TaxTMI 
TaxTMI 
2009 (8) TMI 224
X X X X Extracts X X X X
X X X X Extracts X X X X
....iable to Central Excise Duty. Animal food supplement is not liable for payment of Central Excise Duty since Heading 23.02 attracts nil rate of duty. 3. According to the Respondents, they first used the inputs in the manufacture of Crude Vitamin A which is an intermediate product. Crude Vitamin A is further used in the manufacture of (i) Vitamin-A, being a dutiable final product cleared on payment of Central Excise Duty and (ii) Animal feed supplement being an exempted final product cleared without payment of Central Excise Duty. 4. Respondents took Cenvat credit for duty paid on inputs received in the factory. Prior to the removal of animal feed supplement, the respondents, in their Cenvat credit, debit/reversed the credit to the extent inputs are used in the manufacture of crude Vitamin A which is in turn is used in the manufacture of animal feed supplement. According to respondents thus, at the earliest available opportunity they have surrendered the credit going into the exempted final product. The respondent thus did not take advantage of the credit availed on inputs used in the manufacture of exempted final product. 5. Three show cause notices covering the period Marc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in taking the alternative view that as the petitioner has complied with the requirements of Rule 6(1) no duty was payable in terms of Rule 6(3). 7. To understand the issue in its correct perspective, we may gainfully refer to the relevant provisions of Rule 6 Rule 6. Obligation of manufacturer of dutiable and exempted goods - (1) the CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2). (2) Where a manufacturer avails of Cenvat credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of exempted goods and take Cenvat credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods, (emphasis supplied) (3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely :- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y Parks) shall be allowed if the final product is exempt from the whole of duty of excise leviable thereon or is chargeable to Nil rate of duty". Practical accounting difficulties were faced in those cases where a manufacturer produced dutiable final product say car and also exempted final product say tractor. In such case, in law, no credit is available on input used in the manufacture of tractor. It was not reasonably possible to separate the inputs like steel sheet, paints etc, to be utilized in manufacture of both the final products, say car and tractor. In that context, it was clarified by the Central Government vide Circular No. 5/87, dated 7-1-1987 as under: "A reference is invited to Board's instructions F. No. B. 22/3/86-TRU, dated the 10th April, 1986, wherein it has been clarified with regard to Point No. 5 that Modvat credit is not available if the final products are exempt or are chargeable to nil rate of duty. However, where a manufacturer produces along with dutiable final products, final products which would be exempted from duty by a notification (e.g. an end-use notification and in respect of which it is not reasonably possible to segregate the inp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pt and use of inputs for the aforesaid purpose and shall not take credit of the specified duty paid on such inputs. (emphasis supplied) 10. The relevant portion of explanatory Notes to Budget changes 1996-97 issued by Central Government explaining the rationale for the introduction of Rule 57CC [1996 (15) RLT M71], is as under: "At present a manufacturer manufacturing both fully exempted and dutiable final products avails the credit of the duty paid on inputs at the time of the receipt of the goods in the factory. When he clears the fully exempted final product, he is required to reverse the credit taken on inputs contained in the exempted final product. This procedure is quite cumbersome and many a time, in the absence of any input-output correlation, it is difficult to determine whether the reversal of credit has been correct or not. In order to circumvent this problem, a provision has been made by inserting a new rule 57CC so as to prescribe that an amount equal to 20% of the value of the exempted goods is reversed in the modvat credit account at the time of clearance of the exempted final product whether or not the inputs on which modvat credit has been taken is use....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... maintain separate inventory and accounts of the receipts and of use of inputs in the manufacture of exempted goods. This rule as both the explanatory note to the Finance Bill and the Budget speech was introduced on the realization that the procedure was cumbersome and it was difficult to determine whether the reversal of credit was proper or not. The delegate making the rule as also the Finance Minister were aware of the practical difficulties faced by the Industry. Thus if the manufacturer uses inputs in respect of both, manufacture of exempted goods and dutiable goods, then if a separate inventory is maintained for receipt and use, the manufacturer in respect of dutiable goods could take credit of the specified duty paid on such inputs, otherwise pay 8% of the price in terms of Rule 57CC. 14. Respondent relies on the judgement in Chandrapur Magnet Wires Pvt. Ltd. v. Collector of Central Excise reported in 1996 (81) E.L.T. 3 (S.C.), in support of their contention that Rule 6(1) should not be read literally but is capable of an alternative consideration, namely that if an assessee reserves the credit on inputs used in the manufacture of final products before the goods leave ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iable as well as duty exempted goods and who took Modvat credit on such common inputs. The Court then in paragraph no. 19 observed as under :- "In cases where the manufacturer does not comply with Rule 57CC(9), he shall debit the presumptive sum equal to eight per cent of the value of the exempted goods at the time of clearance from the factory gate. This rule would apply to stock transfers also." The object of Rule 57CC was explained as under. "In the circumstances, Rule 57CC is a provision which seeks to recover presumptive amount at the rate of eight per cent of the price of exempted final product at the time of removal for sale. In the circumstances, the Tribunal erred in holding that Rule 57CC is not applicable to the present case as it involves stock transfer and not a sale. If the view of the Tribunal is to be accepted, then neither Section 4 of the 1944 Act nor the Valuation Rules, 1975 framed thereunder could apply. If the nature of the presumptive sum is kept in mind then there will be no conflict between our view and the view expressed by the Central Board of Excise and Customs vide Instructions based on Circular No.B-42/1/96-TRU; dated 27-9-1996. We....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in a position to understand on a clear and literal interpretation of Rule 6(2). Rule 6(1) and Rule 6(2) read together mean that inputs used in the manufacture of exempted products no cenvat credit is allowed. It may however happen that the inputs are used in the manufacture of both exempted and dutiable goods, in which event if the register as required is maintained the credit can be taken for the quantity of inputs used in the manufacture of dutiable goods. If records are not maintained as required, the duty has to be paid in terms of Rule 6(3). The presumptive tax payable in terms of Rule 6(3) has been recognised and accepted by the Supreme Court in Ballarpur Industries (supra) while construing Rule 57CC. Rule 6(1) does not lead to the construction that if the manufacturer without maintaining the books, does not take credit for the duty paid on inputs for manufacture of exempted goods. Rule 6(1) is satisfied. Rule 6(1) is satisfied only when the requirements of the Rule 6(2) are satisfied, what requires register to be maintained for separate accounts for receipt, consumption and inventory of the inputs. Rule 6(3) then provides that if separate accounts are not maintained then th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch an argument as the Finance Minister while providing for a presumptive tax under Rule 57CC had realised this difficulty. This presumptive tax has been continued in Rule 6. Hardship or breaking down of the rule even if it happens in some cases by itself does not make the rule bad unless the rule itself cannot be made operative. At the highest it would be a matter requiring reconsideration by the delegate. In support of their contention, learned counsel has sought to rely on the judgment of K.K. Varghese v. ITO - 1981 (4) SCC 173 to contend that the interpretation, which is manifestly absurd and if unjust results follow that interpretation that has to be avoided. The Court there observed that a task of interpretation of a statute or enactment is not a mechanical task. It is more than a mere reading of a mathematical formulae because few words possess the precision of mathematical symbols. We may refer to the relevant provision relied upon by learned counsel. "........We must therefore eschew literalness in the interpretation of Section 52 sub-section (2) and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... SCC 481 and Tirath Singh v. Bachittar Singh - 1955 (2) SCR 457 to contend that unreasonable results cannot be intended by the legislature. In our opinion, as earlier set out, a reading of the rule does not result in any absurdity at the highest in a few cases where an intermediate product may be manufactured before the final products are manufactured, it may give rise to some difficulties. That by itself cannot result in departing from the normal rule of construction. In such an eventuality, the question has to be addressed to the Legislature or the delegate. If however an assessee can reverse the credit on the final product, before the goods are taken out of the factory, we fail to understand why on the same basis it is not possible to maintain records of the very same inputs which are used in the manufacture of final products at an intermediate stage. 23. Section 5A it is submitted enables the Government to exempt products in public interest and such public interest cannot be lost off, sight while interpreting Rule 6 to be used as a tool of oppression to extract an amount which is much beyond the remedial measure. Rule 6, it is submitted cannot be interpreted in the manner wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ms set out therein. The rule if properly read starts with the words "Cenvat Credit shall not be allowed". Therefore, Rule 6 makes it clear that in so far as inputs used in the manufacture of exempted goods, no cenvat credit is allowed. The rule making authority however noting that inputs may be used both for manufacturing final products which may be dutiable and other final products which are exempt, has provided that such manufacturer will be given credit in so far as inputs used for manufacturing of dutiable goods, if accounts are maintained in terms of the rules. Therefore merely because the assessee contends that he is willing to forego credit on inputs used in the manufacture of exempted final product does not warrant a departure from the requirements of Rule 6(2) and 6(3). The rules contemplate that on failure to maintain accounts in terms of Rule 6(2) the consequences would be in terms of Rule 6(3)(a) or (b). Nor is is possible to read down the rule as "amount not exceeding" as is sought to be contended on behalf of the assessee. 25. The next submission advanced on behalf of the assessee is that revenue is mistaken in assuming that rule 6(3)(b) is the only method of compl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he rule can be regarded as directory since it lays down one of those modes which will be unquestioned for its validity. The other modes of proof are not necessarily shut out. It is to be remembered that all rules of procedure are intended to advance justice and not to defeat it." The question before the Full Bench of Allahabad High Court in J.K. Manufacturers Ltd. v. STO - 1970 (26) STC 310 (All-FB) was whether the Sales Tax Officer was right in refusing the exemption to sales of yarn on the ground that the petitioner-assessee had not submitted in certificates in Form III-A showing that the these goods were sold to a dealer for resale in the same condition either with the returns or within extended time even though the assessee had filed the same before completion of assessment. Section 3AA of the UP Sales Tax Act stated that "Unless the dealer proves otherwise, every sale by a dealer shall, for the purposes of sub-section (1), be presumed to be a consumer." The Explanation to Section 3AA added : "A sale of any of the goods specified in sub-section (1) to a registered dealer who does not purchase them for resale in the same condition in which he has purchased them, or to an unre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. The delegate has made the rule. An assessee seeking to take advantage of Rule 6, is fully aware of the requirements of the rules including Rule 6(1).If the rule as framed was arbitrary or in the case of sub-ordinate legislation manifestly arbitrary then it was for the assessee to challenge the said rule. The assessee has chosen not to do so, but seeks to adopt a contention that the rule can be differently read to achieve the said object. Rule 6(1) to which reference may be made again is clear, that Cenvat credit cannot be availed of on inputs used in the manufacturing of exempted goods. It then adds the words "except in the circumstances mentioned in sub-rule (2). A Court cannot read into the said rule something different or render otiose the words which we have earlier set out. The rule mandates specifically that an assessee seeking to avail Cenvat credit in respect of inputs used in the manufacture of exempted goods, the only method to which he can avail of is by following sub-rule (2). Rule 2 provides for maintaining accounts. 27. In the light of the above discussion, in our opinion, it is not possible to accept the contention as advanced on behalf of the assessee that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve chosen not to maintain the records as required, revenue authorities even against the grain of the language of the rule, must estimate the inputs used in the manufacture of final dutiable products and accordingly, pass necessary orders. It is also not possible to accept the contention that because they are familiar with the procedure of ascertaining the amount of credit, that by itself makes rule 6(3)(b) directory. The reference placed on the judgment of the Supreme Court in Krishnamurthy v. CIT - 1989 (176) ITR 417 (SC), in our opinion is misplaced. In that case, the Supreme Court held considering the provisions of Section 45 of the Income Tax Act that the asset is difficult to value, but is nonetheless of a money value, the best valuation possible must be made. There can be no quarrel with that proposition, considering that under the Income Tax Act normally, there are two methods of valuation which are land and building, and rent capitalization method. 29. It is also submitted that apportionment on some reasonable basis is not new to tax but a familiar thing. Reference was made to the judgment of the Supreme Court in Commissioner of Income Tax v. Best and Co. - AIR 1966 SC 1....