2001 (7) TMI 723 - AT - Central Excise

Manufacturers denied Modvat credit on capital goods due to ownership issue. Appeal allowed; demand barred by limitation.

The appellants, manufacturers of polyester staple fibre (PSF), claimed Modvat credit on capital goods supplied by Reliance Industries Ltd. (RIL). The ... Modvat - Demand - Limitation Issues Involved:1. Eligibility of Modvat credit on capital goods supplied by RIL.2. Interpretation of Rule 57R and Rule 57Q.3. Applicability of extended period of limitation for demand.Summary:1. Eligibility of Modvat credit on capital goods supplied by RIL:The appellants, manufacturers of polyester staple fibre (PSF), entered into an agreement with Reliance Industries Ltd. (RIL) where RIL supplied raw materials and capital goods free of cost to the appellants. The appellants claimed Modvat credit on these capital goods. The department objected, arguing that the appellants were not the owners of the inputs, which was a requirement for availing Modvat credit. The Commissioner confirmed the demand for duties and imposed equivalent penalties.2. Interpretation of Rule 57R and Rule 57Q:The appellants argued that the concept of ownership was not contemplated in the Modvat rules and that procedural lapses should not deny substantive rights to Modvat credit. The Tribunal examined Rule 57R(3) and Rule 57Q, concluding that ownership of the goods was implied in the rules. The Tribunal reasoned that using inputs without acquiring ownership would result in unjust enrichment. The Tribunal held that the appellants, not being the owners of the capital goods, were not entitled to Modvat credit.3. Applicability of extended period of limitation for demand:The appellants contended that the department was aware of the relevant facts since 1995, and thus the extended period of limitation could not apply. The Tribunal, however, found that the appellants had not disclosed the ownership details adequately and invoked the extended period of limitation. The Tribunal cited the Nizam Sugar Factory case, stating that knowledge of the department does not preclude the application of the extended period under proviso to Section 11A.Separate Judgments:Member (T) J.H. Joglekar disagreed with Member (J) G.N. Srinivasan on the applicability of the extended period of limitation. Joglekar held that the demand was barred by limitation, as the department had knowledge of the facts for over three years. The matter was referred to a third member, Gowri Shankar, who concurred with Joglekar, concluding that the demand was indeed hit by limitation. Consequently, the impugned order was set aside, and the appeal was allowed.