Per V.K. Agrawal :

M/s. Kabra Investment (P) Ltd. have filed this appeal being aggrieved with the Order No. Commr(A)/48/AHD-II/2001 dated 10.7.2001 passed by the Commissioner of Appeals.

2. Shri Jitendra Singh, learned Advocate, submitted that the Appellants manufacture HDPE/PP sacks and avail Modvat Credit of the duty paid on the inputs; that in the month of June, 1994, they purchased PP/HDPE fabrics and availed of Modvat credit amounting to Rs. 2,80,280/-; that the fabrics in the running length of Rolls was cut into the required sizes in their factory; that on account of labour dispute which led to strike, they could not convert the said cut pieces into sacks; that they sold those cut pieces of HDPE/PP fabrics to other party on payment of concessional rate of duty, appellants being a small scale unit; that the Assistant Commissioner, under Adjudication Order No. 77/98 dated disallowed the Modvat Credit and directed them to reverse/pay the same and imposed a penalty of Rs. 5,000/- holding that they had sent the goods to another party whose identity was not disclosed and the inputs had not been used for manufacturing process; that the Commissioner (Appeals), under the impugned order also rejected their appeal holding that they did not use HDPE fabrics for the manufacture of sacks, their final product and the inputs were thus required to be cleared by reversing the credit equal to the amount of Modvat Credit earned on the said inputs. The learned Advocate, further, submitted that the denial of Modvat Credit is illegal as all the conditions of the Modvat schemes were satisfied inasmuch as the inputs were issued for process and manufacturing and they were subjected to process of cutting; that they had removed cut pieces of HDPE/PP fabrics and not the fabrics in roll forms; that accordingly inputs were not cleared as such. He relied upon the decision of the Larger Bench of the Tribunal in the case of CCE, Vadodara vs. Asia Brown Boveri Ltd. 2000 (39) RLT 575 (CEGAT-L.B.)=RLT (L.B.-CEGAT) - 1838=2000 (120) ELT 228 (T) wherein it was held that the requirement of Rule 57F (1)(ii) is for payment of duty on the inputs where they have not been used by the manufacturer. The learned Advocate also mentioned that duty has been demanded under Section 11A (1) of the Central Excise Act which is not correct; that no penalty is imposable on the appellants as no violation of any provision was committed by them and they had not acted dishonestly. Finally he submitted that undisputedly the Appellants had cleared the cut pieces of HDPE/PP fabrics on payment of duty, which should be adjusted from the demand made under the Adjudication Order.

3. Shri V.K. Verma, learned DR., on the other hand, submitted that the appellants had not used the inputs brought by them in the manufacture of their final products namely, sacks and accordingly no Modvat Credit is admissible to them; that mere process of cutting of fabrics in Roll form into pieces of required sizes does not amount to manufacture and as such in terms of the provisions of Rule 57F(1) of the Central Excise Rules at the relevant time the duty of excise equal to the amount of credit allowed has to be discharged; that this was the ratio of the decision in the case of Asia Brown Boveri Ltd. wherein it was held that "the proviso to Rule 57F(1) clearly explains the rationale for creating the legal fixation by providing that duty of excise payable at the time of removal for home consumption shall not be less than the amount of credit that has been allowed in respect of the inputs under Rule 57A."

4. We have considered the submissions of both the sides. The facts, which are not in dispute, are that the inputs are HDPE/PP fabrics whereas the final product is HDPE/PP sacks. Further admittedly appellants had only cut the Rolls of fabrics into pieces of required sizes, a process which does not amount to manufacture. The appellants have, thereafter, instead of manufacturing sacks, sold the pieces of HDPE/PP f