Judgment:
1. This is an appeal directed against the order in appeal bearing No.V-2(32 Ceta) 1668/88, dated 22-2-1989, rejecting the appellants' appeal against the confirmation of the demand amounting to Rs. 1,02,600/-being the modvat credit alleged to have been incorrectly availed of. There is no need to set out the facts of the case in detail. The confirmation of the demand and the rejection of the appeal are only on the ground that the Gate passes, under which the input materials viz. Naphthalic Anhydride, received by the appellants' factory, have been endorsed thrice by the recipients of the goods prior to receipt in the appellants' factory. The facts, which are not disputed by either side, are that the entire goods covered by the Gate Passes in original packed condition, have been received by the appellants' factory. But these goods have changed three hands duly endorsed by three recipients before they ultimately reached the appellants' factory. The show cause notice has been issued by the Superintendent on the ground as below : "It is observed that the said gate passes were not issued in the name of SBS Organics Pvt. Ltd., Ankleswar. These gate passes were received after three endorsements by different parties. Therefore, you are not entitled to take modvat credit on the strength of gate passes endorsed for more than one time." This is the main crux of the allegation, on the basis of which credit had been demanded and the demand has been confirmed.
2. Heard Shri Christian, and Shri Arya. Shri Christian pressed mainly on the point viz. whether modvat credit is permissible in respect of the inputs which had been received under Gate passes endorsed more than once before they reached the final user of the inputs. Shri Christian contended that under Rule 57(G) of the Central Excise Rules, it is envisaged that no credit shall be taken, unless inputs are received in the factory under the cover of a gate pass, an AR-I, a Bill of Entry or any other document as may be prescribed by the Central Board of Excise and Customs. In this case, it is not in dispute that the inputs have been received under the gate passes. He also referred to the Trade Notice No. 86/89, dated 12-5-1989 issued by the Baroda Collectorate, wherein, the Board had directed that two endorsements are permitted to be made on the Gate passes. According to the Trade Notice, original gate passes which has been endorsed once can be further endorsed once more, provided the entire goods covered by the gate passes are transferred to the third party in original packing. Shri Christian, contended that though in this case, endorsement is more than twice, it should not stand in the way of extension of credit, because of the fact that this is only a breach of the executive direction restricting the number of endorsements to 2. The main spirit behind the modvat scheme is to ensure that the credit of duty actually paid on the input materials is made available to the manufacturer of the finished product and this scheme is mainly intended to avoid the cascading effect of taxation of input. This has totally been missed and a narrow view is taken that input duty relief should not be given because the gate passes have been endorsed more than twice. So long as the department does not have any doubt regarding the duty paid nature of the goods, credit of duty cannot be denied only on the ground that the gate pass has been endorsed more than once or more than twice. He also contended that Rule 57G does not prescribe that the Gate pass should be only in the name of the claimant of the modvat credit. In this context, he also cited the decision of the CEGAT reported in 1986 (26) 657,Seems wrong - Ed. wherein, it has been held that the gate pass need not be in the name of the manufacturer availing of proforma credit and it need not be endorsed. He also cited the decision of this Bench reported in 1984 ECR 2632 (Cegat) and also 1986 (8) ETR 400 Cegat SRB (Tri.) in the case of Vikrant Tyres Ltd. He emphasised that the procedural requirement should not come into the way of furthering injustice and benefit should not be denied on these technicalities.
3. Heard Shri Arya. He contended that the gate passes are the documents intended for removal of the goods from the factory of manufacture to the first destination. Once it reaches the first destination, it is not necessary to move the goods under gate pass. Subsequent removals can be under the sale invoice and other delivery challans. Hence, when it is specified under Rule 57G that the inputs are to be received in the factory under the cover of gate pass, it means that the goods should come to the consignee manufacturer direct from the factory of manufacture of inputs. However, Shri Arya agreed that the Board have relaxed this condition by permitting endorsement upto two times on the gate pass, so that the goods can be received under these endorsed gate passes, provided they are supplied in full quantity as covered by the gate pass and received in factory packed condition. Shri Arya also contended that for administrative reasons, the Board have permitted such endorsements only limited to two in number. If the parties go on taking the credit on gate passes with more than two endorsements, it will cause a considerable burden for verification and it is also open to abuse. He, therefore, contended that in this case admittedly, credit has been taken on gate passes bearing more than two endorsements and hence should not be allowed.
4. We have carefully considered the arguments from both sides. The main issue to be decided in this appeal is whether the denial of modvat credit in respect of inputs received under gate passes endorsed in favour of the appellants after passing through more than two hands, is sustainable. Rule 57G of the Central Excise Rules stipulates that inputs are to be received under the cover of a gate pass, an AR-1, a Bill of Entry or any other document as may be prescribed by the Board.
Gate pass is a document prescribed for removal of the goods from the factory of manufacturer to the first destination. This is evident from the provisions of Rule 52A and Rule 173G of the Central Excise Rules.
Hence, when there is a stipulation in Rule 57G that the inputs are to be received under gate pass by the claimant of modvat credit, it should be normally taken to mean that the said Rule contemplates receipt of inputs straight from the factory of manufacturer under gate pass. In that case, the consignee is necessarily to be the modvat claimant and consignor being the manufacturer of inputs. However, when this requirement created some difficulties in the case of Small Scale units to obtain the inputs through intermediaries the Board appears to have made relaxation to this requirement, by permitting one endorsement in the gate passes initially and subsequently based on the representations permitting upto two endorsements in the gate passes. This relaxation made by the Board appears to be purely of administrative nature based on consideration of implementing the modvat scheme, so long as the duty paid nature of the goods and duty paid thereon could be established. As seen from the Trade Notice cited by the learned Advocate, it is evident that the Government is keen to extend the modvat credit so long as the goods in factory packed condldon as are covered by the gate passes are received by the parties intending to avail modvat credit. Going by this spirit of the relaxation, we are unable to appreciate the routine and mechanical approach of the authorities below in rejecting the claim of the modvat credit only on the ground that more than one endorsement have been made. When the Board themselves have taken a decision to relax the procedural requirement by way of administrative instruction it should be the endeavour of the authorities to extend modvat credit wherever, the duty paid nature of the goods is evident from the gate passes produced and quantum of duty paid on the inputs could be ascertained from them. A positive approach is called for in this regard. We also take note of the argument of Shri Arya that permitting a number of endorsements would involve in considerable administrative burden and the gate passes are likely to be abused. In this case, it is contended by the other side that the previous endorsements have been made not by any other manufacturer who could utilise this inputs but only by intermediaries in the trade channel. In any case, the department is entitled to make verification or investigation with regard to the genuineness of the gate pass and also on the question whether gate pass has been utilised for availment of modvat credit at the earliest stages. In this case, no such enquiry appears to have been conducted and the modvat credit has been denied only on the ground that more than that of permitted endorsements have been made in the gate passes. Such an order cannot be sustainable in the context of the scheme of modvat credit read along with the relaxation made by the Board. We, therefore, set aside the order passed by the authorities below and permit availment of credit. While doing so, we allow the liberty to the Assistant Collector to cause any inquiry or investigation to satisfy himself about the genuine nature of the gate passes and also about non-utilisation of the gate passes at the earlier stages of endorsements for availment of modvat credit. The appeal is disposed of in the above terms.