Full Judgment
2. The ld. JDR Shri D. Gurnani, submitted that the materials in this case obtained by the Respondents were in the nature of lead scrap and waste like broken and worn out articles purchased from Dealers, Traders and Telecommunication Department which, by their very nature, could not have suffered any duty in such a context where no duty need be paid on the material, and no duty has been paid. It is well settled by the larger bench decision in the case of Machine Builders v. Collector of Central Excise, reported in 1996 (83) E.L.T. 576 (Tribunal) that the material should be regarded as clearly recognisable as non-duty paid.
Therefore, the denial of deemed Modvat credit in this case is justified.
3. Shri B. N. Rangwani the ld. Consultant for the Respondents relied upon the Tribunal decision in the case of Kanungo Alloys Pvt. Ltd. v.Commissioner of Central Excise, Jaipur reported in 1996 (16) RLT 777 (CEGAT-NB) to say that the Department has to prove that the scrap is clearly recognisable as non-duty paid and in this case the ld.Consultant pointed out that the invoices and the bills under which they have received the material is with the Department, and they can do the varification before coming to the conclusion that deemed credit has to be denied. It was submitted that lead scrap is also imported besides being purchased from Traders and Dealers. Most of the manufacturers according to the Respondent's preferred to pay on the goods because of the complexity of the exemption Notification. Therefore, the scrap material received by the Respondents from the dealers should have been considered as duty paid.
4. We have carefully considered the submissions. The question is whether the nature of the material on which deemed Modvat credit has been taken by the Respondents can be described as clearly recognisable as non-duty paid. In this context the detailed description of the nature of the material and the source from which the Respondents obtained the supplies as given in the Assistant Collector's order which throws light on the issue. This is as follows: "The assessee has availed the Modvat credit on lead waste and scrap on the strength of the challans/bills/invoices through which he procurred such waste input material from dealers like M/s. Salgir Enterprises, Kirti Trading, M/s. Paramount Traders, Kapri Traders, Lucky Scrap, Amrit Sales Corporations, Murali Metal Corpn., Department of Telecommunication, Bhopal, National Rayon Corporation, Kalyan and Post & Telegraph office department etc. It is an admitted fact on both sides that the lead waste and scraps so purchased by the assessee from the aforesaid units were not generated in the manufacturing process of any lead or lead articles. In other words, the dealers are the suppliers of such waste and scrap to the assessee and they are not manufacturer of lead scrap of lead articles neither they in turn or directly purchasing it from the organised sector or tiny sector who are manufacturing lead items.
Obviously, such waste and scrap has not been generated in the process of manufacture of lead ingots or lead articles. Rather it is an admitted fact that such waste and scrap are Bazar scrap and have been collected from hawkers as "Bhangar" and it consists of old and used or weared and teared articles of lead which has out lived its utility. Such scrap have arisen out of old and used machinery, lead storage batteries, lead insulators, X'ray equipments etc. The scraps are in fact not in metallic form as such and has not arisen in extraction if lead from lead are or lead concentrate nor have risen while working out on lead ingots, machanically or otherwise. These are old used and waste materials containing lead along with other material have been procured for recycling and for retrieval of the lead. Therefore, the question of payment of duty in fact or in law every constructively does not arise for such waste and scrap. All the parties from whom these materials have been purchased may be registered dealers or the users of articles which may contain lead such as post & telegraph or M.T.N.L. who clear the old and used items as scrap and sell it for some consideration but definitely these are not the units who are manufacturing articles of lead or are consuming lead or lead articles under the scheme of Central Excise law & procedure. Therefore the bazar scrap have never been subjected to duty, as such on either rate including the nil rate." It is evident from the above that there is no indication of direct purchase from manufacturers. The material is in the nature of broken and discarded and worn-out articles which are of such nature as could not have suffered any duty. In this context the larger Bench decision in the case of Machine Builders becomes relevant. The Larger Bench observed after taking note of conflicting decisions of the Tribunal in this regard, that payment of duty on inputs is pivotal to the scheme of Modvat credit. The deeming provisions in the order under Rule 57G(2) to deem the materials as duty paid is issued and the intention, the Larger Bench held, is not to deem that inputs which actually did not suffer duty are inputs which suffered duty. The Larger Bench further observed that if duty need not be paid and has not been paid, the question of duty paid being earned as credit does not arise. Applying the ratio of the Larger Bench decision to the facts of the case as noted above the material received by the Respondents are Bazar scrap being broken and worn out articles which could not have suffered duty; they are not in the nature of clearances of scrap by a manufacturer of lead articles, the scrap arising in the course of manufacture of other articles, in which case the question of applying the exemption Notification would only arise; only then will the need arise for verification. In such a view of the matter, the impugned order by the Commissioner (Appeals) is not sustainable. It is set aside and the appeal is allowed.