2004 (8) TMI 106 - SC - Central Excise

Modvat credit allowed for input duties when duty-paid final tractors, per Rule 57D(2); excludes open-market parts

SC allowed the appeal, holding that appellants are entitled to Modvat credit on duties paid for inputs used to manufacture parts cleared without payment ... Admissibility of Modvat credit on duties paid for inputs used in the manufacture of parts cleared without payment of duty - Whether Appellants will be entitled to Modvat credit on duties paid for the inputs used for manufacture of parts? - Held that:- 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. 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-C.E., dated 2nd April, 1986. 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-C.E., dated 2nd April, 1986 may not be available. Appeal allowed. Issues involved:1. Admissibility of Modvat credit on duties paid for inputs used in the manufacture of parts cleared without payment of duty.2. Interpretation of Central Excise Rules, 1944 and Notification No. 217/86-C.E., dated 2nd April, 1986 regarding the applicability of Modvat credit.3. Determination of final products for claiming Modvat credit.4. Application of Rule 57C and 57D of the Central Excise Rules, 1944 in the context of duty payment on final products.Detailed Analysis:1. The case involved a dispute over the admissibility of Modvat credit for duties paid on inputs used in the manufacture of parts that were cleared without payment of duty. The Appellants, as manufacturers of tractors, claimed Modvat credit under Notification No. 217/86-C.E., dated 2nd April, 1986, for duties paid on inputs used in parts production.2. The interpretation of Central Excise Rules, 1944 and Notification No. 217/86-C.E., dated 2nd April, 1986 was crucial in determining the eligibility for Modvat credit. The Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) held that since the parts were cleared without duty payment, Modvat credit was not available. The relevant Rules 57A, 57C, and 57D were examined to understand the conditions for allowing credit of duty paid on inputs.3. The issue of determining the final products for claiming Modvat credit was central to the dispute. The Respondent argued that the parts cleared without duty payment constituted the final products, making Modvat credit inadmissible. However, the Appellants contended that the tractors, on which duty was paid, were the final products, not the parts cleared without duty payment.4. The application of Rule 57C and 57D of the Central Excise Rules, 1944 was analyzed in the context of duty payment on final products. The Court emphasized that the purpose of the Notification and Rules was to streamline duty payment processes and prevent cascading effects. It was clarified that the intermediate products, like the parts in this case, would not be considered final products for the purpose of claiming Modvat credit.5. The Court referred to a previous judgment related to the same Notification, highlighting that as long as duty was paid on the final product, the lack of duty payment on intermediate products did not disentitle the manufacturer from claiming Modvat credit. Based on this interpretation and the specific facts of the case, the Court allowed the Appeals, granting Modvat credit on duties paid for inputs used in parts manufacturing for tractors on which duty was paid.