IMPORTANT POINT
In cases where intermediate product comes into existence in the manufacture of a final product, even though no duty has been paid on the intermediate product, credit would still be allowed so long as duty is paid on the final product.

Headnote:Central Excise Act, 1944-Central Excise Rules, 1944-Rules 57A, 57C and 57D-Notification No. 217/86-CE dated 2.4.1986-Claim of benefit of-Maintainability-Manufacture of tractor-Parts being used in tractor, cleared from one factory of appellants to another factory-Parts are manufactured from duty paid inputs, are used in manufacture of tractors-Duty is being paid on tractors-Whether appellants will be entitled to MODVAT credit on duties paid for inputs used for manufacture of parts-(Yes) so long as parts are used in manufacture of tractors on which duty is paid-In respect of parts which are sold in the open market and/or used for manufacture of tractors on which no duty is paid, benefit of Notification No. 217/86-CE dated 2.4.1986 may not be available.
       Held : It is to be seen that the whole purpose of the Notification and the Rules is to streamline the process of payment of duty and to prevent the cascading effect if duty is levied both on the inputs and the finished goods. Rule 57D (2), which has been extracted hereinabove, shows that in the manufacture of a final product an intermediate product may also come into existence. Thus in cases where intermediate product comes into existence, even though no duty has been paid on the intermediate product as it is exempted from whole of the duty or is chargeable to Nil rate of duty, credit would still be allowed so long as duty is paid on the final product. In cases of manufacturers like the Appellants the final product is the tractor. The intermediate product would be parts which are manufactured for being used in the tractor. In such a case the parts would not be the final product. Thus Rule 57C would have no application. The mere fact that the parts are cleared from one factory of the Appellants to another factory of the Appellants would not disentitle the Appellants from claiming benefit of Notification No. 217/86-CE dated 2nd April, 1986. As stated above, the Notification itself clarifies that the inputs can be used within the factory of production or in any other factory of the same manufacturer. (Paras 8 and 9)
       In this view of the matter, we set aside the impugned Judgment and the Order of the Commissioner of Central Excise. It is held that the Appellants will be entitled to MODVAT credit on duties paid for the inputs used for manufacture of parts, so long as the parts are used in the manufacture of tractors on which duty is paid. We clarify that in respect of parts which are sold in the open market and/or used for manufacture of tractors on which no duty is paid, the benefit of the Notification No. 217/86-CE dated 2nd April, 1986 may not be available. (Para 11)

JUDGMENT

S.N. Variava, J.-These Appeals are against the Judgment dated 17th March, 2003 passed by the Customs Excise and Gold (Control) Appellate Tribunal (for short CEGAT).

2. Briefly stated the facts are as follows :

The Appellants are manufacturer of tractors. They MODVAT credit in respect of duties paid on inputs used in the manufacture of parts. Those parts were then cleared to another factory of the Appellants, without payment of duty, by virtue of Notification No. 217/86-CE dated 2nd April, 1986. The parts were then used to manufacture tractors on which duty was paid.

3. The Respondent issued a show-cause notice on the ground that MODVAT credit was not admissible as the final goods, i.e. the parts were cleared without payment of duty. The Appellants claimed that the final products were not the parts but the tractors. The Appellants claimed that duty was being paid on the tractor and, therefore, MODVAT credit was available under Notification No. 217/86-CE dated 2nd April, 1986.

4. The explanation given by the Appellants was not accepted. The Appellants therefore filed an Appeal before CEGAT. By the impugned Judgment, CEGAT has held that, as the parts are cleared from the factory where they are manufactured to another factory of the Appellants which is located in a different premises and is separately registered under the Central Excise Law, the finished products are the parts. CEGAT has held that as no duty was paid on the parts MODVAT credit was not available.

5. At this stage, the concerned Rules of the Central Excise Rules, 1944 and the relevant portion of Notification No. 217/86-CE dated 2nd April, 1986 may be noticed. Rules 57A, 57C and 57D read as follows :

"57A. Applicability.-(1) The provisions of this section shall apply to such finished excisable goods (hereinafter referred to as the "final products", as the Central Government may, by notification in the Official Gazette, specify in this behalf, for the purpose of allowing credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of 1975), as may be specified in the said notification (hereinafter referred to as the "special duty") paid on the goods used in or in relation to the manufacture of the said final products (hereinafter referred to as the "inputs") and for utilizing the credit so allowed towards payment of duty of excise leviable on the final products, whether under the Act or under any other Act, as may be specified in the said notification, subject to the provisions of this section and the conditions and restrictions that may be specified in the notification:

Provided that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted.

Explanation.-For the purposes of this rule, "inputs" includes-

(a) Inputs which are manufactured and used within the factory of production, in or in relation to, the manufacture of final products,

(b) paints and packaging materials, and

but does not include-

...................................................... .....................................................

57C. Credit of duty not to be allowed if final products are exempt.-No credit of the specified duty paid on the inputs used in the manufacturer of a final product (other than those cleared either to a unit in a Free Trade Zone or to a hundred per cent Export-Oriented Unit) shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty.

57D. Credit of duty not to be denied or varied in certain circumstances.-(1) Credit of specified duty allowed in respect of any inputs shall not be denied or varied on the ground that part of the inputs is contained in any waste, refuse, or by-product arising during the manufacture of the final product, or that the inputs have become waste in or in relation to the manufacture

Click Here to Read the rest of this document

2004 Supreme(SC) 939

IMPORTANT POINTIn cases where intermediate product comes into existence in the manufacture of a final product, even though no duty has been paid on the intermediate product, credit would still be allowed so long as duty is paid on the final product.

Cases Referred (1)

IMPORTANT POINT
In cases where intermediate product comes into existence in the manufacture of a final product, even though no duty has been paid on the intermediate product, credit would still be allowed so long as duty is paid on the final product.