25 August 2004
Supreme Court
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M/S. ESCORTS LTD. Vs COMMNR. OF CENTRAL EXCISE, DELHI

Bench: S. N. VARIAVA,G. P. MATHUR
Case number: C.A. No.-006909-006912 / 2003
Diary number: 13760 / 2003
Advocates: RAJESH KUMAR Vs B. KRISHNA PRASAD


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CASE NO.: Appeal (civil)  6909-6912 of 2003

PETITIONER: M/s. Escorts Ltd.                                                                

RESPONDENT: Commissioner of Central Excise, Delhi                    

DATE OF JUDGMENT: 25/08/2004

BENCH: S. N. Variava & G. P. Mathur

JUDGMENT: J U D G M E N T S. N. VARIAVA, J.

               These Appeals are against the Judgment dated 17th March,  2003 passed by the Customs Excise and Gold (Control) Appellate  Tribunal (for short CEGAT).                 Briefly stated the facts are as follows:  The Appellants are manufacturer of tractors.  They MODVAT credit in  respect of duties paid on inputs used in the manufacture of parts.     Those parts were then cleared to another factory of the Appellants,  without payment of duty, by virtue of Notification No. 217/86-CE dated  2nd April, 1986.  The parts were then used to manufacture tractors on  which duty was paid.                 The Respondent issued a show-cause notice on the ground  that MODVAT credit was not admissible as the final goods, i.e. the  parts were cleared without payment of duty.   The Appellants claimed  that the final products were not the parts but the tractors. The  Appellants claimed that duty was being paid on the tractor and,  therefore, MODVAT credit was available under Notification No. 217/86- CE dated 2nd April, 1986.                    The explanation given by the Appellants was not accepted.   The Appellants therefore filed an Appeal before CEGAT.  By the  impugned Judgment, CEGAT has held that, as the parts are cleared  from the factory where they are manufactured to another factory of  the Appellants which is located in a different premises and is  separately registered under the Central Excise Law, the finished  products are the parts.  CEGAT has held that as no duty was paid on  the parts MODVAT credit was not available.                   At this stage, the concerned Rules of the Central Excise  Rules, 1944 and the relevant portion of Notification No. 217/86-CE  dated 2nd April, 1986 may be noticed.   Rules 57A, 57C and 57D read  as follows: "57A. Applicability.- (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 "special duty") paid on the goods used in or in relation  to the manufacture of the said final products (hereinafter  referred to as the "inputs") and for utilizing 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:

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       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.

       Explanation.- For the purposes of this rule, "inputs"  includes-          (a)     inputs which are manufactured and used within  the factory of production, in or in relation to,  the manufacture of final products, (b)     paints and packaging materials, and (c)     inputs used as fuel,

but does not include \026

..........................................................................

..........................................................................

57C.    Credit of duty not to be allowed if final  products are exempt. \026 No credit of the specified duty  paid on the inputs used in the manufacturer of a final  product (other than those cleared either to a unit in a Free  Trade Zone or to a hundred per cent Export-Oriented Unit)  shall be allowed if the final product is exempt from the  whole of the duty of excise leviable thereon or is  chargeable to nil rate of duty.

57D. Credit of duty not to be denied or varied in  certain circumstances. \026 (1) Credit of specified 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 during the  manufacture of the final product, or that the inputs have  become waste in or in relation to the manufacture of the  final product, whether or not such waste, refuse or by- product is exempt from the whole of the duty of excise  leviable thereon or is chargeable to nil rate of duty or is  not specified as a final product under rule 57A.

       (2) Credit of specified duty allowed in respect of any  inputs shall not be denied or varied on the ground that any  intermediate products have come into existence during the  course of manufacture of the final product and that such  intermediate products are for the time being exempt from  the whole of the duty of excise leviable thereon or  chargeable to nil rate of duty:

Provided that such intermediate products are \026

(a)     used within the factory of production in the  manufacture of a final product (other than  those cleared either to a unit in a Free Trade  Zone or to a hundred per cent Export-Oriented  Unit) on which the duty of excise is leviable  whether in whole or in part; and  

(b)     specified as inputs or as final product under a  notification issued under rule 57A."

The relevant portion of the Notification No. 217/86-CE dated 2nd April,  1986 reads as follows:

"Inputs: Captive consumption exempt.

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217/86-CE, dt. 2.4.1986, as amended by 12/87- CE, dt. 23.1.1987 (w.e.f. 10.2.1987), 82/87-CE, dt.  1.3.1987, 204/87-CE, dt. 9.9.1987 (w.e.f. 1.10.1987),  97/89-CE, dt. 1.3.1989, 146/90-CE, dt. 17.9.1990, 79/91- CE, dt. 25.7.1991, 33/92-CE, dt. 1.3.1992:   In exercise of  the powers conferred by sub-rule (I) of rule 8 of the  Central Excise Rules, 1944, the Central Government  hereby exempts goods specified in column (2) of the Table  hereto annexed (hereinafter referred to as "inputs")  manufactured in a factory and used within the factory of  production or in any other factory of the same  manufacturer, in or in relation to the manufacture of final  products specified in column (3) of the said Table, from the  whole of the duty of excise leviable thereon, which is  specified in the Schedule to the Central Excise Tariff Act,  1985 (5 of 1986):

Provided that nothing contained in this notification  shall apply to inputs used in or in relation to the  manufacture of final products (other than those cleared  either to a unit in a Free Trade Zone or to a 100% Export  Oriented Unit), which are exempt from the whole of the  duty of excise leviable thereon or are chargeable to "Nil"  rate of duty:

Provided further that where such use of inputs is in a  factory of a manufacturer, different from his factory where  the goods have been produced, the exemption contained in  this notification shall be allowable subject to the  observance of the procedure set out in Chapter X of the  Central Excise Rules, 1944.

THE TABLE

S.  No. Description of inputs Description of final products (1)              (2)          (3) 1. Goods classifiable under  any headings of  chapters 2, 3, 4, 5, 7, 8,  9, 11, 13, 14, 15, 16,  17, 18, 19, 20, 21, 22,  23, 25, 26, 28, 29, 30,  31, 32, 33, 34, 35, 36,  37, 38, 39, 40, 41, 42,  43, 44, 45, 46, 47, 48,  49, 59, 64, 65, 66, 67,  68, 69, 70, 71, 72, 73,  74, 75, 76, 78, 79, 80,  81, 82, 83, 84, 85, 86,  87, 88, 89, 90, 91, 92,  93, 94, 95 or 96 [other  than those falling under  Heading Nos. 36.05 or  37.06 of the Schedule  to the Central Excise  Tariff Act, 1985 (5 of  1986) Goods classifiable under any  headings of chapters 2, 3, 4,

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5, 7, 8, 9, 11, 13, 14, 15, 16,  17, 18, 19, 20, 21, 22, 23,  25, 26, 28, 29, 30, 31, 32,  33, 34, 35, 36, 37, 38, 39,  40, 41, 42, 43, 44, 45, 46,  47, 48, 49, 54, 55, 59, 64,  65, 66, 67, 68, 69, 70, 71,  72, 73, 74, 75, 76, 78, 79,  80, 81, 82, 83, 84, 85, 86,  87, 88, 89, 90, 91, 92, 93,  94, 95 or 96 [other than  those falling under Heading  Nos. 36.05, 37.06, 54.08,  54.09, 54.10, 54.11, 54.12,  55.04, 55.05, 55.06, 55.07,  55.08, 55.09, 55.10, 55.11  or 55.12 of the Schedule to  the Central Excise Tariff Act,  1985 (5 of 1986)                                         (Emphasis supplied)     " It is the contention of the Respondent, which has been  accepted by CEGAT, that Rule 57C would become applicable as the  parts are cleared from one factory to another without payment of duty.   In our view, this reasoning cannot be accepted.  The underlined  portion of the Notification, set out hereinabove, shows that the inputs  may be used within the factory of production or in any other factory of  the same manufacturer.  Thus merely because parts are cleared from  one factory of the Appellants to another factory does not make the  parts the final product.  It is not denied that the parts, which are  manufactured from the duty paid inputs, are used in the manufacture  of tractors and that the duty is being paid on the tractors. Mr. Lakshmikumaran very fairly conceded that in cases  where the parts are cleared for sale in the open market or in cases  where the parts are used for manufacture of small tractors, on which  no duty is paid, the Appellants do not and have not claimed any  MODVAT credit.  He states and it is not denied that in respect of such  parts separate registers have been maintained.  It is to be seen that the whole purpose of the Notification  and the Rules is to streamline the process of payment of duty and to  prevent the cascading effect if duty is levied both on the inputs and  the finished goods.  Rule 57D (2), which has been extracted  hereinabove, shows that in the manufacture of a final product an  intermediate product may also come into existence. Thus in cases  where intermediate product comes into existence, even though no  duty has been paid on the intermediate product as it is exempted from  whole of the duty or is chargeable to Nil rate of duty, credit would still  be allowed so long as duty is paid on the final product.   In cases of manufacturers like the Appellants the final  product is the tractor.  The intermediate product would be parts which  are manufactured for being used in the tractor.  In such a case the  parts would not be the final product.  Thus Rule 57C would have no  application.  The mere fact that the parts are cleared from one factory  of the Appellants to another factory of the Appellants would not  disentitle the Appellants from claiming benefit of Notification No.  217/86-CE dated 2nd April, 1986. As stated above, the Notification  itself clarifies that the inputs can be used within the factory of  production or in any other factory of the same manufacturer. Mr. Lakshmikumaran relied upon the decision of this Court  in the case of Collector of Central Excise, New  Delhi  vs.  Hindustan Sanitaryware & Industries reported in 2002 (145)  E.L.T. 3 (S.C.), wherein, in respect of this very Notification, this Court  has held that so long as duty is paid on the final product, the mere fact  that duty was not paid on the intermediate product would not  disentitle the manufacturer from the benefit of Notification No.  217/86-CE dated 2nd April, 1986.  In that case, the input was plaster

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of paris, the intermediate product was moulds made out of the plaster  of paris, the final product was sanitary ware.  In our view, the facts of  that case are identical to the facts of the present case. The ratio laid  down therein fully applies to this case. In this view of the matter, we set aside the impugned  Judgment and the Order of the Commissioner of Central Excise.  It is  held that the Appellants will be entitled to MODVAT credit on duties  paid for the inputs used for manufacture of parts, so long as the parts  are used in the manufacture of tractors on which duty is paid.  We  clarify that in respect of parts which are sold in the open market  and/or used for manufacture of tractors on which no duty is paid, the  benefit of the Notification No. 217/86-CE dated 2nd April, 1986 may  not be available. The Appeals are thus allowed.   There will be no order as  to costs.