1991 (1) TMI 272 - AT - Central Excise

Tribunal: Modvat Credit disallowed pre-exemption; calls for clarity on Rule 57C

The Tribunal upheld the lower authorities' decision, ruling that Modvat Credit taken and utilized before the final products became exempt from duty was ... MODVAT Credit Issues Involved:1. Applicability of Rule 57C of the Central Excise Rules.2. Validity of Modvat Credit taken and utilized before the final products became exempt from duty.3. Relevance of the South Regional Bench decision in the Wipro case.4. Interpretation of Rule 57F(3) and its correlation with Rule 57C.5. Impact of the Madras High Court judgment in E.I.D. Parry (India) Ltd. on the present case.Issue-wise Detailed Analysis:1. Applicability of Rule 57C of the Central Excise Rules:The Assistant Collector disallowed Modvat Credit of Rs. 2,28,323.49 based on Rule 57C, which states that no credit of duty paid on inputs used in the manufacture of a final product shall be allowed if that final product is exempt from duty or chargeable to nil rate of duty. The appellants argued that this rule should apply only to inputs received after the final products became exempt from duty on 1-3-1988. However, the lower authorities maintained that the credit taken before this date was also disallowed because the final products subsequently became exempt from duty.2. Validity of Modvat Credit taken and utilized before the final products became exempt from duty:The appellants contended that the credit on inputs received and utilized before 1-3-1988 should not be disallowed. They argued that the Modvat Scheme provides for instant credit without strict correlation between inputs and outputs. The respondents countered that Rule 57C invalidates the credit if the final products become exempt, regardless of when the inputs were received or utilized. The Tribunal agreed with the respondents, stating that the credit becomes inadmissible once the final products become exempt from duty, and any credit taken and utilized before this date is irregular.3. Relevance of the South Regional Bench decision in the Wipro case:The appellants relied on the Wipro case, where it was held that proforma credit taken correctly on inputs is not liable to be disallowed even if the final products subsequently become exempt from duty. The Tribunal noted that the Collector (Appeals) dismissed the relevance of the Wipro decision without providing reasons. Upon examining the Wipro case, the Tribunal found that the facts were similar but felt that certain crucial factors were not considered by the South Regional Bench, leading to a different interpretation in the present case.4. Interpretation of Rule 57F(3) and its correlation with Rule 57C:Rule 57F(3) allows credit of specified duty on inputs to be utilized for payment of duty on final products made from such inputs. The Tribunal emphasized the significance of the word 'such,' indicating a link between the inputs and the final products made from them. The Tribunal argued that the liberal treatment of allowing credit to be taken and utilized without strict correlation between inputs and outputs is an extra-legal working arrangement. Rule 57C, which disallows credit if the final products are exempt from duty, must be read in conjunction with Rule 57F(3) to ensure the statutory stipulations are met.5. Impact of the Madras High Court judgment in E.I.D. Parry (India) Ltd. on the present case:The appellants cited the E.I.D. Parry case, where the Madras High Court held that there is no obligation to correlate imported inputs with the final product as long as the inputs are fully utilized. The Tribunal distinguished the present case from E.I.D. Parry, noting that the latter did not involve final products becoming exempt from duty. The Tribunal concluded that Rule 57C's specific provision invalidates credit if the final products are exempt from duty, making the E.I.D. Parry judgment inapplicable to the present case.Conclusion:The Tribunal rejected the appeal and sustained the orders of the lower authorities, holding that the credit taken and utilized before the final products became exempt from duty was inadmissible. The Tribunal suggested that the Government may consider a clarificatory amendment or issue suitable executive instructions to address such cases in the future.