  take credit  for duty paid on the inputs and make adjustment  thereof against  the duty  payable  on  the goods manufactured  and cleared  by a  manufacturer  without actually utilising the inputs. A manufacturer may have taken

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and utilised  the credit  for inputs  which are lying in the store-room. The  manufacturer may  also  have  utilised  the inputs in  manufacturing uncleared goods. In both the cases, duty will  have to  be paid on the inputs because the credit for the  duty paid  on such  inputs has  been availed  of by setting off  such credit  against other goods cleared by the manufacturer. All  these rules  really go to show that there was no  requirement of  actual utilisation  of the inputs in the manufacture  of the  goods for  the purpose  of claiming set-off of  duty paid on the inputs against the duty payable on the goods manufactured by the manufacturer.      With respect  to  the  main  controversy,  the  Revenue emphasises the  words "all  excisable goods.....  on which a duty of  excise is  leviable and in the manufacture of which any   goods   falling   under   Item   No.68.....have   been used....from so  much of the duty of excise leviable thereon as is  equivalent to  the duty of excise already paid on the inputs." It says that the aforesaid words mean and imply the concept o  correlation. In  other words,  they say that only the  duty   paid  on   inputs  which   have  been  used  for manufacturing the  goods cleared from the factory (where the inputs were  received) can  be taken credit of, as explained in the  illustration given  hereinabove. On  the other hand, the learned counsel for the appellant submits that the words in the body of the notification should be read alongwith the procedural rules  mentioned in  the Appendix. In particular, he relies  upon clauses  (9) and  (10) of  the Appendix. The learned counsel  also relies upon the instructions issued by the Central  Board of Excise and Customs on 18.6.1979 to the following effect:      "Central Excise - Simplification of      procedure regarding  Tariff Item 68      - Goods  used as  "inputs"  in  the      manufacture of  finished  excisable      goods.           Attention   is    invited   to      Notification  No.201/79-ce,   dated      the 4th  June, 1979 (page---) and a      copy of  the Press  Note issued  by      the Board is appended. In the Press      Note the  need for  simplifying the      procedure  of  set-off  granted  in      relation to  Tariff Item  68  goods      under  notification  No.  178/77-CE      dated 18.6.77 has been explained.           2. The  revised  procedure  is      based on  the lines of rule 56-A of      the  Central  Excise  Rules,  1944.      Consequently  instructions  of  the      Board issued with reference to rule      56-A will  also mutatis mutandis be      applicable  here  unless  they  are      inconsistent with the provisions of      notification  No.201/79.  Attention      is  specification  invited  to  the      instructions   contained   in   the      Board’s letter F.No.211/11-M/77-CX.      6  dated   15.11.77,  (as  amended)      relating  to  issue  of  subsidiary      gate passes.      [C.B.E. &  C.  F.NO.223/22/78-CX.6,           dated 18.6.79.]              [Cir.No.22/79-CX.6]                PRESS NOTE           When excise  duty under Tariff

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    Item 68 was increased from 2% to 5%      ad valorem  in the 1977 Budget, all      excisable goods manufactured out of      goods falling  under that item were      exempted from  so much  of the duty      of excise  leviable on  them as was      equivalent to  the duty  of  excise      already   paid    under   it.   The      exemption  was  restricted  to  the      duty payable  on the finished goods      when the  duty paid on the "inputs"      was more  than that on the finished      goods.           2. The  Trade had been earlier      experiencing    difficulties     in      availing of  the set-off of duty in      relation    to    those    finished      excisable goods  which had not been      notified  under   rule   56-A   the      Central    Excise     Rules.    The      difficulties were  aggravated where      innumerable varieties  of  finished      excisable    goods    were    being      manufactured and in the manufacture      of which goods falling under Tariff      Item 68  were used, not necessarily      in relation  to any  fixed formula,      but in  a particular ratio that can      change from  time to  time and from      variety to variety.           Some of  the  industries  that      had expressed  difficulty  on  this      account  were   tyres,   chemicals,      electrical     manufactures     and      grinding-wheels. On  account of the      innumerable and  products  and  the      varying  ratios,  with  alternative      usages, manufacturers  were furnish      it difficult and irksome to furnish      the "input" and "output" ratio that      would   remain   constant   and   e      acceptable to the Department.           For claiming  set-off of  duty      paid on  Tariff Item  68 furnishing      on the  ""input" -  "output"" ratio      was necessary  as at  the  time  of      claiming the set-off while clearing      the     finished      goods     the      manufacturers had  to  satisfy  the      Central Excise Department about the      exact amount  of set-off  sought to      be claimed  with reference  to  the      duty paying  documents under  which      the "input" had been received.           3.   Government   have   given      considerable thought to alleviating      these difficulties.  And,  now,  as      measure   of    facilitation    the      procedure   for    claiming    this      exemption  has  been  substantially      simplified.   Under   the   revised      notification No.201/79-C.E.  issued      on 4.6.1977,  the cumbersome  "set-      off" procedure  has been  given up,      and a  self contained procedure for

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    claiming  the  exemption  has  been      prescribed.   This   procedure   is      basically  on   the  lines  of  the      perform  Credit  System  prescribed      under  rule  56-A  of  the  Central      Excise Rules, 1944."                         (emphasis added)      With a  view to  explain the  procedure obtaining under Rule 36-A,  the learned counsel for the appellant brought to our notice  Clause (VI)  of sub-rule (3) of Rule 56-A of the Central Excise Rules, as it obtained prior to 1973 and as it obtains now i.e., as substituted by the 1973 Amendment:      Before Amendment?      (vi) Except  to the extent provided      in the  second proviso  to sub-rule      (2), the  credit allowed in respect      of any  material or component parts      shall be  utilised towards  payment      of duty  on the  finished excisable      goods in  the manufacture  of which      such materials  or component  parts      are used  or on  the  materials  or      component parts  themselves and  no      part  of   such  credit   shall  be      refunded in cash or by cheque.      After Amendment      (vi) (a) The credit of duty allowed      in  respect   of  any  material  or      component  parts  may  be  utilised      towards  payment  of  duty  on  any      finished excisable  goods  for  the      manufacture of  which such material      or component  parts were  permitted      to  be  brought  into  the  factory      under sub-rule  (2) or  where  such      material or  components  parts  are      cleared from  the factory  as such,      on  such   material  or   component      parts.      (b) No part of such credit shall be      utilised save  as provided  in sub-      clause (a)  or shall be refunded in      cash or by cheque."                         (emphasis added)      The portions  underlined by  us clearly bring about the conceptual  change  brought  about  by  the  amendment.  The correlation provided  by the unamended clause (vi) has given way to  a permission  to utilise the credit (of duty paid on inputs) "towards  payment of  duty on any finished excisable goods for  the manufacture  of which  such  material....were permitted to be brought into the factory."      It is significant to note that the language employed in the  main  body  of  the  notification,  upon  which  strong reliance  is   placed  by   the  Revenue,  is  schematically different from the unamended clause (vi) of Rule 56-A(3) (as would  be  evident  from  a  reading  together  of  the  two provisions) whereas  the language  employed in clause (9) of the Appendix  to the  notification is  in part material with the amended  clause (vi).  Be that  as it  may, if one reads only the  first para  of the  notification, one may possibly agree  with   the  Revenue  but  if  one  reads  the  entire notification including  Rules 9  and 10 of the Appendix, the contention of  the appellant  commends itself  as  the  only correct understanding.  Not  only  Rule  9,  even  Rule  10] indicates,  as   pointed  out   above,  the   absence  of  a

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correlation between  the inputs  and the finished goods. The instructions of  the Board  do  explain  the  background  to Notification 201.  (We must  make it  clear that  we are not relying upon the Board’s instructions either as binding upon the Courts  or as an aid to construction of the notification but only  as explaining  the background  to the  issuance of Notification 201.) The change in the language and content of clauses (vi) of sub-rule (3) of Rule 56-A in 1973 is equally relevant in  this behalf.  It explains  why the  concept  of correlation -  or the  rule of set-off, as it is referred to in the  Press-note was  given  up  and  a  different  method adopted. Clause  (9) of  appendix to Notification 201, it is significant to note, is in part material with clause (vi) of Rule  56-A(3)   (as  substituted  in  1973).  The  practical difficulties in  implementing the  method in  force prior to the issuance  of Notification  201 and the object underlying the said  notification (as also the amendment of clause (vi) of Rule  56-A(3) in  1973) also  induce  us  to  accept  the appellant’s  contention   in  preference  to  the  Revenue’s contention.      By accepting  the appellant’s  contention,  the  object underlying the  enactment is  in no  way defeated nor is the objective  underlying   the  notification   No.201  of  1979 defeated. The  object  underlying  the  notification  is  to prevent the  cascading effect  of duties  if levied  both on inputs and  the finish  goods. With a view to make the goods available  at   comparatively  reasonable   prices  to   the consumer, the duty paid on the inputs is deducted out of the duty payable  on  the  finished  goods.  Acceptance  of  the appellant’s contention  effectuates the  said object whereas acceptance of  the Revenue’s contention would tend to defeat the aforesaid  objective in  a case like the present one. It is true  that the notification provides for an exemption and has to  be strictly construed but it is equally well-settled that  the   exemption  notifications,  as  to  be  construed reasonably having  due regard  to the  language employed. It may also  be noticed  that both  Rule 56-A  and notification No.201 of 1979 are actuated which similar considerations and provide for broadly similar concessions. Indeed, that is how the Board has understood these two provisions.      Mr.  Sridharan,  learned  counsel  for  the  appellant- manufacturer, has made it clear that appellant is not asking for any  transfer of  credit to  any other  factory  of  the appellant. All  that he  wants  is  that  the  appellant  be allowed to  take credit  of the  entire duty  paid on inputs (barely malt)  received  into  its  Rajahmundry  factory  as against the  duty payable on the goods (Horlicks) cleared at Rajahmundry on payment of duty. This it is entitled to do.      For the reasons given above, we are of the opinion that the appellant  is entitled  to succeed  in this  appeal. The appeal is  accordingly  allowed  in  the  above  terms.  The decision of the Tribunal impugned herein is set aside. There shall be no order as to costs.