1. These 77 appeals have common issues and are therefore disposed off vide the single order. The following 42 appeals are filed by the Revenue where the cross-objections are filed by the Respondents.
2. The following appeals are filed by the assesses. No cross-objections have been filed by the Revenue.
3. The Central Excise duties are multipoint in the sense that during its transformation an article passes through a number of stages, being held separately excisable and dutiable at each stage. The Modvat scheme was designed to alleviate the "cascading" effect of such taxes. Simply put, the credit of the duty paid on the input is available for discharging duty on the final products and goods made therefrom. To ensure revenue neutrality the scheme does not permit taking of such credit where the final products are not dutiable. The manufacturer has to file declaration showing the description of the inputs and of the final goods. He can take credit of the duty paid only when he is in receipt of specified documents showing that the inputs had suffered duty. A notable exception has been made to this cardinal principle vide Rule 57G (2) (2nd Proviso) in the following words.
"Provided further that having regard to the period that has elapsed since the duty of excise was imposed on any inputs, the position of demand and supply of the said inputs in the country and any other relevant considerations, the Central Government may direct that with effect from a specified date, all stocks of the said inputs in the country, except such stocks lying in a factory, customs area (as defined in the Customs Act, 1962 (52 of 1962) or a warehouse as are clearly recognisable as being non-duty paid, may be deemed to be duty-paid and credit of duty in respect of the said inputs may be allowed at such rate and subject to such conditions as the Central Government may direct, without production of documents evidencing the payment of duty " 4. In terms of this authority the Government had issued a number of orders specifying the extent of such availment Appellants assessees referred to above who were engaged in manufacture of rolled products of iron and steel i.e., C.P. bars/round bars/rods, etc. had availed of the facility of such "deemed credit" of Rs. 920/- pmt in terms of Government of India order TS/36/94-TRO dated 1-3-1994. For ease of reference the said order is reproduced below: "Sub : Central Excise - Chapters 72 and 73 - Deemed Credit in respect of re reliable material "In exercise of the powers conferred under the second proviso to Rule 57G(2) of the Central Excise Rules, 1944, (1 of 1944), and in supersession of Order F No 342/5/91-TRU dated the 7th July, 1992, as amended, the Central Government hereby directs that the ingots and rerollable materials of iron or steel purchased from outside and lying in stock on or after 1st day of April, 1994 with the rerollers, availing of the exemption under Notification No. 1/93-Central Excises dated the 28th February, 1993 will be deemed to have paid duty, and the credit of duty under Rule 57A of the said rules in respect of such ingots and rerollable materials used, without undergoing the process of melting, in the manufacture of goods falling under Chapter 72 or 73 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), may be allowed at the rate of Rs. 920/- per tonne, without production of documents evidencing the payment of duty 5. At the material time Notification No. 45/93-CE dated 01-03-1994 was in existence exempting dutiable products obtained by the breaking up of ships, boars and other floating structures from the entire duty of Central Excise leviable thereon.
6. Show cause notices were issued alleging that the assessees had obtained the inputs from the ship breaking yards The deemed credit was wrongly taken and was required to be reversed. The noticees filed identical replies The first claim made was that the demand was hit by limitation inasmuch as the utilisation of credit from this source was in the knowledge of the department It was claimed that the order did not contain any exclusion clause and that such exclusion clause could not be imported from the provisions of Rule 57G(2) The contention in the show cause notice was that although the order of the Government under the said rule permitted availment of the deemed credit without producing documents evidencing payment of duty, the existence of such document was a pre-condition which was not waived by the order This claim in the show cause notice was contested by all noticees. It was claimed that ship-breaking areas were not Customs areas but that the ships were taken for breaking up only after being cleared from Customs on payment of duty The prohibition in the parent rule of goods lying in the customs area therefore is not attached to scrap being obtained on breaking of the ships It was claimed that the tariff items specifically relating to goods obtained by breaking of the ships having been deleted from the tariff would not result in the denial of deemed credit inasmuch as the resultant goods would merit classification against the general entries in the relevant chapter heading in the tariff It was claimed that the penalties under Rule 173Q(1) were not leviable It was claimed that not all the material was purchased from ship breakers but substantial portion was purchased from traders in the open market It was claimed, citing earlier orders issued under the same provision, that where the Government so desired the order itself would debar those materials which were clearly found to be non-duty paid Where the order was silent in this respect, the prohibition existing in the rule could not be imported into such an order.
7. About the proposal to limit the availability of Modvat credit to units operating under the scheme of Notification 1/93-CE after the unit had crossed the value limit of clearance of Rs 75 lakhs it was argued that the orders issued under Rule 57G(2) did not make any such provision and therefore deemed credit could be taken even after the unit had crossed the clearance limits.
8. It was claimed that the ships brought in for breaking up would be cleared on payment of duty. The bill of entry was therefore the duty paying document The goods obtained by breaking up the ship were clearly therefore "duty paid".
9. The Assistant Collector passed orders after hearing the noticees He framed the point for decision as below: "In view of above, primarily 2 things are to be ascertained and decided First one, whether the subject input received by the parties is from such stock lying m a factory, Customs area or a warehouse, if so it is clearly recognisable as being non-duty paid Secondly the subject input have suffered any duty or otherwise irrespective of the facts, same have been procured from a factory, customs area or a warehouse " 10. He held that the ship breaking yards were inside the customs areas As regards the character of inputs (duty paid or not?) he observed that the relevant tariff entries, namely, headings 72 30 and 73 27 were deleted from the tariff vide Finance Act, 1994 and the goods were also exempted in terms of Notification 45/94. The non duty paid nature of the contested goods thus stood established. On the plea that additional duty of customs had been paid on the ships up to 28-02-1994 he observed that the duty paid character could not attach to the goods manufactured by breaking of the duty paid ships. He thus established that the goods had not suffered duty. As regards the plea that the wordings of the order did not contain this clause, he held that the exceptions incorporated in the parent rule would apply in spite of this omission.
As regards the plea that some of the inputs were received from the traders, he noted that the ship breaking origin was obvious even in such cases. In view of this analysis he held that even where declarations were filed under Rule 57H they were liable to be dismissed. In all cases he held the credit was wrongly availed and confirmed the demands denying the plea of limitation. He also imposed penalties upon the noticees.
11. The noticees then filed 40 appeals which were disposed off by the Commissioner (Appeals) in a single order. The Commissioner (Appeals) referred to the relevant provision and enumerated the conditions to be fulfilled for availing of the deemed credit benefit. He noted that the order No. TS/36/94/TRU, dated 01-03-1994 did not specifically exclude ship breaking scrap from the benefit of the notification although it was common knowledge that bulk re-rollable scrap was available from the activity of ship breaking.
12. He further held that deemed credit order did not exclude goods which were subject to "nil" rate of duty relying upon the judgment in case of Arun Auto [1990 (48) E.L.T. 543]. He held that even where the goods were exempted in terms of Notification 44/94-C.E. they would continue to be eligible for deemed credit. As regards the removal of the two entries in Chapter 72 and 73 he observed that after one year the two entries were re-introduced. He said in the absence of the two entries also the goods were not removed from the tariff but fell under other different headings. He did not agree with the Assistant Collector's finding that waiver of production of documentary evidence did not do away with the requirement of its existence. He held that the Assistant Collector had placed undue reliance on Ministry's clarification under file No. 77/77/94-C.E., dated 10-11-1994. He held that deemed credit benefit would continue to be available even where the assessee had passed the duty free limit of 30 lakhs but would cease when upper value limit of Rs. 2 crores had been exceeded. With this finding he set aside the lower orders resulting in the appeals being filed by the Revenue.
13. The appeals filed by the assessees also involve the same issue. The appeal Nos. E/344, 353, 354/97 are filed against the common order in original No. 9/Commr./96 dated 9-12-1996 passed by Commissioner of Central Excise, Rajkot. The three respondents had taken deemed credit on receipt of ship breaking scrap. The Commissioner relied upon Board's clarification under circular No. 77/77/94 dated 10-11-1994 advising denial of Modvat credit on account of the fact that such scrap was exempted under Notification 46/94-CE and confirmed the demands against the assessee.
14. The other appeals in this batch are filed by the assessees against order-in-appeal No. Commr(A)/76 to 108/RHA/99 dated 29-10-1999. In this order the Commissioner (Appeals) upheld the lower orders denying deemed credit placing reliance on the cited circular of the Board. The arguments in the appeals filed by the department and the arguments made by the respondents in these cases are relevant in disposal of this batch of cases.
15. Shri Parelkar submits that the areas in Saurashtra where bulk of the ship breaking units were situated are notified as Customs areas under Section 8 of the Customs Act, 1962. Referring to the wording of Rule 57G(2) of the Central Excise Rules, 1944 he submits that stocks lying in a customs area being clearly recognisable as non-duty paid came out of the purview of the deemed credit facility. It is his claim that even in the absence of a specific clause in an order issued pursuant to this Rule, the ship breaking material would stand excluded from the benefit. In support of his claim he relied upon the following judgments:Rapsri Engineering Industries Pvt. Ltd. v. CCE - 1989 (43) E.L.T. 577 (2) Achal Alloys (P) Ltd. v. Collector Of Central Excise -1994 (73) E.L.T. 718 16. He also referred to the Tribunal judgment in the case of Ma Tara Rope Works - 1991 (54) E.L.T. 360 where it is held that goods cleared at nil rate of duty stood exempted from the benefit of the notification. He claimed that by virtue of exclusion of tariff entries 7230 and 7323 and by virtue of exemption Notification No. 45/94-CE ship breaking scrap was established as non duty paid. He relied upon the instruction No. 77/77/94-CE dated 10-11-1994 in support of this.
17. Shri Parelkar submitted that the correct interpretation of the deemed credit order was that the availment could be taken by the re-rollers only up to the point where their value of clearances had not exceeded Rs. 75 lakhs. In other words after the unit had crossed the clearance level of Rs. 75 lakhs the benefit could not continue up to the time when the units clearance reached the level of Rs. 2 crores. He further claimed the Commissioner holding that the benefit was available under Rule 57H(1)(b) was wrong. He claimed that since the assessees had wrongly and wilfully availed of the credit in the wrong manner, apart from reversal of the credit, they invited imposition of penalties also.
18. Shri S.P. Seth, Advocate supported the Commissioner's order in favour of the assessees. He submitted that the non availability of the deemed credit facility to units operating under Notification 1/93 after their having crossed the limit of Rs. 75 lakhs was not covered in the show cause notices at all. Since the issue was brought in for the first time by the Assistant Commissioner in his order it was extraneous to the proceedings initiated by the show cause notices. He submitted that the order dated 1-3-1994 permitted taking of deemed credit on the stocks already lying with the re-rollers; whose premises could not be termed as "Customs area". He stated that the fact that the goods being exempted from duty by itself not be sufficient to deny the benefit of deemed credit in the absence of specific prohibition in the order of the Government. He cited one more deemed credit order issued on the same date which contained this prohibition to support his plea. It is submitted that the Board's instructions were not binding on the Tribunal citing the ratio of the judgment of the larger bench in the case of Machine Builders. He cited that the issue was settled in favour of the assessees.
19. Shri Seth continued to submit that the benefit should not be denied to the assessees who had crossed the turn over limit of Rs. 75 lakhs firstly against the bulk of the show cause notice this issue was not raised and secondly that the wordings of the exemption order did not suggest such denial. On this ground he distinguished the larger bench decision of the Tribunal in the case of Digambar Foundary v. CCE - 2000 (118) E.L.T. 85. It was his further submission that the denial of Modvat credit on the inputs purchased from dealers in the open market on the presumption that the goods in turn must have been bought from ship breakers was entirely untenable.
20. We have considered the submissions and have seen the authorities cited.
21. For deemed credit facility the second proviso to Rule 51G(2) seeks to confer the status of "duty paid" on all stocks of the specified inputs in the country. The rationale was that at some point of time these goods had suffered duty, but due to the passage of time the factum of payment could not be readily established. Exception to this presumption is made only of goods lying in factory, in a customs area or in a warehouse.
22. Section 2(e) of the Central Excise Act, 1944 defines 'factory' as any premises wherein excisable goods are manufactured.
23. Rules 9 and 49 of the Central Excise Rules, 1944 as they existed at the material time prohibited removal of any excisable goods without payment of duty. Once duty had been paid such goods could not be retained in the factory in terms of Rule 51A of the said Rules.
Therefore there could exist no doubt that the goods inside the factory as defined in the Central Excise Act had never suffered the burden of duty.
24. Customs Area is defined in Section 2(11) of the Customs Act, 1962 as an area in which imported goods kept before clearance by the customs authorities. Section 45 of the Act prescribes that the goods in the customs area would not be removed from that area except when so permitted by the proper officer who would make order for clearance only when the goods had suffered duty. Hence it was equally clear that any goods lying inside the customs area would not have suffered duty.
25. In terms of Section 2(43) of the Customs Act a warehouse referred to that appointed under Section 57 or 58 of the Act. These sections and the scheme of Chapter IX of the said Act establish that any goods inside the warehouse would clearly not have suffered any duty. The phrase 'warehouse' as defined under Rule 2(18) of the Central Excise Rules, 1944 read with Rule 140 thereof establishes the same position.
26. When read and interpreted properly the enabling provisions do not bar any input from availment of deemed credit thereupon as long as their source was different from the three prohibited areas. In fact removal of any goods from these three sources without payment of duty would first attract major penalties under both the Acts.
27. The Revenue has alleged that the areas from which ship breaking scrap emerged as a customs area in terms of the notification issued by the various authorities. There appears to be a very serious gap in understanding. Customs area is that where the goods are kept before clearance thereof. Ships are broken only after payment of duty leviable thereon. Therefore it is not possible to say that the point of origin of the ship breaking scrap was inside a customs area Exclusive reliance has been placed by the Commissioner, Rajkot in his order on circular No 77/77/94-C dated 10-11-1994 The opinion of the Board reads as follows: "It has been brought to the notice of the Board that scrap generated by breaking of a ship etc is not being allowed deemed Modvat credit by certain field formations The ship-breakers have also represented to the Board The matter has been examined and the following instructions are issued: "Rule 57G of the Central Excise Rules, 1944, stipulates that the Government has the power to allow deemed credit having regard to the period that has elapsed since the duty of excise was imposed on any inputs, the position of demand and supply of the said inputs in the country and any other relevant considerations If no duty is imposed on any of the inputs then the provisions of Rule 57G cannot be invoked to allow deemed credit Since the scrap cleared by the ship-breakers have not suffered the duty, it would not be correct to allow deemed credit on such scrap.
"2 Suitable instructions may be issued to the field formations accordingly " 28. It is difficult to make any meaning out of this cryptic dictate of the Board The interpretation does not arise out of the parent rule at all The interpretation as made is entirely illogical and cannot be allowed to become the basis of denial of credit.
29. The order dated 01-03-1994 which is the centre of controversy in these appeals does not have any additional exclusion clause In other orders issued by the Government under the authority of Rule 57G(2) additional exclusions had been made Thus in order No B-22/5/86-DRU dated 07-04-1986, those inputs which were exempted under any rule or the notification, and those inputs which had suffered "nil" rate of duty did not qualify for the credit Whether the enabling rule empower the Government to put additional restrictions is not an issue before us in this set of proceedings but it is very clear that where such extra exclusions are not part of an order issued under this rule, such exclusions cannot be read into an order simply because such exclusions exist in some other orders.
30. In their judgment in the case of Lloyd Steel Industries Ltd - 1997 (23) RLT 623 the Tribunal had on this very interpretation allowed the benefit The judgment in the case of Machine Builders - 1996 (83) E L T 576 has been widely followed and has been cited in these proceedings also Perusal of this rder shows that the Tribunal was dealing with two orders of the Government, namely, F No B-22/5/86-TRU dated 07-04-1986 and F No 332/30/87-TRU dated 02-11-1987 We have seen the text of both these orders and find that the additional exclusions of goods exempted under any rule or notification have been incorporated into these orders Therefore the ratio that where certain inputs are shown to be unconditionally free of duty, the benefit would not be available must be confined to those cases where additional exclusions were made and cannot apply to the present proceedings Therefore the consistent claim made by the Revenue that ship scraps was exempted from payment of duty does not support the claim that the benefit of Modvat credit was not available.
31. The logic of the Revenue that although the said order waived presentation of documents indicating payment of duty, the possession of such documents was necessary, cannot survive in view of the analysis of the relevant rule as made by us.
32. The deletion of two tariff entries has also taken considerable space of the proceedings. These two entries and similar entries in other chapters making the source of the goods as the ground key for classification was obviously for the purpose of facilitation and for ease of referencing. It did not create or identify a separate class of products. In other words all the products falling there under already stood enumerated in the various earlier tariff headings. Therefore the temporary removal of the two entries did not spell exclusion of such goods from the benefit available to the assessees.
33. The remaining major issue in these proceedings is the availability of the benefit of the deemed Modvat credit after the beneficial unit has crossed the limit of duty free value of clearance as prescribed under Notification 1/93. Shri Seth raised that this allegation did not figure in the show cause notice. We do not consider this to be a material objection. The benefit in the order of the Government was for the assessees availing the benefit of this notification and whatever interpretation was put on the said notification would affect the availment of the benefit of this notification. Therefore the claim that the issue was not specifically raised in the show cause notice has no force.
34. The very order of the Ministry which has been cited in the present proceedings was before the larger bench in the cited case of the Digamber Foundary. In the judgment the Tribunal distinguished between the eligibility for and the extent of exemption of Notification 1/93-CE. The Tribunal held that the benefit of deemed Modvat credit would cease where an assessee operating under the benefit of Notification 1/93-CE had crossed the value of clearance limit of Rs. 75 lakhs per annum. The ratio of this judgment squarely apply this batch of appeals.
(1) The assessees in this batch of appeals were entitled to take the Modvat credit in terms of the order dated 1-3-1994 at the specified rates on the inputs obtained by them from the breaking of ships.
(2) Such benefit was available to such assessees up to the time their value of clearance did not exceed Rs. 75 lakhs.