1993 (10) TMI 187 - AT - Income Tax

Tribunal restores Modvat credit for essential plastic droppers in pediatric drops, ensuring fair treatment among manufacturers.

The Tribunal allowed the appeal, directing the restoration of Modvat credit for plastic droppers included with Pediatric drops, considering them as ... Modvat credit Issues Involved:1. Whether plastic droppers can be considered as an input used in or in relation to the manufacture of Pediatric drops under the Modvat scheme.Issue-wise Detailed Analysis:1. Whether plastic droppers can be considered as an input used in or in relation to the manufacture of Pediatric drops under the Modvat scheme:The appellants, manufacturers of Pediatric drops, included plastic droppers in the cartons with the sealed bottles of the drops. The Department objected, arguing that the droppers were not used in the manufacture or in relation to the manufacture of the Pediatric drops. The Assistant Collector disallowed the Modvat credit, and the Collector (Appeals) upheld this decision. The appellants contended that the droppers were necessary for administering the drops and their cost was included in the retail price under the Drug (Price Control) Order.The Tribunal noted that the primary issue was whether the droppers could be construed as an input used in or in relation to the manufacture of the final product. The appellants argued that the droppers, marked in 'ML' for precise dosage, were essential for administering the drops and should be considered as packing material related to the final product. They cited precedents where similar items were deemed eligible for Modvat credit.The Department argued that the droppers were not used in the manufacture or in relation to the manufacture of Pediatric drops. They were merely placed in the cartons and not necessary for the final product, which could be marketed without them. The Department also referred to contrary decisions by other benches and the rescission of earlier clarifications allowing Modvat credit for similar items.The Tribunal, after hearing both sides, chose to view the issue from a different angle. It acknowledged that while the droppers were not used in the manufacture of Pediatric drops, they were used in relation to the manufacture of the final product marketed at the factory gate. The term 'in relation to' has a broader connotation and can include items used after the emergence of the final product but before marketing. The Tribunal emphasized that the value of the droppers was included in the final product's price and was necessary for administering the prescribed dosage.The Tribunal referred to Section 4 of the Central Excise Act, which states that the value of goods is the price at which they are ordinarily sold at the factory gate. Since the value of the droppers was included in the value of the Pediatric drops for excise duty purposes, they should be considered as a component of the final product. The Tribunal cited the Supreme Court's decision in East End Paper Industries, which held that anything rendering goods marketable at the factory could be regarded as a component.The Tribunal concluded that the droppers were not optional accessories but necessary components for administering the drops. Their value was included in the final product's price, and they were marketed as part of the Pediatric drops pack. Therefore, the droppers should be construed as components of the final product, making them eligible for Modvat credit.The Tribunal also noted that the Department had not challenged a similar decision by another Collector (Appeals), which allowed Modvat credit for droppers. Denying credit in this case would result in discriminatory treatment and unfair competition among manufacturers.In conclusion, the Tribunal allowed the appeal, directing the restoration of the Modvat credit, provided the value of the droppers was included in the retail price of the final product declared under the Drug (Price Control) Order.Separate Judgment:One member concurred with the reasoning and conclusion but recorded a separate approach due to the sensitive nature of the issue.The MODVAT Scheme aims to avert the cascading effect on the price structure of manufactured commodities. The scheme allows credit for duty paid on inputs used 'in or in relation' to the final product, as specified in Rule 57A. The definition of 'input' is diversified, including packaging material and items used in the manufacture of final products, with specific exclusions.The Supreme Court, in Collector v. Eastend Paper Mills, held that anything required to make goods marketable must be part of the manufacturing activity. The MODVAT Scheme aims to prevent double duty on the final product marketed at the factory gate. Since the value of the droppers was included in the assessable value of the Pediatric drops, denying credit would frustrate the scheme's objective.The dropper, fitted with caps, also served as packaging material. Therefore, the appeal was allowed, subject to ensuring the value of the droppers was included in the retail price of the final product.