1993 (8) TMI 189 - AT - Central Excise

Modvat credit allowed on inputs for parts under Notification 217/86 when final products dutiable, Rule 57C and 57F(2)

CEGAT held that Modvat credit could not be denied on inputs used in the manufacture of motor vehicle parts and I.C. engines cleared under Notification ... Modvat credit - inputs under Modvat scheme in respect of materials, which they utilise in the manufacture of Motor Vehicle parts and I.C. Engines - terms of exemption Notice 217/86 as amended by Notification 97/89 - provisions of Rule 57C vis-a-vis Notification 217/86 - Whether Modvat credit can be denied, when goods manufactured utilising Modvat inputs in their factories but transferred to their another unit for further manufacture of dutiable final products in the said other unit. - HELD THAT:- In the case of exemption for goods removed to 100% EOU, such products are totally exempted and even the final export products turned out from these items in the 100% EOU are not to suffer any duty. Hence in that case, the Government, as a policy measure for freeing the export products from the burden of any input levy, have to specifically provide for an exception in Rule 57C. But in the case of Notification 217/86, the final products manufactured out of inputs are required to suffer duty and hence the chain of credit is extended upto the stage of final product, which is to be cleared on payment of duty. This is what emerges from a combined reading of Notification 217/86 and Rule 57C. A Notification 217/86 based on the concept of Modvat operating over a part of the sphere of production in the vertical integrated line of production and the availability of Modvat benefit in respect of duty paid on primary inputs received (where the Modvat scheme and the notification allows benefits for those primary inputs used in the ultimate final product) are required to be considered. In such a situation, the pertinent question to be asked is whether the ultimate final product suffers duty or not. If it suffers duty, credit from stage one is admissible, irrespective of the removals partly outside for conversion into dutiable final product. This concept is also recognised in another manner in Rule 57F(2), where inputs are received and duty credit taken and thereafter send such inputs to outside job workers for conversion into intermediate products or for further processing, to be utilised in the ultimate final product. It would therefore be more appropriate to treat Notification 217/86 as akin to situation under Rule 57F(2), but applicable only to cases, where inputs are sent to another factory of the same manufacturer. Hence, the scope of Rule 57C in a situation like the present one, is to be construed in the context of the Modvat scheme and not to destroy that concept. Any interpretation in such a situation has to be to give effect to Notification 217/86 and not to take away the benefit of averting duty payment at each stage in the line of production. Hence, a mechanical application of Rule 57C, is to be avoided, since it destroys the very benefit, which is otherwise available under the scheme right from stage one to the final stage. In the case of disintegrated production, credit is available from stage one by paying duty at each finished stage and taking credit of such duty in the other units down the line, whereas in the case of vertically integrated production units the same benefit is sought to be conferred by averting payment of duty at each stage and postponing the availment of credit to the final stage of manufacture. This is how, we could interpret the provisions of Rule 57C in the context of Notification 217/86. Any other interpretation will frustrate the object of the scheme, apart from leading to discrimination between vertically integrated production line and laterally disintegrated production amongst different units. Appeals are allowed with direction to restore credit. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether Modvat credit can be denied when goods manufactured using Modvat inputs are transferred to another unit of the same manufacturer for further manufacture of dutiable final products.How the provisions of Rule 57C of the Central Excise Rules are to be applied in conjunction with Notification 217/86, which allows the transfer of goods without payment of duty for further manufacture.Whether the exemption provided under Notification 217/86 is analogous to other exemptions, thereby attracting Rule 57C, which denies Modvat credit for goods cleared at a 'nil' rate of duty.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Denial of Modvat CreditRelevant legal framework and precedents: The legal framework revolves around Rule 57C of the Central Excise Rules, which denies credit on inputs if the final product is exempt from duty or chargeable to a 'nil' rate of duty. Notification 217/86 allows goods to be cleared without duty for further manufacture of dutiable products.Court's interpretation and reasoning: The court interpreted that Notification 217/86 is intended to facilitate the movement of goods for further manufacture without the burden of duty at each stage. It is not comparable to other exemptions that permanently exempt goods from duty.Key evidence and findings: The court found that the goods in question are used in the manufacture of dutiable final products and that the Modvat scheme and Notification 217/86 aim to avoid cascading effects of duty.Application of law to facts: The court applied the law by considering the ultimate duty liability on the final products and concluded that denying Modvat credit would frustrate the scheme's objective.Treatment of competing arguments: The court considered the department's argument that Rule 57C should apply to goods cleared at 'nil' duty but found that the exemption under Notification 217/86 is distinct and should not lead to denial of credit.Conclusions: Modvat credit should not be denied as the final products are dutiable, and the exemption is merely a deferment of duty.Issue 2: Application of Rule 57C and Notification 217/86Relevant legal framework and precedents: Rule 57C and Notification 217/86 are analyzed in the context of facilitating manufacturing processes across units without intermediate duty burdens.Court's interpretation and reasoning: The court emphasized that Notification 217/86 should be interpreted to support the Modvat scheme's objective, which is to avoid unnecessary duty payments at each manufacturing stage.Key evidence and findings: The court noted that the final products are cleared on payment of duty, which aligns with the Modvat scheme's intent.Application of law to facts: The court applied the law by recognizing the exemption as a procedural facilitation rather than a permanent duty waiver.Treatment of competing arguments: The department's analogy to other exemptions was rejected, as Notification 217/86 is specifically designed to work within the Modvat framework.Conclusions: The court concluded that Rule 57C should not apply in a manner that undermines the Modvat scheme and Notification 217/86.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'Notification 217/86 is mainly intended to avert payment of duty at each intermediate stage and take credit of such duty at each subsequent stage, starting from the basic materials, turning out components and finally ending with the ultimate final product.'Core principles established:The Modvat scheme aims to prevent cascading effects of duty by allowing credit for inputs used in manufacturing dutiable final products.Notification 217/86 should be interpreted as a facilitative measure within the Modvat framework, not as a conventional exemption.Final determinations on each issue:Modvat credit should be allowed for inputs used in the manufacture of goods transferred under Notification 217/86 for further manufacture of dutiable final products.Rule 57C should not be applied in a manner that negates the benefits intended by Notification 217/86.In conclusion, the appeals were allowed, and the court directed the restoration of Modvat credit, emphasizing the need to interpret the provisions in a manner that furthers the objectives of the Modvat scheme and Notification 217/86.