Holding

Rule 57AC imposes a ceiling of 50% of duty paid on CENVAT credit for capital goods, including those received before the amendment but not installed, and the High Court’s interpretation allowing 100% credit is erroneous.

Summary

Saurashtra Chemicals Ltd imported two generator sets, one of which was received on 24 Oct 1998 but not installed until after 1 Apr 2000. At the time of receipt Rule 57Q(3) of the Central Excise Rules applied, allowing up to 75% credit, but the Rules were amended on 1 Apr 2000 by Rule 57AC which limits CENVAT credit on capital goods to 50% of duty paid in the year of receipt, with the balance possibly claimable in later years, and provides a special clause (c) for goods received before the amendment but not installed. The Revenue issued a show‑cause notice for credit claimed beyond 50%; the Assistant Commissioner limited credit to 50%, the Commissioner (Appeals) allowed the claim, the Tribunal upheld the Revenue, and the High Court reversed, holding that 100% credit could be allowed. The Supreme Court held that the wording “subject to” in Rule 57AC imposes a strict 50% ceiling even for goods covered by clause (c), and that the High Court’s view was erroneous. Consequently, the appeal was allowed and the High Court judgment set aside.

Issues considered

Whether Rule 57AC of the Central Excise Rules limits CENVAT credit on capital goods to 50% of duty paid even for goods received before the amendment but not installed before 1 April 2000.
Interpretation of the phrase ‘subject to’ in Rule 57AC and its effect on the quantum of credit permissible.
Whether the High Court was correct in allowing 100% credit under the Rules.

Legislation cited

Central Excise Act, 1944s. 11, s. 35-G
Central Excise Rules, 1944s. Rule 57AC, s. Rule 57Q(3)
Customs Tariff Act, 1975s. 3
Income Tax Act, 1961s. 32

Subjects

CENVAT creditcapital goodsRule 57ACCentral Excisestatutory interpretationsubject totax credit limitationgenerator set

Judgment

COMMNR OF CENTRAL EXCISE, BHAVNAGAR A
v.
MIS. SAURASHTRA CHEMICALS LTD.

MAY 10, 2007

[S.B. SINHA AND MARKANDEY KATJU, JJ.)
B

Central Excise Act, 1944/Central Excise Rules, 1944: R 57 AC and
. I
_..(
57Q{3):

CENVAT Credit on inputs/capital goods-Import of Generator set-
c
Amendment-R. 57 Q (3) replaced by R. 57 AC-Scope and ambit of R. 57
AC-Held: R. 57 (2) (a) and (b) of the Rules does not restrict grant of credit
on capital goods in a financial year-In terms whereof 50% of the credit
could be taken in a financial year and ba/ai ice may be availed in subsequent
years-A beneficent statute may ha\'e to be construed liberally-Capita/
goods received after the amendment in the Rules governed by clauses (a) and D
(b) of R. 57 AC (2) of the Rules but if received prior thereto it is governed
by clause C of R. 57 (AC) (2)-The provisions allowing the credit
circumscribed by the phrase "subject to" which is limited to an amount not
exceeding 50% of duty paid on capital goods-Hence, High Court was not
justified in holding that CENVAT credit to the extent of 100% could be E
allowed in terms of R. 57 AC of the Rules-Thus, impugned judgment cannot
be sustained, which is set aside accordingly-Interpretation of Statute-
Litera/ interpretation.

Words and Phrases"
F

•
'Subject to'-Meaning of in the context of R. 57 AC of the Central
Excise Rules, I 944.

Respondent-assessee, engaged in the manufacture of Soda Ash, Sodium
Bicarbonate and Caustic Soda, has been availing the benefit of MODVAT/
CENV AT credit on inputs as well as capital goods under the provisions of the G
Central Excise Rules. The respondent imported two generator sets. Although
one of the generators was received by the assessee on 24.10.1998, the same
was installed only on 1.04.2000. In the relevant financial year, Rule 57Q(3)
of the Rules was in operation. However, the said Rule was replaced by Rule
371 H
372 SUPREME COURT REPORTS [2007) 6 S.C.R.

A 57AC by way of amendment in the Rules, which came into force with effect
from 1.04.2000. A show cause notice was issued to the assessee on or about
5.05.2001 by the Superintendent Central Excise, directing it to show cause
as to why certain amount of credit as questioned in the notice should not be
recovered from them. The matter was determined by the Assistant
B Commissioner of Central Excise, holding that the respondent was entitled to
CENVAT credit only to the extent of 50%. However, an appeal preferred
thereagainst by the respondent was allowed by the Commissioner (Appeals).
An appeal preferred by the Revenue was dismissed by the Tribunal An appeal
preferred by the Revenue has been dismissed by the High Court. Hence, the
present appeal.
c Allowing the appeal, the Court

HELD: 1.1. Sub-rule (1) of Ru!e 57 AC of the Central Excise Rules
refers to 'inputs'. Clauses (a) and (L) of Sub-Rule (2) of Rule 57AC of the
Rules governs the receipt of the capital goods in a factory. It does not restrict
D grant of credit in a given financial year. Whereas 50% of the credit can be
taken in one financial year, the balance may be availed in the subsequent years,
subject to the condition that the capital goods are still in possession and use
of manufacturer of the final products in subsequent years. Clauses (a) and
(b) of Sub-Rule (2) of Rule 57 AC of the Rules, therefore, provide for a
composite scheme. [Para 71 [377-E, F, G)
E
1.2. By reason of the provision under clause (c) of sub-R 12 of R 57 AC
of the Rules, the credit sought to be given by reason of Rule 57Q(3) has not
been taken away in its entirety, but merely postulates that if the credit had
not already been availed, the same merely be obtained but limited only to the
F extent of 50% thereof. [Para 7) (378-A, BJ

1.3. A beneficient statute may have to be considered liberally but where
a statute does not admit of more than one interpretation, literal interpretation
must be resorted to. The provision allows taking of credit but the same is
circumscribed by the condition as is apparent from the use of the words
G "subject to" which is limited to an amount not exceeding 50% of the duty
paid on such capital goods. The term "subject to" in the context assumes
some importance. (Para 8) [378-B, CJ

Ashok Leyland Ltd v. State of Tamil Nadu and Anr., [2004) 3 SCC 1
and S.N. Chandrashekar and Anr. v. State of Karnataka and Ors., [2006) 3
H sec 208, referred to.
COMMNR OF CENTRAL EXCISE, BHAVNAGAR ..SAURASHTRA CHE~flCALS LTD [SB SINHA. J ) 373

Black's Law Dictionary. Fifth Edition. P. 1278, referred to. A
2.1. Illustration appended to Sub-rule (2) of Rule 57AC of the Rules on
its plain reading governs Sub-rules 2(a) and 2(b) of Rule 57AC and not Sub-
rule 2(c) thereof as it refers to a situation where 'the machinery' has been
received on April 16, 2000 and not prior thereto. Capital goods received after
1.04.2000 are governed by Clauses (a) and (b) of Sub-rule (2) of Rule 57 AC B
whereas if received prior thereto, the same would be governed by Clause (c)
thereof. Hence, the High Court was not correct in opining that CENVAT credit
to the extent of 100% could be allowed in terms of Rule 57 AC of the Rules.
(Paras 9 and 1011378-G; 379-AI

2.2. While granting relief to the extent of 50% in the relevant year. C
The Commissioner purports to hold that the credit of balance 50% can be
availed in subsequent years. The Commissioner in arriving at the said finding
did not notice the distinction between Clauses (a) and (b) of Sub-rule (2) of
Rule 57AC, on the one hand, and Clause (c) thereof, on the other. It also
failed to notice that the illustration will have no application in the instant case. D
It is furthermore now a well-settled principle of law that an illustration cannot
control the main provision. (Para 11) (379-D, El

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2428 of2007.

From the Final Judgment and Order dated 12.01.2006 of the High Court E
of Judicature of Gujarat at Ahmedabad in Tax Appeal No. 862 of 2005.

G.E. Vahanvati, Solicitor General, T.V. Ratnam and B. Krishna Prasad for
the Appellant.

Ramesh Singh and Sheela Goel for the Respondent. F
The Judgment of the Court was delivered by

S.B. SINHA, J. I. Leave granted.

2. Interpretation of Rule 57 AC of the Central Excise Rules, 1944 (for G
short "the Rules") is in question in this appeal which arises out of the
judgment and order dated 12.01.2006 passed by the High Court of Gujarat at
Ahmedabad in Tax Appeal No. 862 of2005.

3. Respondent is engaged in manufacture of excisable goods, viz., Soda
Ash, Sodium Bicarbonate and Caustic Soda. It is registered under the Central H
374 SUPREME COURT REPORTS (2007) 6 S.C.R.

A Excise Tariff Act, 1985. Its products are governed by the provisions of the "'#-
Chapter VIIA 'of the Rules. It has been availing the benefit of credit of duty
paid on inputs as well as capital goods under the provisions of the Rules.

4. On or about 24.09.1996, the respondent imported two generator sets.
We are herein concerned with the second one. Although it was received by
B the respondent on 24.10.1998, the same admittedly was not installed prior to
1.04.2000. In the relevant financial year, the rule which was in operation was
Rule 57Q(3) of the Rules was as under:

"57Q(3). Notwithstanding anything contained in sub-rule (1), the
manufacturer of the final products shall be allowed credit of additional
c duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of
1975) on goods falling under Chapter Heading No. 98.01 of the first
schedule to the Customs Tariff Act, to the extent of 75% of the said
additional duty paid on such goods."

Indisputably, the said Rule was replaced by Rule 57 AC of the Rules,
D which came into force with effect from 1.04.2000. It reads as under:
"57AC. Conditions for allowing CENVAT credit-( 1) The CENV AT
credit in respect of inputs may be taken immediately on receipt of the
inputs in the factory of the manufacture.
E (2) (a) The CENV AT credit in respect of capital goods received in a
factory at any point of time in a given financial year shall be taken
only for an amount not exceeding fifty per cent of the duty paid on
such capital goods in the same financial year.

(b) The balance of CENV AT credit may be taken in any financial year
F subsequent to the financial year in which the capital goods were
received in the factory of the manufacturer, provided that the capital
goods (other than components, spares and accessories, refractories
and refractory materials and goods falling under heading No. 68.02
and sub-heading 680 I.I 0 of the First Schedule to the Central Excise
G Tariff Act) are still in the possession and use of the manufacturer of
final products in such subsequent years.

(c) CENVAT credit may also be taken in respect of such capital goods
as have been received in the factory, but have not been installed,
before the 1st day of April, 2000 subject to the condition that during
H the financial year 2000-2001, the credit shall be taken for an amount
COMMNR OF CEN11\AL EXCISE, BHAVNAGAR '· SAURASHTRA CHEMICALS LTD [S.B. SINHA, J I 375
-v not exceeding fifty per cent of the duty paid on such capital goods. A

Illustration.- A manufacturer received machinery on April 16, 2000 in
'
> his factory. CENVAT of two lakh rupees is paid on this machinery. The
manufacturer can take credit up to a maximum of one lakh rupees in
the financial year 2000-200 I, and the balance in subsequent years.
B
(3) The CENVAT credit in respect of duty paid on the capital goods
shall be allowed to a manufacturer even if the capital goods are
I acquired by the manufacturer on lease, hire purchase or loan agreement,.
--~ from a financing company.

(4) The CENV AT credit in respect of capital goods shall not be allowed
in respect of that part of the value of capital goods which represents
c
the amount of duty on such capital goods, which the manufacturer
claims as depreciation under Section 32 of the Income-tax Act, 1961
(43of1961).

(5)(a) The CENVAT credit shall be allowed even if any inputs or D
capital goods as such or after being partially processed are sent to
,.. '""1 a job worker for further processing, testing, repair, re-conditioning or
)- any other purpose, and it is established from the records, challans or
memos or any other document produced by the assessee availing the
CENVAT credit that the goods are received back in the factory within
180 days of their being sent to a job worker. If the inputs or the capital E
goods are not received back within 180 days, the manufacturer shall
pay an amount equivalent to the CENVAT credit attributable to the
inputs or capital goods by debiting the CENVAT credit or otherwise.
However, the manufacturer can take the CENV AT credit again when
the inputs or capital goods are received back in his factory. F
~ 1~ (b) CENVAT credit shall also be allowed in respect of jigs, fixtures,
moulds and dies sent by a manufacturer of final products to a job
worker for the production of goods on his behalf and according to his
specifications.

(6) The Commissioner of Central Excise having jurisdiction over the G
factory of the manufacturer of the final products who has sent the
inputs or partially processed inputs outside his factory to a job
worker may, by an order which shall be valid for a financial year in
respect of removal of such inputs or partially processed inputs, and
subject to such conditions as he may impose in the interest of revenue H
376 SUPREME COURT REPORTS (2007] 6 S.C.R.

A including the manner in which duty. if leviable, is to be paid, allow
finished goods to be cleared from the premises of the job worker.
v-
(7) Where any inputs are used in the final products which are cleared
for export under bond or used in the intennediate products cleared for
export, the CENV AT credit in respect of the inputs so used shall be
B allowed to be utilized by the manufacturer towards payment of duty
of excise on any final products cleared for home consumption or for
export on payment of duty and where for any reason such adjustment
is not possible, the manufacturer shall be allowed refund of such
amount subject to such safeguards, conditions and limitations as may
be specified by the Central Government by notification in the Official
c Gazette. No refund of credit shall, however, be allowed if the
manufacturer avails of drawback allowed under the customs and Central
Excise Duties Drawback Rules, 1995, or claims a rebate of duty under
Rule 12, in respect of such duty."

D 5. For the purpose of grant of MODVAT credit, the law which was
operating in the field at the relevant point of time was a decision of the
Customs, Excise and Service Tax Appellate Tribunal (CESTAn, Chennai in
Grasim Industries Ltd v. Commissioner of Central Excise, Trichy (2004) 176
ELT 265 (Tri-Chennai) in tenns whereof the quantum of credit pennissible was
held to be 75% when the goods were received in the factory. It was held that
E only with effect from 1.03.2000, I00% credit was to be given and the said Rule
was not retrospective. A Civil Appeal preferred thereagainst by Grasim
Industries Ltd. before this Court being Civil Appeal No. 3477 of 2004 was
dismissed by an order dated 19.07.2004 stating:

"We see no reason to interfere.
F
The Civil Appeal is dismissed.

There shall be no order as to costs."

Interpretation of Rule 57AC of the Rules, as inserted on 3.05.2000 is, in
G question before us.
Before embarking on the said question, we may notice that a show
cause notice was issued to the respondent on or about 5.05.200 I by the
Superintendent Central Excise, AR-II, Porbander directing it to show cause as
to why:
H
C0\1~NR. OF CENTRAL EXCISE, BHAVNAGAR "· SAURASHTRA CHEMICALS LTD. (S.B SINHA. l) ) 77

"(i) The amount of credit amounting to Rs. 8,51,490/- (656481/- plus A
195009/-) should not be recovered from them under 57 AH of the rules
read with Section 11 of the Act:

(ii) interest @24% should not be levied upon them as per the provisions
of Section 11 AB of the Act.
B
(iii) Penalty should not be imposed upon the Noticee under rule
I 73Q( I) of the Rules;"

Cause was shown. The matter was determined by the Assistant
Commissioner of Central Excise, Junagadh in terms of an order dated 13.09.200 I
holding that the respondent was entitled to CENV AT credit only to the extent C
of 50%. An appeal preferred thereagainst by the respondent aggrieved by
and dissatisfied therewith before the Commissioner (Appeals), Customs and
Central Excise, Rajkot was allowed by an order dated 31.12.2001. An appeal
preferred by the Revenue thereagainst was dismissed by the Tribunal. An
appeal by the Revenue under Section 35-G of the Central Excise Act, 1944 has
been dismissed by the High Court by reason of the impugned judgment dated D
12.012006.

6. The High Court in its judgment opined that as the previous notification
did not contain any restrictive clause in regard to the availability of 50% of
entitlement, the Commissioner as also the Tribunal did not commit any error E
in applying the notification effective as on 1.03.2000. The Revenue is, thus,
before us.

7. Sub-rule (l) of Rule 57AC of the Rules refers to 'inputs'. It is not
relevant for our purpose. Clauses (a) and (b) of Sub-Rule (2) of Rule 57 AC
of the Rules governs the receipt of the capital goods in a factory. It does F
not restrict grant of credit in a given financial year. Whereas 50% of the credit
can be taken in one financial year, the balance may be availed in the subsequent
years, subject to the condition that the capital goods are still in possession
and use of manufacturer of the final products in subsequent years. Clauses
(a) and (b) of Sub-Rule (2) of Rule 57 AC of the Rules, therefore, provide for
a composite scheme. We are not concerned even therewith in this appeal. G
Clause (c) of Sub-Rule (2) of Rule 57AC of the Rules is relevant for our
purpose inasmuch as in this case, we have noticed hereinbefore, that the
second generator set was received on 24.10.1998, but was not installed prior
to 1.04.2000.
H
378 SUPREME COURT REPORTS [2007] 6 S.C.R.

A Applicability of Grasim Industries Ltd. (supra) vis-a-vis Rule 57Q(3) of
the Rules has now become irrelevant. Clause (c) of Sub-Rule (2) of Rule 57AC ~-·.
of the Rules deals with a situation with which we are concerned. By reason
of the said provision, the credit sought to be given by reason of Rule 57Q(3)
has not been taken away in its entirety, but merely postulates that ifthe credit
B had not already been availed, the same merely be obtained but limited only
to the extent of 50% thereof.

8. A beneficient statute may have to be considered liberally but where
a statute does not admit of more than one interpretation, literal interpretation I
must be resorted to. The provision allows taking of credit but the same is )... ,., J

C circumscribed by the condition as is apparent from the use of the words
"subject to" which is limited to an amount not exceeding 50% of the duty paid
on such capital goods. The term "subject to" in the context assumes some
importance.

In Ashok Leyland Ltd v. State of Tamil Nadu & Anr., [2004] 3 SCC 1
D this Court held:
""Subject to" is an expression whereby limitation is expressed. The
order is conclusive for all purposes." ')-- ~.

This Court further noticed the dictionary meaning of"subject to" stating:
E "Furthermore, the expression 'subject to' must be given effect to.

In Black's Law Dictionary, Fifth Edition at page 1278 the expression
"Subject to" has been defined as under :

"Liable, subordinate, subservient, inferior, obedient to; governed
F or affected by; provided that; provided, answerable for. Homan v.
Employers Reinsurance Corp., 345 Mo. 650, 136 S.W. 2d 289, 302"

[See also S.N. Chandrashekar and Anr v. State of Karnataka and Ors.,
[2006] 3 sec 208]
G
9. Illustration appended to Sub-rule (2) of Rule 57AC of the Rules on
its plain reading governs Sub-rules 2(a) and 2(b) of Rule 57AC and not Sub- '
rule 2( c) thereof as it refers to a situation where 'the machinery' has been
received on April 16, 2000 and not prior thereto. Capital goods received after
H 1.04.2000 are governed by Clauses (a) and (b) of Sub-rule (2) of Rule 57AC

.
r
COMl>!NR OF CENTRAL EXCISE, eHA VNAGAR ,._ SAURASHTRA CHEMICALS Lm. [S.B. SINHA, J. J 379

... -~ whereas if received prior thereto, the same would be governed by Clause (c) A
thereof.

10. We, therefore, are of the opinion that the High Court was not correct
in opining that CENV AT credit to the extent of I 00% could be allowed in terms
of Rule 57 AC of the Rules.
B
11. Mr. Ramesh Singh, learned counsel appearing on behalf of the
respondent, however, submitted that credit had been given only to 50% of
the total amount of duty paid, as would appear from the order of, the
Commissioner dated 31.12.2001 which is in the following terms:

"On going through the sub rule 2(c) of Rule 57AC it is very much C
patent that the items of capital goods which have not been installed
(emphasis supplied) before !st day of April, 2000 would be entitled
to the credit for an amount not exceeding fifty per cent of the duty
paid on such capital goods. I find that in the instant case also, it is
uncontrovertible fact that the said Generator was not installed in the D
appellants factory prior to 01.04.2000, and therefore, they rightly availed
of the credit of Rs. 7,80,036/-(50% of Rs. 15,60,072.28)"

But, what was done was that while granting relief to the extent of 50%
in the relevant year, it purports to hold that the credit of balance 50% can be
availed in subsequent years. The Commissioner in arriving at the said finding E
did not notice the distinction between Clauses (a) and (b) of Sub-rule (2) of
Rule 57 AC, on the one hand, and Clause (c) thereof, on the other. It also
failed to notice that the illustration will have no application in the instant case.
It is furthermore now a well-settled principle of law that an illustration cannot
control the main provision.
F
12. For the reasons aforementioned, the impugned judgment cannot be
-7 sustained which is set aside accordingly. The appeal is allowed. However,
in the facts and circumstances of the case, there shall be no order as to costs.

S.KS. Appeals allowed.
G