REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.            OF 2010 [Arising out of S.L.P. (C) No. 4038 of 2009]

MEWAR POLYTEX LTD.           …. Appellant

Versus

UNION OF INDIA & ORS      ….Respondents

JUDGMENT

Dr. MUKUNDAKAM SHARMA, J.

1. Leave granted.

2. The  assessee  (appellant  herein)  seeks  to  challenge  the  

judgment  of  the  High  Court  of  Rajasthan  at  Jodhpur  in  

Central Excise Appeal No.9 of 2006. By its judgment and  

order  dated  26.8.2008,  the  High  Court  dismissed  the  

appeal, affirming the order of the Tribunal dated 4.7.2005,  

which had allowed the appeal of the Revenue and set aside  

the order of the Commissioner (Appeals), who in turn had  

set aside the order in original. By the order in original, the  

1

Assistant Commissioner had disallowed the Modvat credit of  

` 5,37,799,  and confirmed the  recovery  thereof,  and also  

imposed a penalty of ` 50, 000 under Rule 173 Q (1) (bb) of  

the Central Excise Rules, 1944 (for short “the Rules”).

3. The necessary facts, in brief are, that the show cause notice  

dated 15.2.1999 was issued to the assessee alleging that it  

had wrongly taken credit to the extent of  ` 5,37,799 under  

Rule 57A of the Rules, during August 1998. The notice also  

called upon the assessee to show cause and explain as to  

why  the  aforesaid  credit,  wrongly  taken  by  the  assessee  

should  not  be  disallowed/recovered  under  provisions  of  

Rule  57-I,  and  also  why  penal  action  under  Rule  173Q  

(1)(bb)  should  not  be  taken,  and  interest  should  not  be  

charged under Section 11 AB.

4. The assessee is engaged in the manufacture of HDPE/PP  

fabrics  and  bags,  and  was  clearing  the  goods  for  home  

consumption on payment of central excise duty, as well as  

exporting the goods under bond without payment of duty,  

and was availing Modvat credit on the inputs under Rule  

57A.  The  Revenue  alleged  that  the  assessee  vide  

2

declarations in Form AR4 dated 4.8.1998,  17.8.1998 and  

22.8.1998 had exported  certain  quantity  of  fabrics  in  its  

own account, and in the said AR4s had declared that the  

assessee had manufactured the fabric as mentioned in AR4,  

and that the benefit of Modvat under Rule 57A has not been  

availed, and also that it had not availed the facilities under  

Rule 12(1)(b) and 13(1)(b) of the Rules, and that export was  

made  in  discharge  of  export  obligation  under  “advance  

licence” file.  

5. It  was alleged by the Revenue that the same was a false  

declaration, as the assessee has been availing Modvat credit  

on the inputs under Rule 57A. Likewise, in column 4 of the  

Form, the assessee had further declared that the export is  

under  duty  draw  back,  while  on  examination  of  Central  

excise records and R.T.12 returns of the assessee, it  was  

found that  the  assessee  had taken Modvat  credit  on the  

inputs used in the manufacture of exported goods, and they  

had not received any duty free consignment of PP Granules  

(Inputs) from anyone for exporting the goods on its behalf  

till the date of above-said exports, and that they had also  

3

not  reversed any credit  taken on the  inputs  used in  the  

goods  exported  vide  above  referred  AR4s.  Thus,  the  

assessee,  it  was  alleged,  had  wrongly  taken  credit  of  

Modvat,  to  the  tune  of  ` 5,37,799,  which  was  not  

admissible.

6. The Assessing Officer confirmed the demand, which was set  

aside in appeal, and was reconfirmed in further stages of  

appeal, as delineated above.

7. The  High  Court  dismissed  the  appeal,  holding  that  the  

assessee  had  resorted  to  subterfuge  and  impermissible  

technicalities  in  attaining  its  desired  end  to  claim  the  

Modvat  credit.  While  the  High  Court  admitted  that  the  

assessee had not indeed claimed the Modvat credit on the  

inputs at the date when Form AR4s were submitted and the  

goods were exported, it was held by the Hon’ble Court that  

the said line of argument could not make a case in favour of  

the assessee. The High Court arrived at this conclusion on a  

reading of the provisions enshrined in Rule 57A, Sub-rules  

(1) and (2), and on interpreting the declarations made under  

Form AR4 in context of the case. The High Court held:

4

“A reading of the [Rule 57A] does make it clear, that   the Modvat credit is to be utilised towards payment   of  duty  of  excise,  leviable  on  final  products.   Obviously therefore, the sine qua non for entitlement  of  Modvat  credit  is,  that  the  final  product  should  have suffered the incident of excise duty,  and it is   from out of that excise duty, that the credit of Modvat   is  availed  by  the  assessee.  In  the  present  case,   admittedly, the finished products have not suffered  any excise duty, may be on account of resorting to   any  contrivance,  or  subterfuge,  but  the  hard  fact  remains,  that  the  finished goods have not suffered  any  excise  duty,  and  therefore,  per  force  the  language of Rule 57-A, the assessee was not entitled  to claim the credit of Modvat.

[…] the declaration was required to be considered in  the right perspective,  in as much as,  the benefit of   Modvat credit should not have been availed, not only   at the precise point of time when the declaration is   given, but the benefit should not have been availed  with respect to the inputs used in manufacture of the   finished products, which was sought to be exported  under AR4. Obviously, not only at the cut off time of   giving  declaration  AR4,  but  also  at  any  time  in   future.”

Based on this line of reasoning, the High Court deemed it fit to  

dismiss the appeal preferred by the assessee. Aggrieved by the  

decision  of  the  High  Court  the  appellant-assessee  has  

approached this Court by way of this Special Leave to Appeal,  

on which we have granted leave.

5

8. The appeal was listed for hearing and we heard the learned  

counsel appearing for the parties who have ably taken us  

through  all  the  relevant  documents  on  record  and  also  

placed before us the various decisions which may have a  

bearing on the issues raised in the present appeal.  

9. Before we outline the arguments led by the parties to this  

appeal, it would be appropriate to outline some of the facts  

which  are  beyond  dispute.  It  is  well-settled  that  the  

assessee had not claimed Modvat credit at the time when  

the declarations under Form AR4 were made. However, the  

assessee had in fact,  claimed Modvat credit subsequently  

on the inputs used for the very same manufactured goods  

that were exported under AR4. In effect, the assessee had  

used  indigenous  duty-paid  inputs,  and  the  finished  

products were exported without payment of excise duty and  

subsequently, Modvat credit was claimed on such inputs.  

To  explain  further,  we  may  elaborate  briefly  on  the  

technicalities that made this possible for the assessee.

10. In the normal course, an assessee is entitled to Modvat  

credit  on  the  duty  paid  in  the  manufacture  of  finished  

6

products and it is from out of that excise duty, the Modvat  

credit is availed of by the assessee. In the case of imported  

raw materials, a countervailing duty (CVD) has to be paid,  

equal to excise duty on such goods. On the other hand, an  

assessee who manufactures finished goods to be exported  

out  of  imported  input  material  is  given  an  “Advance  

License” to import the inputs required for the manufacture  

free from duty.  

11.The  case  that  is  then  made  out  by  the  assessee  in  the  

present appeal is that the goods exported by the assessee  

were  manufactured  out  of  indigenous  goods,  and  hence  

Modvat credit could be claimed. At the same time, however,  

credit for the CVD was availed of by the assessee in respect  

of the goods imported to be used in manufacture. Therefore,  

the crux of the entire case at hand is whether the assessee  

has been at the receiving end of a double benefit, having  

claimed credit twice for the raw materials used.

12.To  fortify  its  stance,  the  assessee  contended  before  this  

Court  that it  had taken credit  of  the duty on indigenous  

inputs only after the replenishment arrived. That is to say,  

7

the assessee had not claimed Modvat credit at the time the  

declarations under the advance license scheme were filed,  

but only later. It was further contended by the assessee that  

it has not gained any extra benefit except as provided under  

law. While fulfilling the export obligation under the Advance  

Licensing  Scheme,  the  assessee  contends  that  it  was  

entitled to avail credit on duty paid on indigenous inputs as  

well  as  on CVD in lieu  of  excise  duty  paid on imported,  

replenished material. On this count, it is the submission of  

the  assessee  that  it  has  only  availed  Modvat  credit  on  

indigenous  inputs  and  availed  drawback  on  the  export  

consignment as no credit was availed on CVD paid for the  

imported  material.  Therefore,  any  action  that  could  have  

been taken against  the  assessee should have  been made  

under  the  Customs and Central  Excise  Duties  Drawback  

Rule, 1971 which was not done in the present case.

13.For its part, the Revenue has contended that the assessee  

has  resorted  to  technicalities  in  order  to  avail  the  

aforementioned double benefit. The essence of the argument  

led by the Revenue is that the Modvat credit availed relates  

8

to the same inputs which were used in the manufacture of  

exported goods under AR4. Since the assessee had exported  

the  goods  under  AR4,  claiming  that  no  excise  duty  was  

payable  on  the  exported  goods,  it  was  contended  by  the  

Revenue that no Modvat credit could be claimed in line with  

the provisions of Rule 57A.

14.In sum and substance,  we are faced with a claim of the  

assessee that, in order to meet the exigency of the export  

order,  the  assessee  used  indigenous  inputs  for  the  

manufacture of the export goods. Subsequently, when the  

‘replenishment’ arrived in the form of imported goods, the  

assessee availed the drawback duty for the same. However,  

the  question  to  note  is  whether  there  were  two separate  

duties that arose, for the assessee to claim credit on both,  

or if the entire process is to be considered as a single cycle,  

which culminated in the export of goods under the Advance  

Licensing Scheme?  

15.The  statutory  position  regarding  the specified  benefits  is  

postulated in Rule 57A of the Rules.  

9

“Rule  57A.  Applicability.-(1)  The  provisions  of  this   section shall apply to such finished excisable goods  (hereafter,  in  this  section,  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  hereafter,  in  this   section, referred to as the specified duty) paid on the  goods  used  the  manufacture  of  the  said  final  products (hereafter, in this section, referred to as the   inputs)  

2) The credit of specified duty allowed under sub-rule   (1)  shall  be  utilised  towards  payment  of  duty  of   excise leviable the final products, whether under the   Act or under any other Act, as may be specified in   the notification issued under sub-rule (1) and subject  to the provisions this section and the conditions and  restrictions, if any, specified in the said notification.”

A literal reading of the aforestated provision makes it amply  

clear  that  an entitlement  to Modvat  credit  will  arise  only if  

excise  duty  is  incident  upon  the  final  product.  The  final  

product  in  this  instance  refers  to  the  finished  goods  (PP  

fabrics)  that  were  exported  under  the  Advance  Licensing  

Scheme without any payment of duty. Therefore, the attempt  

of  the  assessee  to  justify  its  availing  of  Modvat  credit  is  

seriously undermined by the provisions in Rule 57A.

10

16. Subsequently,  it  is  to  be  seen  whether  the  claiming  of  

Modvat  credit  after  filing  the  declarations  in  Form  AR4  

would  entitle  the  assessee  to  Modvat  credit  on  the  

indigenous  inputs.  The  declarations  filed  under  AR4s  

entitled the assessee to import  inputs on payment of  the  

CVD, which subsequently was permitted to be drawn back.  

Therefore,  the  assessee  had  utilized  the  specified  

mechanism to  avail  of  a  benefit  on the  imported  inputs,  

while  availing  of  Modvat  credit  on  the  indigenous  raw  

material  used  in  the  manufacture  of  the  same,  exported  

goods. In effect, the assessee has not only availed of Modvat  

credit  on  the  indigenous  input,  but  also  drew  back  

countervailing duty paid on imported inputs that were mere  

stock replenishments, which amounts to a double benefit.  

That  the  Modvat  credit  was  technically  claimed  only  

subsequent to the filing of AR4 declarations, although the  

indigenous goods were used in the manufacturing process  

apriori does  not  also  reflect  well  on  the  intention  of  the  

assessee.  The  assessee  has  merely  resorted  to  the  

technicality  of  claiming  Modvat  credit  subsequent  to  the  

AR4  declarations,  thereby  entitling  it  to  drawback.  

11

Subsequently,  the Modvat  credit  has been availed on the  

very same indigenous goods, which shows that the claim of  

the  assessee  to  be  legitimately  entitled  to  two  separate  

duties is but a façade.   

17.There can be no question of separate duties arising in this  

case since the issue concerns the manufacture and export  

of  one  and  the  same  goods.  The  imported  inputs  were  

primarily  stock  replenishments  that  were  used  in  the  

execution  of  other  orders,  and  allowing  the  assessee  to  

claim  Modvat  credit  on  the  indigenous  input  would  

tantamount to giving a benefit twice for the same process  

that  began with  the  manufacture  and  culminated  in  the  

export of the specified goods. The assessee cannot be held  

to  be  not  entitled  to  claiming  Modvat  credit  on  finished  

goods where duty is not incident.  Any attempt to avail  it  

subsequently,  casts  serious  aspersions  on  the  bonafide  

intention of the assessee. The argument of the assessee that  

action had to be taken under the Duties Drawback Rules,  

1971 and not through reversal of credit does not bear merit.  

The reversal of credit is meant to deny the assessee of a  

12

benefit  that  they  would  have  otherwise  enjoyed  without  

justification. The drawback equivalent to CVD is legitimately  

permissible vide the process of AR4 declarations and thus,  

it is the benefit that is enjoyed without justifiable basis that  

has to be reversed.

18.In light of the aforesaid facts and circumstances, we find  

that the contentions of the assessee are without merit. We  

dismiss  the  appeal  filed  by  the  assessee,  but  leave  the  

parties to bear their own costs.

………………………………..J.               [Dr. Mukundakam Sharma]

..……………………………….J.      [Anil R. Dave]

New Delhi December 9, 2010.

13