Holding

The excise duty paid on raw material covered by the MODVAT scheme is not to be included in the cost of the excisable product for assessment of excise duty under Section 4(1)(b) read with Rule 6 of the Valuation Rules.

Summary

The manufacturers purchased raw material and used it to make an intermediate product, which was then used to produce a final excisable product. The issue was whether the excise duty paid on the raw material, which could be claimed as credit under the MODVAT scheme, should be deducted from the raw material’s price when computing the cost of the intermediate (excisable) product under Section 4(1)(b) read with Rule 6 of the Valuation Rules. The Court held that, for valuation purposes, the MODVAT credit reduces the real cost of the raw material and therefore the excise duty paid on that raw material must not be included in the cost of the excisable product. The Court relied on the commercial meaning of “cost”, the provisions of the Central Excise Rules (57A‑57J) and the guidance of accounting standards. Consequently, the revenue’s appeal was dismissed.

Issues considered

Whether the excise duty paid on raw material covered by the MODVAT scheme is to be included in the cost of the excisable product for valuation under Section 4(1)(b) and Rule 6 of the Central Excise (Valuation) Rules
Whether the MODVAT credit reduces the assessable value/cost of the product
Interpretation of the term ‘cost’ in the Central Excise and Salt Act, 1944
Whether Explanation to Section 4(4)(d)(ii) excludes MODVAT credit from the cost calculation

Legislation cited

Central Excise and Salt Act, 1944s. 4(1)(b), s. 4(4)(d)(ii)
Central Excise Rules, 1944
Central Excise (Valuation) Rules, 1975s. Rule 57A‑57J, s. Rule 6
Customs Tariff Act, 1975s. 3

Subjects

central exciseMODVATcost valuationassessable valueexcise dutycreditraw materialintermediate productRule 6Section 4commercial interpretation

Judgment

A COLLECTOR OF CENTRAL EXCISE, PUNE ETC. ETC.
v.
DAI ICHI KARKARIA LTD. ETC. ETC.

AUGUST 11, 1999

B [S.P. BHARUCHA, R.C. LAHOTI AND N. SANTOSH HEGDE, JJ.]

Central Excise and Salt Act, 1944/Central Excise Rules, 1944/Central
Excise (Valuation) Rules, 1975:

C S.4(1) (b) I Rules 57A to 57J/Rule 6 - Excisable product-Computation
ofprice for assessment of excise duty-Intermediate products being specified
goods for purpose of MOD VAT scheme-Cost of-Held, in determining cost
ofthe product, excise duty paid on raw material also covered under MOD VAT
scheme is not to be included

D Words and phrases:

Word 'cost'-Meaning of-Explained

The assessee-manufacturers purchased raw material for use in the
manufacture of intermediate products. The intermediate products were used
E in the manufacture of final products. The raw material and the intermediate
products were liable to excise duty and were specified goods for the purpose
of MODV AT scheme. The assessable value of the intermediate products was
to be determined on the basis of its cost and in determining the assessable
value of the intermediate products, the cost of raw material was to be taken
F into account. Before the Central Excises and Gold (Control) Appellate Tribunal
the question that arose for consideration was : whether part of the cost of
the raw material was the price paid by the manufacturer to its seller or it
was the price of the raw material less the excise duty thereon, which was
paid by the seller and for which the manufacturer was entitled to credit
under the MODV AT scheme, to be utilised against the payment of excise duty
G on products manufactured by him including the intermediate product. The
Tribunal held in favour of the manufacturers.

In the appeals filed by Revenue before this Court, it was contended for
Revenue that for determining the cost of the excisable product for the
purpose of assessment of excise duty, in view of Explanation to s.4(4) (d) (ii)
H 3~
C.C.E. v. D.l. KARKARIA LTD. 361

of the Central Excise and Salt Act, 1944, the credit under the MODVAT A
scheme taken by the manufacturer, equal to the excise duty paid on the raw
material, was not to be taken into account to reduce the price paid by the
manufacturer to the seller of the raw material. It was submitted that the
MODY AT scheme resulted in reducing the excise duty on the excisable
product; but it had no bearing in determining the cost of its production; the
cost of production of the excisable product was not reduced by the amount B
of the MODY AT credit on the raw material, the credit was a contingent
credit; and the manufacturer did not have any indefeasible right or title to
it.

Dismissing the appeals, the Court
c
HELD: 1. In determining the cost of an excisable product covered by
the MODVAT scheme under Section 4 (1) (b) of the Central Excise and Salt
Act, 1944, read with Rule 6 of the Central Excise (Valuation) Rules 1975,
the excise duty paid on raw material also covered by the MODVAT scheme
is not to be included. The Tribunal has rightly recorded the finding that D
MODY AT credit results in reduction of the cost of the excisable product to
the extent of the credit. 1376-H; 377-A)

_, Eicher Motors ltd. v. Union of India, (1999) 106 ELT 3, relied on.

Collector of C. Ex. v. lncab Industries, (1990) 45 ELT 342 and Super E
Cassettes Industries ltd. v. Union of India, (1997) 94 ELT 302, referred to.

Mis. Kirlosker Brothers ltd Dewas (MP.) v. Union of India & Ors . .
(1992) 2 SCC 658, and Collector of Central Excise Bangalore v. Mysore
Paper Mills ltd., (1997) 7 SCC 64, distinguished.

2.1. The MODVAT schemes is a part of the Central Excise Rules, F
1944, Rules 57A to 57J of the Rules make it clear that a manufacturer
obtains credit for the excise duty paid on raw material to be used by him in
the production of an excisable product immediately it makes the requisite
declaration and obtains an acknowledgment thereof. It is entitled to use the
credit at any time thereafter when making payment of excise duty on the G
excisable product. There is no provision in the Rules which provides for a
.· reversal of the credit by the excise authorities except where it has been
illegally or irregularly taken, in which event it stands cancelled or, if
utilised, has to be paid for. 1370-B; 373-E-F; GJ

2.2. In the instant case, the credit under the MODVAT scheme has H
362 SUPREME COURT REPORTS (1999] SUPP. I S.C.R.

A been validly taken, and its benefit is available to the manufacturer without
any limitation in time or otherwise unless the manufacturer itself chooses
not to use the raw material in its excisable product. The credit is, therefore,
indefeasible. It should also be noted that there is no co-relation of the raw
material and the final product; that is to say, it is not as if credit can be taken
only on a final product that is manufactured out of the particular raw
B material to which the credit is related. The credit may be taken against the
excise duty on a final product manufactured on the very day that it become
available. (373-F-G)

3.1. The word 'cost' is not defined in the Act. Therefore, the meaning
C to be given should be such as accords with the meaning that a man of
business puts upon it, and for so doing established accountancy practice
would be relevant. [376-D; G]

Chal/apalli Sugars Ltd v. Commissioner ofIncome-Tax, A.P., (1975) 98
ITR 167, relied· on.
-
D
3.2. The cost of the excisable product for the purpose of assessment
of excise duty under Section 4 (1) (b) of the Act read with Rule 6 of the
Valuation Rules should be reckoned as it would be reckoned by a man of
commerce. Such realism must inform the meaning that the courts give to
words of a commercial nature, like cost, which are not defined in the statutes
E which use them. Accordingly, the real cost of the raw material (exclusive of
freight, insurance and the like) would be the price paid to the seller of the
raw material less the credit under that MODV AT scheme. This, in real
terms, is the cost of the raw material and it is this which should properly
be included in computing the cost of excisable products. [376-C-D-E-F]
F
"Guidance Note on Accounting Treatment for MODVAT" as on
16.3.1995, issued by Institute of Chartered Accountants oflndia-Paragraph
6, referred to. ·

CIVIL AP PELLA TE JURISDICTION : Civil Appeal No. l 0176 of
G 1996 Etc. Etc.
' ....
From the Judgment and Order dated 11.1.96 of the Central Excise and
Gold (Control) Appellate Tribunal, New Delhi in E. 4331 of 1993-A in F.O. No.
195 of 1996-A.

H Soli J. Sorabjee, Attorney General! C.S. Vaidyanathan, Additional Solicitor
C.C.E. v. D.I. KARKARIA LTD. [BHARUCHA, J.] 363

General, Bhaskar Gupta, Joseph Vellapally, Harish N. Salve, N.K. Bjapai, Dalip A
Tandon, Ms. Nisha Bagchi, K.C. Kaushik, Hemant Sharma, K. Swamy, Jaideep
Gupta, P. Parmeshwaran, Trideep Pais, Mrs. B. Sunita Rao, B.V. Desai, Siddharth
Chowdhary, Tarun Gupta, Ravinder Narain, Sanjeev Sen, Sajan Narain, Ms.
Bhawana Ahuja, Ms. Monica Singhal, V. Lakshmikumaran, A.R. Madhav Rao,
K. Srinivas, P.K. Sahu, M.L. Lahoty, Paban K. Sharma, Himanshu Shekhar, K.J. B
John, P. Venugopal, P.S. Sudheer, C.N. Sreekumar, P. Sureshan, Ms. Radha
Rangaswamy, Ms. Mohna Madanlal, Ms. Pallavi Choudhary, A.K. Goel, S.S.
Shamshery, Ms. Sheela Goel, K.K. Mohan, G. Umapathy, R.K.Sharma, Sanjay
Grover, Rajesh Kumar, Dinesh Kumar Garg, Sanjay R. Hegde, M.P. Vinod, A.S.
~ .. Pundir, Mrs. Sarla Chandra, Ms. Priya Hingorani and Aman Hingorani for the
appearing parties. C
The Judgment of the Court was delivered by

BHARUCHA, J. It is convenient to set out, at the outset, the question
involved in these appeals.
D
The manufacturer purchases raw material. He uses the raw material in
the manufacture of an intermediate product. He then uses the intennediate
product in the manufacture of a final product. The raw material and the
intermediate product are liable to excise duty and they are specified goods
for the purposes of the MODY AT scheme. The assessable value of the
intermediate product for the purposes of excise duty has, it is agreed in the E
instant case, to be detennined on the basis of its cost. In determining the
assessable value of the intermediate product the cost of the raw material has
to be taken into account. The question is: is part of the cost of the raw
material the price paid by the manufacturer to its seller, as contended by the
Revenue, or is it the price of the raw material less the excise duty thereon, F
which has been paid by the seller and for which the manufacturer is entitled
to credit under the MODY AT scheme, to be utilised against the payment of
excise duty on products manufactured by him, including the intermediate
product, as contended by the manufacturer.

The Central Excise and Gold Control Appellate Tribunal decided the G
question in favour of the respondent-manufacturers and the Revenue is in
appeal. The reasoning of the Tribunal is unclear and has not been relied upon
by learned counsel for the manufacturers. Broadly put, the logic of its decision
is this: since the manufacturer gets credit for the amount of the excise duty
that has been paid on the raw material, the amount of such excise duty cannot
be said to form a part of the cost that is incurred by the manufacturer in H
364 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A procuring it.
It was argued on behalf of the manufacturers that the Revenue itself
had taken a stand that supported the manufacturers and that, therefore, it
could not now urge to the contrary. The learned Attorney General, however,
pointed out, with the reference to documents, that the stand of the Revenue
B had been different at different times. The divergent stand of the Revenue at
different times only serves to illustrate the difficulty in answering the question.

In the first appeal the manufacturer, Mis. Dai Ichi Karkaria Ltd., purchases
a raw material known as 'lab' for short, it uses the 'lab' in the manufacture of
an intermediate product, surface active agent or surfactant. It uses the
C surfactant in the manufacture of a final product, emulsifer. The other respondent
manufacturers purchase other raw materials, manufacture other intermediate
products and use them in manufacturing other final products. We are here
concerned with the assessment for the purposes of excise duty of the
intermediate product. For the sake of convenience, therefore, we shall refer
·-
D to the intermediate product as the excisable product.

To understand the contentions in the appeal, it is necessary to set out
the provisions of Section 4 of the Central Excises and Salt Act, 1944 ('the
Act') and some provisions of the Central Excise (Valuation) Rules, 1975.

E "Section 4. Valuation of excisable goods for purposes of charging of
duty of excise - (I) Where under this Act, the duty of excise is
chargeable on any excisable goods with reference to value, such value
shall, subject to the other provisions of this section, be deemed to be-
.....

(a) the normal price thereof, that is to say, the price at which such
F goods are ordinarily sold by the assessee to a buyer in the course of
wholesale trade for delivery at the time and place of removal, where
the buyer is not a related person and the price is the sole consideration
for the sale:

Provided that -
G (i) where, in accordance with the normal practice of the wholesale
trade in such goods, such goods are sold by the assessee at different
prices to different classes of buyers (not being related persons) each
such price shall, subject to the existence of the other circumstances
specified in clause (a). be deemed to be the normal price of such
H goods in relation to each such class of buyers;
C.C.E. v. D.l. KAR KARIA LTD. [BHARUCHA, J.] 365

(ii) where such goods are sold by the assessee in the course of A
wholesale trade for delivery at the time and place of removal at the
price fixed under any law for the time being in force or at a price, being

- the maximum, fixed under any such law, then, notwithstanding anything
contained in clause (iii) of this proviso, the price or the maximum price,
as the case may be, so fixed, shall, in relation to the goods so sold,
be deemed to be the normal price thereof;
B

(iii) where the assessee so arranges that the goods are generally not
sold by him in the course of wholesale trade except to or through a
related person, the normal price of the goods sold by the assessee to
or through such related person shall be deemed to be the price at C
which they are ordinarily sold by the related person in the course of
wholesale trade at the time of removal, to dealers (not being related
persons) or where such goods are not sold to such dealers, to dealers
(being related persons), who sell such goods in retail.

(b) where the normal price of such goods is not ascertainable for the D
· reason, that such goods are not sold or for any other reason, the
nearest ascertainable equivalent thereof determined in such manner as
may be prescribed.

(2) Where, in relation to any excisable goods the price thereof for
delivery at the place of removal is not known and the value thereof E
is determined with reference to the price for delivery at a place other
than the place of removal, the cost of transportation from the place
of removal to the place of delivery shall be excluded from such price.

(3) The provisions of this section shall not apply in respect of any
excisable goods for which a tariff value has been fixed under sub- F
section (2) of Section 3.

(4) For the purposes of this Section -

(a) 'Assessee' means the person who is liable to pay the duty of
excise under this Act and includes his agent; G
(b) 'place of removal' means -

(i) a factory or any other place or premises of production or
manufacture of the excisable goods; or
....; ,
(ii) a warehouse or any other place or premises wherein the H
366 SUPREME COURT REPORTS (1999] SUPP. I S.C.R.

A excisable goods have been permitted to be deposited without
payment of duty.
from where such goods are removed;
(c) 'related person' means a person who is so associated with the
assessee that they have interest, directly or indirectly, in the
B business of each other and includes a holding company, a
subsidiary company, a relative and a distributor of the assessee,
and any sub-distributor of such distributor.
Explanation - In this clause "holding company", 'subsidiary
company' and 'relative' have the same meanings as in the
c Companies Act, 1956 (1 of 1956);
(d) 'value', in relation to any excisable goods, -
(i) where the goods are delivered at the time of removal in
a packed condition, includes the cost of such packing
D except the cost of the packing which is of a durable
nature and is returnable by the buyer to the assessee.
Explanation - In this sub-clause, 'packing' means the wrapper,
container; bobbin, pim, spool, reel or warp beam or any other
thing in which or on which the excisable goods are wrapped,
contained or wound;
E
(ii) does not include the amount of the duty of excise, sales
tax and other taxes, if any, payable on such goods and,
subject to such rules as may be made, the trade discount
(such discount not being refundable on any account
whatsoever) allowed in accordance with the normal
F
practice of the wholesale trade at the time of removal in
respect of such goods sold or contracted for sale.
Explanation - For the purposes of this sub-clause, the amount
of the duty of excise payable on any excisable goods shall be
the sum total of -
G
(a) the effective duty of excise payable on such goods under
this Act; and
(b) the aggregate of the effective duties of excise payable under
other Central Acts, if any, providing f~r the levy of duties of
H excise on such goods.
C.~.E. v. D.I. KARKARIA LTD. [BHARUCHA, J.] 367

,. And the effective duty of excise on such goods under each Act A
referred to in clause (a) or clause (b) shall be -

(i) in a case where a notification or order providing for any
exemption (not being an exemption for giving credit with
respect to, [or reduction of duty of excise under such Act
on such goods equal to, any duty of excise under such B
Act, or the additional duty under Section 3 of the Customs
Tariff Act, 1975 (51 of 1975), already paid] on the raw
material or component parts !JSed in the production or
manufacture of such goods) from the duty of excise under
such Act is for the time being in force, the duty of excise
computed with reference to the rate specified in such Act, C
in respect of such goods as reduced so as to give full and
complete effect to such exemption; and

(ii) in any other case, the duty of excise computed with
reference to the rate specified in such Act in respect of D
such goods.]

(e) 'wholesale trade' means sales to dealers, industrial consumers,
Government, local authorities and other buyers, who or which
purchase their requirements otherwise than in retail.]'

'Value' by reason of rule 2(c) of the Valuation Rules means 'the value E
under Section 4 of the Act'. Rules 3 and 6 of the Valuation Rules read thus:

"Rule 3. The value of any exciseable goods shall, for the purposes of
clause (b) of sub-section ( 1) of Section 4 of the Act, be determined
by the proper officer in accordance with these rules."
F
Rule 6. If the value of the excisable goods under assessment cannot
be determined under rule 4 or rule 5, and -

(a) where such goods are sold by the assessee in retail, the value shall
be based on the retail price of such goods reduced by such amount
as is necessary and reasonable in the opinion of the proper officer to G
arrive at the price at which the assessee would have sold such goods
in the course of wholesale trade to a person other than a related
person :

[Provided that in determining the amount of reduction, due regard
shall be had to the nature of the excisable goods, the trade practice H
368 SUPREME COURT REPORTS f1999] SUPP. I S.C.R.

A in that commodity and other relevant factors;]

(b) where the excisable goods are not sold by the assessee but are
used or consumed by him or oh his behalf in the production or
manufacture of other articles, the value shall be based -

(i) on the value of the comparable goods produced or manufactured
B
by the assessee or by any other assessee:
Provided that in determining the value under this sub-clause, the
proper officer shall make such adjustments as appear to him
reasonable, taking into consideration all relevant factors and, in
particular, the difference, if any, in the material characteristics of
c the goods to be assessed and of the comparable goods;
(ii) If the value cannot be determined under sub-clause (I), on the
cost of production or manufacture including profits, if any, which
the assessee would have normally earned on the sale of such
goods; '
D
( c) where the assessee so arranges that the excisable goods are
generally not sold by him in the course of wholesale trade except to
or through a related person and the value cannot be determined under
clause (iii) of the proviso to clause (a) of sub-section (I) of Section
4 of the Act, the value of the goods so sold shall be determined.
E
(i) in a case where the assessee sells the goods to a related person
who sells such goods in retail, in the manner specified in clause
'1
(a) of this rule;
(ii) in a case where a related person does not sell the goods but
F uses or consumes such goods in the production or manufacture
of other articles, in the manner specified in clause (b) of this rule;

(iii) in a case where a related person sells the goods in the course
of wholesale trade to buyers, other than dealers and related
persons, and the class to which such buyers belong is known
G at the time of removal, on the basis of the price at which the
goods are ordinarily sold by the related person to such class of
buyers. "

The learned Attorney General submitted that, by reason of the
Explanation to Section 4(4)(d)(ii) of the Act, the credit under the MODVAT
H scheme taken by the manufacturer, equal to the excise duty paid on the raw
C.C.E. v. D.I. KAR KARIA LTD. [BHARUCHA, J.] 369

material, was not to be taken into account to reduce the price paid by the A
manufacturer to the seller of the raw material; in other words, the price paid
by the manufacturer to the seller of the raw material was part of its cost to
the manufacturer and it had to be taken into account in computing the
assessable value of the excisable product.

To examine the correctness of the submission, an analysis of Section B
4 of the A'ct and the Valuation Rules, to the extent relevant, has to be made.
Section 4 deals with the valuation of excisable goods which are chargeable
to excise duty with reference to their value. The valuation is to be based
ordinarily on the price thereof, that is to say, the price at which the excisable
goods are ordinarily sold by the manufacturer to a buyer. It is only when the C
valuation cannot be so made that the closest equivalent thereof has to be
determined, in the manner prescribed under the Valuation Rules. 'Value' for
the purposes of the Valuation Rules means the value under Section 4 of the
Act. It is to be determined, ordinarily, under Rules 4 and 5. Rule 6 comes into
play when the valuation of the excisable goods under assessment cannot be
so determined. When the excisable goods are not sold by the assessee but D
are used or consumed by him in the manufacture of other products, as here,
the value is to be based upon the value of comparable goods manufactured
by the manufacturer, and, if that cannot be done, on the 'cost of production
or manufacture including profits, if any, which the assessee would have
normally earned on the sale of such goods'. It is common ground that the E
value of the excisable goods in the instant case has to be determined on the
cost of their manufacture, including profits. Sub-section (4) of Section 4
defines certain words "for the purposes of this section". It defines "Value"
in relation to any excisable goods". It says, so f;ir is relevant here, that the
value of excisable goods does not include the amount of the duty of excise
payable on such goods. The Explanation thereto says that, for the purposes F
of the sub-clause, the amount of excise duty payable on excisable goods is
the sum total of the effective excise duty payable thereon under the Act plus
the aggregate of the effective excise duties payable thereon under other
Central excise statutes.
G
By reason of clause (i) of the Explanation, where there i~ an exemption
'notification or order' giving an exemption in respect of the excisable goods
it shall be given effect to and the excise duty leviable under the concerned
Central excise statute shall be redue1d to the extent of such exemption,
provided such notification or order is not one "for giving credit with respect
to, or reduction of duty of excise under such Act on such goods equal to H
370 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A any duty of excise under such Act, or the additional duty under Section 3
of the Customs Tariff Act, 1975, already paid on the raw material or componeht
parts used in the production or manufacture of such goods."

It is, therefore, only a notification or order relating to the excisable
goods that gives an exemption equal to the excise duty already paid on raw
B material used therein that is not· to be taken into account for the~ purposes
of computing the effective duty on the excisable product. We are not here
concernP.d with a notification or order; the MODY AT scheme is a part of the
Central· Excise Rules. Secondly, it is nobody's case that the credit that each
of the respondent-manufacturers takes on its excisable product is equal to the
C excise duty paid on the raw material used therein. The Explanation to Section
4(4)(d)(ii) cannot, therefore, assist the Revenue's case.

The learned Attorney General drew our attention to the judgment of this
Court in Mis. Kirloskar Brothers Ltd., Dewas (MP.) v. Union of India & Ors.
, [1992] 2 SCC 658, and Collector of Central Excise, Bangalore v. Mysore
D Paper Mills Ltd., [I 997] 7 SCC 64. Neither of these judgments dealt with the
Explanation to Section 4(4)(d)(ii) of the Act or the provisions of the MODY AT
scheme. They are, therefore, of little assistance.

The learned Attorney General brought to our attention the judgment of
E · the Tribunal in Collector of C.Ex. v. lncab Industries, [1990] 45 ELT 342,
adopting it as a part of his argument. The Tribunal read the Rules pertaining
to the MODY AT scheme and found it to be clear that "the manufacturer is
allowed to utilise the duty paid on inputs by deducting the same from the
duty payable on the final product but subject to following the procedure
under the Rules". It added, "It is no doubt true that it will result in reduction
F in the cost of final product to the extent of the credit but it does not
automatically reduce the assessable value which is to be determined in
accordance with Section 4. Assessable value is to be determined in accordance
with Section 4 of the Act only and MODY AT credit has no direct impact on
the assessable value." We shall examine the Rules pertaining to the MODVAT JI
G scheme ourselves but we note the finding of the Tribunal that MODY AT
credit results in the reduction of the cost of the excisable product to the extent
of the credit.

The learned Attorney General cited the judgment of a learned Single
Judge of the Allahabad High Court in Super Cassettes Industries Ltd. v.
H Union of India, [ 1997] 94 EL T 302. The learned Judge found no warrant for
C.C.E. v. D.I. KARKARIA LTD. [BHARUCHA, J.] 371

the view that MODY AT credit once availed of by making the necessary A
entries was irrevocable. He held that there could be no final credit until the
inputs were used and excise duty on the final product was paid or the inputs
were otherwise disposed of.

-· Before we look at the Rules relating to the MODY AT scheme we must
set out the submissions of the learned Attorney General in this regard. He
submitted that the raw material suffered excise duty legally and factually. If
B

there had been no MODY AT scheme excise duty on the raw material would
be included in the cost of production of the excisable product. The MODY AT
scheme did not alter this fundamental position. By virtue of it the cost of the
raw material was not reduced. The MODY AT scheme resulted in reducing the C
excise duty on the excisable product. It was a separate and special facility that
had the effect of reducing the excise .duty incidence on the excisable product
and had no bearing in determining the cost of its production. The credit of
excise duty on the raw material in the register maintained for MODY AT
purposes was only a book entry which might be utilised later for payment of D
excise duty on the excisable product. In other words, it matured when the
excisable product was removed from the factory and the stage for payment
of excise duty thereon was reached. Actually, credit was taken, that is, availed
of or utilised, at the time of the removal of the excisable product. Consequently,
the cost of production of the excisable product was not reduced by the
amount of the MODY AT credit on the raw material. The credit was a contingent E
credit. It might be disallowed under certain circumstances. It could not be
withdrawn like a credit amount in a bank account. The manufacturer did not
have any indefeasible right or title to it. The rules pertaining to the MODY AT
scheme made it clear that MODY AT credit was in the nature of a set off or
an adjustment.
F
There is no doubt that, were it not for the MODY AT scheme and the
credit available on the excise duty paid on the raw material thereunder, the
excise duty paid on the raw material would be a factor in determining the cost
of the excisable product. The question is : does the MODY AT scheme make
a difference? G
The Central Excise Rules, in Chapter YAA, deal with "The credit of
duty paid on excisable goods used as inputs". The relevant Rules are Rule
57A to Rule 57J. Sub rule (1) of Rule 57A reads thus:

"(\)The provisions of this section shall apply to such finished excisable H
372 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A 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 "specified duty") paid on the goods used in or in
B relation to the manufacture of the said final products [whether directly.
or indirectly and whether contained in the final product or not]
(hereinafter referred to as the 'input') and for utilising 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
c 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
D be restricted."

Rule 57C states that no credit of duty paid on a final product may be
allowed if the final product is exempt from the whole of the excise duty
leviable thereon or is chargeable to a nil rate of duty. Rule 570 says that the
E credit of 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 from the manufacture of the final product or on the ground
that any intermediate product has co~e into existence during the course of
the production of the final product. Rule 57E says that if the duty paid on
any inputs on which credit has been allowed is varied subsequently, the
F credit allowed shall be varied accordingly by adjustment of the credit account
or, if adjustment is not possible for any reason, by cash recovery from or, as
the case may be, by refund to the manufacturer availing of the credit. Rule
57F( I) reads thus :

G "The inputs in respect of which a credit of duty has been allowed
under rule 57A -

(i) may be used in, or in re1ation to, the manufacture of final products
for which such inputs have been brought into the factory; or

H (ii) shall be removed, after intimating the Assistant Commissioner of
C.C.E. v. D.I. KARKARIA LTD. [BHARUCHA, J.] 373

Central Excise having jurisdiction over factory and obtaining a A
dated acknowledgement of the same from the factory for home
consumption or for export under bond.

Provided that where the inputs are removed from the factory
for homes consumption on payment of duty of excise, such duty
excise shall be the amount of credit that has been availed in B
respect of such inputs under rule 57A."

Rule 57G provides that the manufacturer intending to take credit of duty paid
on inputs must file a declaration with the concerned excise officer indicating
what the final products are that are manufactured in its factory and the inputs C
intended to be used therein and obtain an acknowledgement thereof. The
manufacturer, having filed the declaration and obtained the acknowledgement,
can take credit for the duty on the inputs received by him. Rule 571 provides
for the recovery of credit wrongly availed of or utilised in an irregular manner.
The manufacturer is then required to show cause why he should not be
disallowed such credit, or, if it has utilised it, why its value should not be D
recovered from him. After considering the reply, the concerned excise officer
is empowered to make the appropriate order in such terms.

It is clear from these Rules, as we read them, that a manufacturer obtains
credit for the excise duty paid on raw material to be used by him in the
production of an excisable product immediately it makes the requisite E
declaration and obtains an acknowledgement thereof. It is entitled to use the
credit at any time thereafter when making payment of excise duty on the
excisable product. There is no provision in the Rules which provides for a
reversal of the credit by the excise authorities except where it has been
illegally or irregularly taken, in which event it stands cancelled or, if utilised, F
has to be paid for. We are here really concerned with credit that has been

• vaijdly taken, and its benefit is available to the manufacturer without any
limitation in time or otherwise unless the manufacturer itself chooses not to
use the raw material in its excisable product. The credit is, therefore,
indefeasible. It should also be noted that there is no co-relation of the raw G
material and the final product; that is to say, it js not as if credit can be taken
of
only on a final product that is manufactured out the particular raw material
to which the credit is related. The credit may be taken against the excise duty
on a final product manufactured on the very day that it becomes available.

It is, therefore, that in the case of Eicher Motors ltd. v. Union of India, H
374 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A (1999) 106 ELT 3 this Court said that a credit under the MODV AT scheme was
"as good as tax paid."

With this in mind, we must now determine whether the excise duty paid
on the raw material should form part of the cost of the excisable product for
the purposes of Section 4(l)(b) of the Act read with Rule 6 of the Valuation
B Rules?

Learned counsel for the respondents drew our attention to the judgment
of this Court in Challapalli Sugars Ltd. v. Commissioner ofIncome-Tax, A.P.,
(1975) 98 ITR 167. The Court was concerned with 'written down value'. The
'written down value' had to be taken into consideration while considering the
C question of deduction on account of depreciation and development rebate
under the Income Tax Act. 'Written down value' depended upon the 'actual
cost' of the assets to the assessee. The expression 'actual cost' had not been
defined in the Income Tax Act, 1922 and the question was whether the interest
paid before the commencement of production on the amount borrowed for the
D acquisition and installation of the plant and machinery could be considered
to be a part of the 'actual cost' of the assets to the assessee. As the
expression 'actual cost' had not been defined, this Court was of the view that
it should be construed "in the sense which no commercial man would 11111

misunderstand. For this purpose, it would be necessary to ascertain the
E connotation of the above expression in accordance with the normal rules of
accountancy prevailing in commerce and industry." Having considered
authoritative books in this regard, this Court said that the accepted
accountancy rule for determining the cost of fixed assets was to include all
expenditure necessary to bring such assets into existence and to put them in
working condition. That rule of accountancy had to be adopted for determining
F the 'actual cost' of the assets in the absence of any statutory definition or
other indication to the contrary.

The learned Attorney General submitted that judgments relating to the
Income Tax Act or other statutes had no relevance while considering a
provision in an excise statute. There can be no doubt about the correctness
G of this proposition, but the Challapalli Sugars Ltd. judgment is one in which
the meaning of'actual cost', not defined under the Income Tax Act, 1922, was
considered. For ascertaining what 'actual cost' was in the circumstances, this
Court referred to accepted accountancy rules and said that they should be
1
adopted and that the expression "actual value" should be construed in a r
H sense which commercial men would understand. The judgment in Challapalli
C.C.E. v. D.I. KARKARIA LTD. [BHARUCHA, J.] 375
Sugars Ltd. is relevant to the instant case where we have to put a meaning A
to the word 'cost' which is not defined in the Act. The meaning we give
should be such as accords with the meaning that a man of business put upon
it, and for so doing established accountancy practice would be relevant.

Learned counsel for the Respondents made reference to the "Guidance
Note on accounting treatment for MODY AT' as on 16th March, 1995 issued B
by the Institute of Chartered Accountants of India. The Guidance Note deals
(in paragraph 6) with "Accounting treatment in case of inputs used in for
relation to manufacture of final products". It states :

"In the light of the above, it may be stated that MODY AT is a C
procedure whereby the manufacturer can utilise credit for specified
duty on inputs against duty payable on final products. Duty credit
taken on inputs is of the nature of set-off available against the payment
of excise duty on the final products. There are two alternative methods
of treatment of MODY AT credit in accounts :
D
(a) Specified duty paid on inputs may be debited to a separate
account, e.g., MODY AT Credit Receivable (Inputs) Account. As and
when MODY AT credit is actually utilised against payment of excise
duty on final products, appropriate accounting entries will be required
to adjust the excise duty paid out of MODY AT Credit Receivable E
(Inputs) Account to the account maintained for payment/provision for
excise duty on final product. In this case, the purchase cost of the
inputs would be net of the specified duty on inputs. Therefore, the
inputs consumed and the inventory of inputs would be valued on the
basis of purchase cost net of the specified duty on inputs. The debit
balance in MODV AT Credit Receivable (Inputs) Account should be F
shown on the assets side under the head 'advances'.

(b) In the second alternative, the cost of inputs may be recorded at
the total amount paid to the supplier inclusive of the specified duty
on inputs. To the extent the MODY AT credit is utilised for payment G
of excise duty on final products, the .amount could be credited to a
separate account, e.g., MODY AT Credit Availed Account. Out of the
MODVAT Credit Availed Account, the amount of MODVAT credit
availed in respect of consumption of inputs would be reduced from
the total cost of inputs consumed. The balance amount standing to
the credit of MOD VAT Credit Availed Account representing MOD VAT H
376 SUPREME COURT REPORTS (1999] SUPP. I S.C.R.

A credit in respect of input not consumed but lying in stock could be
shown in the balance sheet as deduction from the value of inventory. "

(Emphasis supplied)

The learned Attorney General referred to an extract from a compendium
B of Guidance Notes of the said Institute as revised upto 3 lst March, 1990. It
states : "Where excise duty is paid on excisable goods and such goods are
subsequently utilised in the manufacturing process the duty paid on such
goods become a manufacturing cost and must be included in the valuation
of work in progress or finished goods arising from the subsequent processing
C of such goods." It is not clear whether this Guidance Note was issued in
relation to excise duty paid on an input under the MODYAT scheme.

We think it is appropriate that the cost of the excisable product for the
purposes of assessment of excise duty under Section 4( 1)(b) of the Act read
with Rule 6 of the Valuation Rules should be reckoned as it would be reckoned
D by a man of commerce. We think that such realism must inform the meaning
that the Courts give to words of a commercial nature, like cost, which are not
defined in the statutes which use them. A man of commerce would, in our
view, look at the matter thus: "I paid Rs. 100 to the seller of the raw material
as the price thereof. The seller of the raw material had paid Rs. 10 as the excise
E duty thereon. Consequent upon purchasing the raw material and by virtue of
the MOD VAT scheme, I have become entitled to the credit of Rs. I0 with the
excise authorities and can utilise this credit when I pay excise duty on my
finished product. The real cost of the raw material (exclusive of freight,
insurance and the like) to me is, therefore, Rs. 90. In reckoning the cost of
the final product I would include Rs. 90 on this account." This, in real terms,
F is the cost of the raw material (exclusive of freight, insurance and the like) and
it is this, in our view, which should properly be included in computing the
cost of the excisable product.

The view we take about the cost of the raw material is borne out by the
G Guidance Note of the Indian Institute of Chartered Accountants, and there
can be no doubt that this Institute is an authoritative body in the matter of
laying down accountanc;y standards.

To answer the question involved in these appeals, in determining the
cost of an excisable product covered by the MODV AT scheme under Section
H 4(l)(b) of the Act read with Rule 6 of the Valuation Rules the excise duty paid
C.C.E. v. DI. KARKARIA LTD. [BHARUCHA, J.] 377

on raw material also covered by the MODY AT scheme is not to be included. A

The appeals are dismissed.

Refunds, if any, shall be made subject to the law.

No order as to costs. B

RP. Appeals dismissed.

•

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