Holding

The Court held that because the inputs were exempt from duty, MODVAT credit was inadmissible and the appellant was not entitled to clear the final products at a concessional rate, making the demand for differential duty, penalty and confiscation valid.

Summary

The appellant, a small‑scale manufacturer of gear boxes and related components, opted for the MODVAT scheme in 1986‑87 and 1987‑88 and claimed input credit on iron and steel inputs. After obtaining a classification list, it cleared its finished products at a concessional duty rate under Notification No. 175/86/CE. The department issued a show‑cause notice under Section 11A invoking the extended period, demanding differential duty, penalty and confiscation, alleging that the inputs were exempt from duty and that the appellant had not actually availed MODVAT credit, thereby clearing at a concessional rate without entitlement. The Tribunal held that the MODVAT credit was inadmissible and affirmed the demand. The Supreme Court upheld this view, stating that exempt inputs cannot generate MODVAT credit and that the appellant’s partial clearance at a concessional rate without credit constituted a breach, justifying the differential duty, penalty and confiscation. The appeal was dismissed.

Issues considered

Whether input duty credit under the MODVAT scheme is admissible when the inputs are exempt from excise duty.
Whether the appellant’s failure to withdraw its MODVAT declaration amounts to wilful suppression warranting invocation of the extended period under Section 11A.
Whether the demand for differential duty, penalty and confiscation is valid in the circumstances.

Legislation cited

Central Excise and Salt Act, 1944s. 11A, s. 35L(b)
Central Excise Rules, 1944s. 57A, s. 57G, s. 57J, s. 92

Subjects

MODVATCentral ExciseDifferential dutyExtended periodPenaltyConfiscationExempt inputsConcessional rateWilful suppression

Judgment

A MIS. ICHALKARANJI MACHINE CENTRE PVT. LIMITED.
v.
COLLECTOR OF CENTRAL EXCISE, PUNE

DECEMBER I 0, 2004

B [S.N. V ARIA VA, DR. AR. LAKSHMANAN
AND S.H. KAPADIA, JJ.]

Central Excise and Salt Act, 1944 :

C Section I/A-Rule 92 of the Central Excise Rules, 1944-Appellant
opted/or MODVAT scheme-Without opting out-Inputs used exempt front
duty-Cleared final products on concessional rate of duty-Wilful suppres-
sion-Extended period, invoking of-Demand of differential Excise duty,
penalty and confiscation-Held, valid and justified-Notification No. 175
D ICE dated 1.3.1986.

Appellant, manufacturer inter alia of gear boxes and gear box
covers, opted for MODVAT scheme for the year 1986-1987 and took
credits for input duty on products falling under Chapter 7209, 7203 and
7203.20 as inputs. They continued to avail the MODV AT facility for the
E year 1987-1988. After getting the classification list approved at
concessional rate of duty, cleared the final products under sub-heading
90.24 and under sub-heading 84.23 on paying duty at concessional rate,
as approved. Show-cause notice under Section 1lA, invoking extended
period, demanding differential duty was issued for clearing at
concessional rate of duty final products made from items which were
F
exempt from duty. Not satisfied with the reply filed by the appellant,
the Additional collector of Central Excise imposed with penalty and
confiscation of goods subject to redemption on payment of fine stipu-
lated. The CEGA T refused to interfere with the order. Hence this
appeal.
G
It was contended by the appellant that they had availed of the
MODVAT credit as they had not withdrawn the declaration filed by
them and there was no wilful suppression as the department was aware,
on the basis of their accounts, that they were not availing the MODV AT
H credit and as such the department erred in invoking the extended period
858
ICHALKARANJI MACHINE CENTRE PVT.LTD. v. COLLECTOR OF C.E., PUNE [KAPADIA, J.] 859

for demanding excise dJty. A

Dismissing the appeal, the court

HELD : 1.1. The input being exempt from duty MODYAT credit
was inadmissible and having not availed the MODYAT credit on the B
input steel bars, the appellant were not entitled to clear final products
at concessional rate of duty. [864-D)

1.2. The appellant partly cleared the final product at concessional
rate without utilizing the credit in the payment of duty on final product
and partly on the basis of credit, which was not admissible. The demand c
of differential Excise duty, penalty and confiscation subject to payment
of redemption fine valid and justified. (864-G-H; 865-A)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 243 l of
1999. D

From the Judgment and Order dated 17.9.98 of the Central Excise
Customs and Gold (Control) Appellate Tribunal, New Delhi in F.O. No. E/
1863/98-Bl in A. No. E/829 of 1992-Bl.
E
Santosh Paul, Rajeev Sharma, Sandeep Chhabra and M.J. Paul for the
Appellant.

G.E. Vahanvati, Solicitor General, A. Sobba Rao, Devadatt Kamat and
B. Krishna Prasad for the Respondent.
F
The Judgment of the Court was delivered by

KAPADIA, J.: This is an appeal by the assessees under section 35L(b)
of the Central Excise and Salt Act, 1944, against the final judgment and
order No. E/1863/98-Bl dated 17.9.1998 passed in Appeal No. E/829/92- G
BI by the Customs Excise & Gold (Control) Appellate Tribunal, New Delhi,
imposing inter a/ia duty amounting to Rs. 3. l 5 lacs and denying exemption
under Notification No. 175/86/CE dated 1.3.1986.

Briefly stated, the facts are as follows :
H
860 SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.

A The appellants are the manufacturers of components of. machinery
falling under chapter 9024.90. They also manufacture gear boxes and gear
box covers falling under chapter 8483.00 of the schedule annexed to the
Central Excise Tariff Act, 1985. In order to manufacture the aforestated
items, the appellants use iron and steel products falling under chapter 7209,
B 7203 and 7203.20 as inputs. The appellants are having permanent small
scale industry registration granted by D.I.C., Kolhapur.

Being a small scale industry, the appellants were entitled to the benefit
of Central Excise Notification No. 175/86-CE dated 1.3.1986.

C For the financial year 1986-87, the appellants had opted for the Modvat
Scheme and took credit of input duty on iron and steel products falling under
continued to 7209, 7203 and 7203.20 as inputs. They continued to avail the
modvat facility for the next financial year 1987-88.

D On 5.4.1988, the appellants had filed classification list claiming
concessional rate of duty w.e.f. 1.4.1988 This concessional rate of duty was
10% less of the effective rate, as provided for under part I (a)(i) of the
notification No. 175/86/CE dated 1.3.1986. On approval of the classification
list, the appellants had cleared final products under sub-heading 90.24 and
under sub-heading 84.23, after paying duty at the effective rate less 10%,
E as approved in their classification list.

On 26.10.1990, a show-cause notice was issued to the appellants to
show-cause why differential duty of Rs, 3 .15 lacs should not be recovered
from them under Section 11 A of Central Excises and Salt Act, 1944 read
F with rule 92 of the Central Excise Rules, 1944. By the said show cause
notice, the proviso to section 1 lA relating to the extended period for
demanding excise duty was invoked. By reply dated 24.2.1991, the appel-
lants contended that they had not withdrawn their declaration filed under
rule 57G; that the assessment officer was aware that the appellants had not
availed of the modvat credit during the financial year 1988-89 and, there-
G fore, invocation of the proviso to section 1 lA was improper and not jus-
tified.

By order dated 16.12.1991, the Additional Collector of Central Excise
found that the appellants had opted for the modvat sch1~me when it was
H introduced in 1987-88; that the scheme, the appellants were required to pay
ICHALKARANJI MACHINE CENTRE PVT.LTD. v. 1,0LLECTOR OF C.E., PUNE [KAPADIA. J] 861

duty on steel bars (inputs) used in the manufacture of gear boxes and gear A
box covers (final products) for taking modvat credit; that the appellants
falsely made the department believe of having taken the modvat credit on
inputs by not withdrawing the declaration filed earlier under rule 57G; that
the appellants cleared the final products by payment of duty at concessional
rate which they were not entitled to do as the final products were made from B
items which were exempted under relevant notifications and in the circum-
stances, the Additional Collector imposed the differential duty of Rs. 3.15
lacs with penalty of Rs. 30,000 on the assessees. By the said order dated
16.12. 191, the Additional Collector confiscated the goods subject to re-
demption on payment of fine of Rs. 10,000.
c
Being aggrieved, the appellants preferred appeal bearing No. E/829/
92-B 1 before the Customs Excise & Gold (Control) Appellate Tribunal,
New Delhi (hereinafter referred to as "the Tribunal). By impugned judgment
and order dated 17.9.1998, the Tribunal found that the appellants had
received cast iron and castings (inputs) in their factory, which were exempt D
from duty and consequently, it was impermissible for the appellants to take
modvat credit in respect thereof. That, as regards the steel bars, which were
used as inputs by the appellants, the Tribunal found that the appellants had
taken the benefit of concessional exemption without taking the modvat
... credit and utilizing it in the payment of duty on the final products. In the
circumstances, the Tribunal found that the appellants had wrongly cleared E
the final products by paying concessional rate of duty in breach of the
conditions in the notification No. 175/86/CE dated 1.3.1986 (as amended).
The Tribunal further found that the appellants had wilfully suppressed above
facts to enable their customers, who were their sister concern, to take higher
credit to duty in respect of the final products of the appellants, which the F
sister concern used as its inputs. Under the above circumstances, the Tri-
bunal refused to interfere with the order passed by the Additional Collector
of Central Excise, on 16.12.1991.

Modvat is basically a duty-collecting procedure, which aims at allow-
ing relief to manufacture on the duty element borne by him in respect of G
the inputs used by him. It was introduced w.e.f. 1.3.1986. The said scheme
was regulated under rules 57A to 57 J of Central Excise Rules, 1944. Rule
57 A entitled a manufacturer to taken instant credit to the central excise duty
paid on the inputs used by him in the manufacture of the fi~ished product,
provided that the input and the finished product were excisable commodities H
862 SUPREME COURT REPORTS [2004] SUPP. 6 S.C.R.

A and fell under any of the specified chapters in the tariff schedule. Under rule
57G, every manufacturer was required to file a declaration before the
jurisdictional Assistant Collector, declaring his intention to take modvat
credit after paying duty on the inputs. The object behind rule 57 A read with
rule 57G and rule 57-I was utilization of credit allowed towards payment
B of duty on any of the final product!>" in relation to manufacture of which such
inputs were intended to be used in accordance with the declaration under
rule 57G. Rule 571 referred to consequence of taking credit wrongly.

The object of the mod vat scheme was to reduce cost to final product
by takmg credit for the duty paid on the inputs.
c
The short point which arises for determination in the present case is
- Whether the appellants went on paying concessional rate of duty wilfully
without availing of modvat credit with intent to misutilize the modvat
scheme?
D
In order to answer the aforestated point, we reproduce hereinbelow the
relevant part of notification No. 175/86/CE dated 1.3.1986, as amended :

"In exercise of the powers conferred by sub-rule (I) of rule 8 of the
Central Excise Rules, 1944 and in supersession of the notification
E of the Government oflndia in the Ministry of Finance (Department
of Revenue) No. 85/85-Central Excises, dated the 17th March,
1985, the Central Government hereby exempts the excisable goods
of the description specified in the Annexure below and falling
under the Schedule to the Central Excise Tariff Act, 1985 (5 of
F 1986) hereinafter referred to as the "specified goods") and cleared
for home consumption on or after the 1st day of April in any
financial year, by a manufacturer from one or more factories,-

(a) in the case of first clearances of the specified goods up to an
aggregate value not exceeding rupees thirty lakhs-
G
(i) in a case where a manufacturer avails of the credits of
the duty paid on inputs used in the manufacture of the
specified goods cleared for home consumption under
rule 57A of the said Rules or sub-section (1) of sectin
H SA of the Central Excises and Salt Act, 1944 (1 of 1944),
ICHALKARANJI MACHINE CENTRE PVT. LTD. v. COLLECTOR OF C.E., PUNE [KAPADIA, J ] 863

from so much of the duty of excise leviable thereon A
which is specified in the said Schedule read with any
relevant notification issued under sub-rule (I) of rule 8,
of the said Rules or sub-section (I) of section 5A of the
Central Excises and Salt Act, 1944 ( 1 of 1944 ), and in
force for the time being as is equivalent to an amount B
calculated at the rate of 10 per cent ad valorem;

(ii) in any other case from the whole of the duty of excise
,. leviable thereon :

Provided that the aggregate value of clearances of the C
specified goods under sub-clause (ii) of this clause in
respect of any one Chapter of the said Schedule, shall not
exceed rupees fifteen Iakhs;

(b) in the case of clearances (being the clearances of the D
specified goods of an aggregate value not exceeding rupees
sixty lakhs) immediately following the said clearances of the
value specified in clause (a) from so much of the duty of
excise leviable thereon which is specified in the said Schedule
read with any relevant notification issued under sub-rule (I)
of rule 8 of the said Rules or sub-sectin (l)of section 5A of E
the Central Excises and Salt Act, 1944 (I of 1944) as is
equivalent to an amount calculated to the rate of 10 per cent
ad valorem:

Provided that the amount of duty of excise payable on the F
specified goods under sub-clause (i) of clause (a), or an the
case may be, under this clause, shall not be less than an
amount calculated at the rate of 5 per cent ad valorem :

Provided further that the aggregate value of clearances of the
specified goods in terms of clause (a) and clause (b) of this G
---r paragraph taken together, shall not exceed rupees seventy-five
lakhs."

The above notifications envisaged total and partial exemption; it also
categorized the clearances into first clearances and subsequent clearances; H
864 SUPREME COURT REPORTS [2004) SUPP. 6 S.C.R.

A it also categorized manufacturers : into those who took modvat credit and
those who did not. Those who took modvat credit were entitled to only
concessional exemption, while those who did not avail of modvat credit
were entitled to total exemption up to a specified limit. While individual
ceiling limits on clearances were prescribed, there was an aggregate ceiling
B limit of Rs. 75 lacs, beyond which normal duty was payable. Therefore, if
a manufacturer effected first clearances of specified goods up to Rs. 30 lacs,
he could avail the concession on such clearances, but in respect of subse-
quent clearances, he will get the concession only up to Rs. 45 lacs. The basic
point is that those who avail of modvat credit entitled to concessional
exemption only, while those who did not avail such credit could get total
C exemption up to a specified limit of Rs. 15 lacs (as it stood at the relevant
time). Under para (a)(i) of the notification, concession was not admissible
where modvat credit was not availed/admissible.

In the present case, as found by the Adjudicating Authority and the
D Tribunal, modvat credit was not availed/admissible. In respect of cast iron
and castings, modvat credit was inadmissible as both these inputs were
exempted, whereas in case of steel bars, the manufacturer did not avail of
modvat credit. Therefore, the appellants were not entitled to clear the final
products at concessional rate of duty. Lastly, without reversing the credit,
the appellants cleared the final products at the concessional rate of duty, in
E breach of the above· notification, in favour of their sister concern and
consequently, the said sister concern was not entitled to the benefit of higher
credit which was admissible to manufacturers who bought goods as their
inputs from small scale industrial units (appellants herein).

F It was argued on behalf of the appellants that they had availed of the
modvat credit as they had not withdrawn the declaration filed by them with
the department. That, there was no wilful supperssion as the department was
aware, on the basis of their accounts, about the appellants not availing the
modvat credit and, therefore, the department had erred in invoking the
proviso to section I 1A relation to the extended period for demanding excise
G duty. We do not find merit in the above arguments. The appellants never
opted out of the modvat scheme. They partly cleared the final products by
paying duty at concessional rate without utilizing the credit in the payment
of duty on final products and partly on the basis of credit which was not
admissible. It is important to note that the underlying object behind the
H notification was to utilize the credit against payment of duty on the final
ICHALKARANJI MACHINE CENTRE PVT. LTD. v. COLLECTOR OF C.E., PUNE [KAPADIA, J.) 865

product. In the circumstances, the demand for differential duty, penalty and A
confiscation subject to payment of redemption fine is valid and justified.

Accordingly, we answer the above question in the affirmative i.e. in
favour of the department and against the appellants.
B
Before concluding, we may clarify that our judgment is confined to the
notification No. 175/86/CE, as it stood at the relevant time.

For the aforesaid reasons, we do not find any reason to interfere in this
appeal, which is, accordingly, dismissed, with no order as to costs.
c
B.K. Appeal dismissed.

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