2013 (8) TMI 772 - SC - Central Excise

Court affirms respondent's entitlement to MODVAT credit, emphasizing compliance with Central Excise Rules

The court upheld the respondent's entitlement to deemed MODVAT credit, ruling in favor of the respondent against the Revenue's appeal. It was determined ... Deemed MODVAT credit - interpretation of notification No. 58/97-CE - Rule 57A(6) proviso - reasonable steps / reasonable care - appropriate duty - inputs received directly from the factory under cover of an invoice declaring duty paid - exclusion where invoice price not declared correctly - non-obstante clause empowering notificationDeemed MODVAT credit - Rule 57A(6) proviso - reasonable steps / reasonable care - interpretation of notification No. 58/97-CE - inputs received directly from the factory under cover of an invoice declaring duty paid - exclusion where invoice price not declared correctly - appropriate duty - Whether a manufacturer of final products is disentitled to deemed MODVAT credit under notification No.58/97-CE when the supplier of inputs has not actually discharged full excise duty despite invoices declaring duty paid, where the conditions in the notification are otherwise satisfied. - HELD THAT: - The Court examined Rule 57A(1) and sub-rule (6) and the notification issued thereunder. Sub-rule (6) empowers the Central Government by notification to deem duty as paid on specified inputs and to allow credit subject to conditions; the proviso requires the manufacturer to take 'all reasonable steps' to ensure that the inputs acquired are goods on which the appropriate duty, as indicated in accompanying documents, has been paid. The notification expressly prescribes applicability: inputs must be received directly from the factory under an invoice declaring that appropriate duty has been paid (clause 4) and excludes inputs where the manufacturer of inputs has not declared the invoice price correctly (clause 5). In the facts, the respondent produced the invoice declaring duty paid, received inputs directly from the manufacturer and the invoice price was correctly declared. The sole lapse alleged was that during subsequent MODVAT verification it was found that the supplier had not discharged full duty for the period covered by the invoices. The Court held that the proviso requires 'reasonable steps' not verification from departmental records; when the notification's prescribed procedure and documentary conditions are complied with, the manufacturer of final products has taken the reasonable care envisaged by Rule 57A(6). To require the purchaser to verify actual payment with departmental authorities would transcend the notification, be impractical and frustrate transactions. The Court also noted that the present dispute concerns a deeming notification under Rule 57A(6) and is factually and legally distinguishable from cases dealing with exemption notifications and the interpretation of the term 'appropriate duty' in that context (as in Dhiren Chemical Industries). Accordingly, where the notification's conditions (clauses 2, 4 and 5) are satisfied, absence of actual discharge of duty by the supplier does not, by itself, disentitle the purchaser to the deemed MODVAT credit. [Paras 22, 23, 24, 25, 26]Where the notification's documentary conditions are fulfilled (direct supply from factory under invoice declaring duty paid and correct invoice price), the manufacturer of final products is not required to verify actual payment with departmental authorities and is entitled to the deemed MODVAT credit notwithstanding a subsequent finding that the supplier had not discharged full duty.Final Conclusion: The appeals are dismissed; where the conditions prescribed by notification No.58/97-CE (including direct supply under an invoice declaring duty paid and correct invoice price) are satisfied, the purchaser having taken the 'reasonable steps' mandated by Rule 57A(6) is entitled to the deemed MODVAT credit and is not required to independently verify actual payment of duty by the supplier with departmental authorities. Issues Involved:1. Entitlement to deemed MODVAT credit.2. Interpretation of Rule 57A(6) of the Central Excise Rules, 1944.3. Compliance with notification No. 58/97-CE(NT) dated 30.8.1997.4. Obligation of the manufacturer of final products to ensure payment of appropriate duty on inputs.5. Legal precedents and their applicability.Detailed Analysis:1. Entitlement to Deemed MODVAT Credit:The respondent-company availed deemed MODVAT credit of Rs.77,546/- based on invoices issued by the supplier, who had not discharged full duty liability. The Competent Authority issued a show-cause notice proposing recovery and penalty, which was upheld by the adjudicating authority and the Commissioner (Appeals). However, the tribunal and the High Court ruled in favor of the respondent, leading to the present appeal by the Revenue.2. Interpretation of Rule 57A(6) of the Central Excise Rules, 1944:Rule 57A(6) allows the Central Government to declare inputs on which excise duty is deemed to have been paid and to allow credit of such duty subject to conditions specified in the notification. The proviso requires the manufacturer to take all reasonable steps to ensure that the inputs acquired are goods on which appropriate duty has been paid as indicated in the accompanying documents.3. Compliance with Notification No. 58/97-CE(NT) Dated 30.8.1997:The notification specifies that deemed duty shall be equivalent to 12% of the invoice price and applies only to inputs received directly from the manufacturer with an invoice declaring that appropriate duty has been paid. It does not apply if the manufacturer has not declared the invoice price correctly. The respondent met these conditions, as the inputs were received directly from the manufacturer with the correct invoice price declared.4. Obligation of the Manufacturer of Final Products to Ensure Payment of Appropriate Duty on Inputs:The Revenue argued that the respondent should verify from the department whether the duty had actually been paid. However, the court held that Rule 57A(6) and the notification only require the manufacturer to take reasonable steps to ensure that the appropriate duty as indicated in the documents has been paid. The respondent had taken due care by following the prescribed procedure, and requiring further verification would be impractical and beyond the scope of the notification.5. Legal Precedents and Their Applicability:The court analyzed previous judgments, including Usha Martin Industries and Motiram Tolaram, which dealt with exemption notifications and the requirement to prove payment of appropriate duty. The Constitution Bench in Dhiren Chemical Industries clarified that 'appropriate duty' means the correct rate of excise duty actually paid. However, the present case differs as it pertains to deemed MODVAT credit under a specific notification, not an exemption notification. The conditions of the notification were satisfied by the respondent, and further verification from the department was not required.Conclusion:The court concluded that the respondent had taken reasonable care as required by the notification and Rule 57A(6). The appeals by the Revenue were dismissed, and the view expressed by the High Court was upheld.