Per Shri P.C. Jain :

Following are the relevant facts :-

1. The appellant, a Govt. of India Undertaking, is having two units - one at Damanjodi and another at Angul. In Damanjodi unit, it manufactures Calcined Alumina falling under Chapter 28 of the Schedule to the Central Excise Tariff Act, 1985, out of duty paid inputs on which modvat credit has been taken and at Angul unit it manufactures Aluminium metal falling under Chapter 76 ibid out of calcined alumina manufactured at, and dispatched from, Damanjodi.

2. During the material period 20.4.1989 to 24.7.1989, the appellant dispatched calcined alumina without payment of duty following the Chapter X procedure of the Central Excise Rules, 1944 in terms of Notification No. 217/86 dated 3.4.86 ( as amended). Modvat credit of duty paid on inputs for manufacture of Alumina (which in turn was utilised in manufacture of aluminium metal cleared on payment of duty) was not debited. Instead, the modvat credit earned at Damanjodi was utilised towards payment of duty on aluminium metal manufactured at Angul. Literally speaking, this meant transfer of modvat credit from Damanjodi unit to Angul unit.

3. By a notice dated 18.9.89, the appellant was called upon to show cause to the Assistant Collector as to why the input duty (modvat credit) amounting to Rs. 39,17,929.31 should not be recovered from it under rule 57I and penalty should not be imposed.

4. In its reply to show cause notice, the appellant submitted that it was under a bonafide belief that the duty paid inputs on which modvat credit was taken by it at Damanjodi could be utilised by it towards payment of duty on aluminium metal manufactured and cleared at Angul through the intermediate manufacture of calcined alumina. If this is not permitted, the very purpose of notification 217/86-CE would be defeated.

5. If further submitted that prior to and subsequent to the relevant period 20.4.1989 to 24.7.1989, the appellant had been following the procedure of (i) clearing cancined alumina on payment of duty by utilising the modvat credit of duty paid on inputs at Damanjodi, (ii) taking modvat credit at Angul of duty paid on cancined alumina and (iii) utilising the same for payment of duty on aluminium metal manufactured at Angul. No objection was and is taken to this procedure being followed by the appellant.

6. It is submitted by the appellant that by following the procedure as it did during the relevant period, no loss of revenue is caused except that the scriptory work of clearing calcined alumina on payment of duty from Damanjodi and again taking credit thereof at Angul is avoided. This is the precise object of Notification No. 217/86. It is, therefore, prayed that if Revenue's contention is accepted that cancined alumina has been cleared without payment of duty under Notification 217/86- CE and, therefore, modvat credit of duty paid on inputs used in cancined alumina needs to be reversed, then the appellant has no objection on paying duty on calcined alumina so that it can take credit again. In other words, the procedure followed by the appellant prior to or subsequent to the relevant period be allowed to be followed retrospectively (i.e. from 20.4.89) since there is no loss of revenue and it is merely a matter of procedure.

7. He also submits that in the case of Bajaj Tempo Ltd. vs. Collector of Central Excise 1944 (69) ELT 122 (T) it has been held that Revenue's contention of reversal of modvat credit in such circumstances is not tenable because Notification 217/86-CE has a specific purpose of avoiding cascading effect of duty on inputs used in dutiable final product through wholly exempted intermediate products used capatively by a manufacturer in the same factory or another factory.

8. Learned SDR, on the other hand, invites specific attention to rule 57C and submits that since cancined alumina is fully exempted, modvat credit is required to be retrenched as held by the West Regional Bench of the Tribunal in the case of Kirloskar Oil