Full Judgment
2. The applicant utilized in the manufacture of its final product, cleared for home consumption on payment of duty, inputs which had been received by it under a Customs exemption notification relating to DEEC scheme without payment of the basic and additional duty of customs. The impugned order of the Commissioner is issued on his view that such a procedure is impermissible according to law.
3. The Advocate for the appellant contends that the circular of the Ministry No. 261/72/16/87-CX 8, dated 8-8-1998, reproduced in 1988 (37) E.L.T. 317 specifically permits such a procedure. The Commissioner's view that he is not bound by this circular cannot be supported in view of the judgment of the Supreme Court in C.C.E. v. Kores (I) Ltd. - 1997 (89) E.L.T. 441. He has also said that this same conclusion has been independently arrived at by the Tribunal in Sawottam Ispat Pvt. Ltd. v.C.C.E.Pratap Steel Industries v. C.C.E. - 1997 (95) E.L.T. 584. He further contends that the legal undertaking executed at the time of import under DEEC of the goods has been discharged, thus showing that the inputs in question have been utilised in the manufacture of the goods exported and thus could not have been used in the manufacture of these goods.
4. The Departmental Representative adopts the reasoning contained in the Commissioner's order. This is that Rule 57A refers to inputs as those on which duty has been paid and therefore non-duty paid material cannot be inputs. The Board's circular is not binding on him for reasons cited by him.
5. In the light of the fact that inputs cleared duty free under the relevant customs notification have been utilized in the manufacture of the goods cleared for home consumption. The contention that these cannot be considered as non-duty paid because for the reason that those goods have been utilized in the manufacture of the exported goods, as evidenced by the cancellation of the legal undertaking, is prima facie difficult to accept. The appellant manufactured the finished product in question by using about 37 lakhs kgs. of non-duty paid material and 90 lakhs kgs. of duty paid material The duty on the finished product was paid partly from the credit taken of the duty paid on the dutiable inputs and partly out of the balance in the personal ledger account.
6. In that situation, we are unable to see prima facie any ground on the levy of the duty. It is a well settled position that there is no direct correlation between input and finished product in the Modvat scheme in the sense that the total amount of credit accumulated from credit taken on inputs can be dipped into towards payment of duty on final products. In other words, the credit taken of the duty paid on such input need not be utilised for payment of duty and on those finished product made from those inputs. This indicates the view expressed by the Board in the circular referred to by the Advocate for the applicant. The Supreme Court judgment in C.C.E. v. Kores (India) Ltd. - 1997 (89) E.L.T. 441 that it is not open to the revenue to advance arguments contrary to a Tariff advice or a Trade notice would prima facie apply to this circular also. Even otherwise the Board's circular must be considered to be the understanding by it of the position relevant to the rules and with contemporaneous exposition.
Apart from that even if the department's case in the notice were correct, the demand for duty would be one-forth of that which has been confirmed, this being the proportion of the duty free input of the total inputs used, on which duty has been demanded.
7. In these circumstances, we are of the view that it would not be correct to ask the applicant to deposit the duty and we waive such deposit and stay their recovery.