K.S. Venkataramani, Member (T)

1. This appeal is directed against the order dated 4.12.1987 passed by the Collector of Central Excise, Hyderabad by which he had directed under Rule 571 of the Central Excise Rules, 1944 that the appellants should reverse the MOD VAT credit amount of Rs. 1,49,936.14 because this was availed of irregularly. He also imposed a penalty of Rs. 5,000/- on the appellants under Rule 173Q of the Central Excise Rules.

2. The facts in brief are that the appellants manufactured steel ingots with the aid of electric induction furnace. They also manufactured other Articles viz. runners and risers. The raw material for manufacture of these goods, among others, is steel scrap. They filed a declaration on 5.6.1986 opting for Modvat facility in respect of steel scrap as an input for their final product. The Central Excise Officers on a visit to the appellants' factory on 16-1-1987 noticed that a quantity of 2685.895 MT of steel scrap had been taken for manufacture of steel ingots, runners and risers and the quantity of final product obtained was 2206.731 MT of ingots and 79.234 MT of runners and risers. A total credit of Rs. 10,07,099.67ps was availed as Modvat credit which includes credit of Rs. 9,80.351.67ps on the scrap. The total duty payable on the 2206.731 MT of ingots and 79.234 MT of runners and risers is Rs. 8,30,415.53. After adjustment of the duty amount of Rs. 8,30,415.53 from the credit taken, a balance of Rs. l,76,684.14ps should be avail able. However, the officers found that this amount was not available in the books of accounts. According to Rule 57F(3) only those final products in which inputs have been utilised on which credit has been taken are entitled to the use of the credit for paying the duty. Where on certain quantities of inputs no credit is available or taken, the final products coming out of these inputs are not entitled to the facility of utilisation of credit. Therefore, a show cause notice was issued to the appellants for having utilised excess credit towards payment of duty on other final products in contravention of Rules 57 F(3)(1) and 57-F(5) of the Central Excise Rules, 1944. The proceedings initiated culminated in the Collector's order which is now challenged in this appeal.

3. Shri N.K. Dev, the learned Consultant appearing for the appellants submitted that in this case both the input viz. steel scrap and the final product viz. ingots are notified for the purpose of Modvat credit under Notification No. 177/86. These have also been declared inputs for the purpose of Modvat scheme. The appellants had availed deemed credit on this scrap. The learned counsel further submitted that Sub-rule (3)(1) of Rule 57F as amended by Notification No. 197/86, dated 14-3-1986 provides for utilisation of the credit of the specified duty allowed in respect of any inputs, towards payment of duty on any of the final products in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under Rule 57G. He emphasised that the appellants are entitled to utilise the entire credit of duty taken on the M.S. scrap received from 5.6.1986 to 28.8.1986 for payment of duty on the final products viz. M.S. ingots which are the only final products manufactured by them. He also pointed out that it is well settled by the clarification issued by the Central Board of Excise and Customs itself that in the matter of Modvat credit there is no one-to-one correlation between the inputs and the final products. The penalty on the appellants is also not justified because there was no mala fide intention and they had actually utilised the input duty which they have had.

4. The learned SDR, Shri. K.K. Bhatia, pointed out that in this case, the appellants have taken deemed credit on the steel scrap. Deemed credit on this input was withdrawn with effect from 28.8.1986. The deemed credit taken on the steel scrap is more than the duty paid by the appellants on their