http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4  

PETITIONER: M/S. CHANDRAPUR MAGNETWIRES (P) LTD. NAGPUR

       Vs.

RESPONDENT: COLLECTOR O

DATE OF JUDGMENT12/12/1995

BENCH: SEN, S.C. (J) BENCH: SEN, S.C. (J) AHMADI A.M. (CJ)

CITATION:  1996 SCC  (2) 159        JT 1995 (9)   568  1995 SCALE  (7)220

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T SEN, J.      This is  an appeal  against  an  order  passed  by  the Customs. Excise  & Gold  (Control) Appellate Tribunal. There is no  dispute about  the facts  of  this  case,  which  are recorded in the order of the Tribunal.      The  appellants  are  engaged  in  the  manufacture  of enamelled copper  winding wire  from duty  paid copper  wire bars under  Chapter Heading  7403.12 of  the Central  Excise Tariff Act,  1985. They  send the  copper wire  bars for job work under Rule 57F(2) of the Central Excise Rules, 1944 for converting them  into copper wires above 6 mm diameter which is classifiable  under Chapter Heading 7408.11. The job work is done  after obtaining due permission from the authorities for operating  under Rule  57F(2) as well as for the benefit of Notification  No.214/86-CE.  The  appellants  manufacture from the  copper wires  of above  6 mm  various other  final products of  copper viz.  copper wires falling under Chapter Heading 7408.11  and  Chapter  Heading  7408.19  and  copper strips falling  under  Chapter  Heading  7408.90  which  are liable  to   Central  Excise  Duty.  They  also  manufacture enamelled copper  winding wires which fall under the Chapter Heading 8544.00.  They avail  credit of  duty paid on copper wires of  above 6  mm received  from the  job workers.  They either sell the same in the market on appropriate payment of duty or  convert the copper wire of above 6 mm into wires of below 6  mm. They  sell these on payment of appropriate rate of duty  or captively  consume them  by transferring them to the enamelling  section. The  enamelled copper winding wires are either  cleared at  nil rate  of duty  or on  payment of appropriate duty  under Notification No.69/86-CE as amended. At the  stage when  the copper  wires of  less than 6 mm are cleared internally, the appellants reverse the MODVAT credit availed by  them on  the copper  wire above  6 mm  in  their RG.23. Part-II  Register maintained  for Chapter  74.  After

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4  

clearing the  copper wire  of less  than 6 mm internally for enamelling, the  appellants manufacture the enamelled copper winding wires which is either cleared at nil rate of duty or on payment  of appropriate  duty. The appellants while doing so take  the MODVAT credit in their RG.23A, Part-II Register maintained for  Chapter 84  in so  far as it pertains to the goods to  be cleared  on appropriate  payment of  duty. They submit that  they do not take the credit of duty paid on the copper wire  bars in  their  RG.23A,  Part-II  Register  for Chapter 84  in so  far as it pertains to goods to be cleared at nil  rate of  duty as of less than 6 mm as they are aware of the  quantity of goods to be cleared at nil rate of duty. They submit  that the  enamelled copper  winding wires which are to  be cleared  at nil  rate are  manufactured  only  on specific orders. They state that they clear enamelled copper winding wires  either on  payment of  appropriate duty or at nil  rate  of  duty  under  Notification  No.69/86-CE  dated 10.2.1986 which  at S.No.1  & 2  lays down the condition for clearing the  same either  on payment of appropriate rate of duty or at nil rate.      The case  of the  appellants is  that if a manufacturer clears various  final products  utilising duty  paid inputs, according to  Central Excise  Rules, he  was entitled to the benefit of  MODVAT scheme and was entitled to get credit for the duty  of excise  paid on  the inputs which were utilised for manufacture  of final  product. The  credit amounts were adjusted against  the duty leviable on the final product. As soon as  the inputs  were purchased,  the duty  paid on  the inputs were entered in a register which had to be maintained statutorily recording  the amount of credit allowable to the manufacturer.      The problem  in this  case arose  because, some  of the goods manufactured by the appellants were exempted from duty by notification  No.69/86-CE dated 10th February, 1986. This notification was amended by a further notification No.106/88 dated 1st  March, 1988  by which  copper winding  wires were exempted from  payment of  the whole  of the duty subject to the condition that the final products were manufactured from copper wire  bars of  over 6  mm and  also  subject  to  the stipulation that -      "(b) No credit of the duty paid on goods      (a)(II)    above,    used    in    their      manufacture, has  been taken  under rule      57A of the said Rules."      There is no dispute that the inputs which were utilised in the  manufacture of  the copper  wires were duty paid and that the  amount of duty paid on the inputs had been entered by the appellants to their credit in the ledger which has to be maintained  under the Excise Rules. The credit amount can be utilised  by the  manufacturer towards payment of duty of excise leviable  on the  final products.  Since  the  copper wires manufactured  by the  appellants had  become duty free there was no question of any adjustment of the credit amount against the  duty payable  on these  copper wires. Moreover, Rule 57C specifically provides that credit of duty cannot be allowed if final products were exempt from payment of excise duty. Faced with this situation, the appellants reversed the credit entries  of duty  paid on  inputs which were utilised for manufacture of the duty free copper wires.      The case  of the Excise Department is that the reversal of credit  entries are  not  permitted  by  the  rules.  The assessee is  not entitled to remove the copper wires without payment of  duty since credit of the duty paid on the inputs used in  the manufacture  of copper  wire had  already  been taken in  accordance with Rule 57A. Once appropriate entries

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4  

have been made in the register, there is no rule under which the process  could be  reversed. Since  the credit  has been taken for  the  duty  paid  on  the  inputs  in  the  ledger maintained by  the assessee, the assessee cannot be heard to say that  no credit  of the  duty has been taken by it under Rule 57A.      It  is  true  that  the  assessee  has  not  maintained separate accounts  or segregated  the  inputs  utilised  for manufacture of dutiable goods and duty free goods, as should have been  done. The  contention of  the Department  that in this situation,  the assessee is not entitled to reverse the entries and  get the  benefit of  the  tax  exemption  is  a question which  merits serious  consideration. There  is  no doubt that  the assessee  should  have  maintained  separate accounts for duty free goods and the goods on which duty has to be  paid. But  our attention  was drawn to a departmental circular letter  on  this  problem  in  which  it  has  been clarified by the Ministry of Finance as under:-      "3.  The  credit  account  under  MODVAT      rules  may  be  maintained  chapterwise,      MODVAT credit  is not  available if  the      final  products   are  exempt   or   are      chargeable to nil rate of duty. However,      where a manufacturer produces along with      dutiable final  products, final products      which would  be exempt  from duty  by  a      notification   (e.g.    an    end    use      notification) and in respect of which it      is not  reasonably possible to segregate      the  inputs,  the  manufacturer  may  be      allowed to  take credit  of duty paid on      all inputs  used in  the manufacture  of      the final products, provided that credit      of duty  paid on the inputs used in such      exempted  products  is  debited  in  the      credit account  before  the  removal  of      such exempted final products."      This circular  deals with a case where the manufacturer produces dutiable  final products  and also  final  products which are exempt from duty and it is not reasonably possible to segregate  inputs utilised in manufacture of the dutiable final products from the final products which are exempt from duty. In  such a  case, the  manufacturer may take credit of duty paid on all the inputs used in the manufacture of final products on  which duty  will have  to be  paid. This can be done only  if the  credit of duty paid on the inputs used in the exempted  products is  debited  in  the  credit  account before the removal of the exempted final products.      In  view   of  the   aforesaid  clarification   by  the Department, we  see no reason why the assessee cannot make a debit entry  in the  credit account  before removal  of  the exempted final  product. If  this debit entry is permissible to be  made, credit  entry for the duties paid on the inputs utilised in  manufacture of  the final exempted product will stand deleted  in the  accounts of  the assessee.  In such a situation, it  cannot be  said that  the assessee  has taken credit for  the duty  paid on  the inputs  utilised  in  the manufacture of the final exempted product under Rule 57A. In other words, the claim for exemption of duty on the disputed goods cannot  be denied  on the  plea that  the assessee has taken credit  of  the  duty  paid  on  the  inputs  used  in manufacture of these goods.      The appeal  is therefore,  allowed. The  order  of  the Customs. Excise  and Gold (Control) Appellate Tribunal dated 17th May,  1995 is  set aside.  There will be no order as to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4  

costs.