1. This is an appeal against the order in appeal passed by the Collector of Central Excise (Appeals) - vide order in appeal No.GS/368/B-I/93, dated 11-5-1992.
2. The facts of the case are that the appellants are manufacturers of drugs. They inter alia manufacture Pediatric drops for children. They bring in plastic droppers with markings in "ML" from outside, which are duty paid. They filed a declaration under the modvat scheme declaring this item as an input used in or in relation to the manufacture of final product- "Pediatric drops". However, this was objected to by the Department on the following grounds: 3. These droppers are separately kept in the cartons alongwith sealed bottles of pediatric drops. These droppers are neither used in the manufacture of the Pediatric drops nor used in relation to the manufacture of the final product. Several show cause notices were issued and they were adjudicated by the Asstt. Collector by disallowing the Modvat credit of duty paid on plastic droppers. Appeal against the above order of the Asstt. Collector, was also rejected by the Collector (Appeals). Hence, the present appeal before the Tribunal.
4. The only issue to be decided in this appeal is whether plastic dropper brought in under Modvat scheme from outside and packed in the cartons containing pediatric drops in sealed bottle, could be construed to be an input used in or in relation to the manufacture of the final product.
5. Shri A.V. Naik agrees that plastic droppers are not subject to any process in the appellants' factory but are packed as such, by placing it in the cartons containing sealed bottles of pediatric drops. But he pleads that it is very necessary for administering the drops to children and is supplied with the bottle containing drops. The dropper is marked in "ML" for indicating the precise quantity of drops to be taken from the bottle for administering to the children. After the pilfer-proof cap is removed from the bottle containing drops, this dropper supplied with the carton is fitted as the cap for the bottle and used. Hence it is an additional cap supplied with the bottle and hence can be construed to be a packing material, used, in relation to the final product. He also refers to the declaration of their retail prices under Price Control Order to submit that the cost of these droppers is included in the retail price declared under the Drug (Price Control) Order. Since its value is included in the price of the final product and it is necessary for administering the drug, it should be construed to be a necessary input. He also seeks to rely on the decision of this Bench in the case of Jayshree Industries -1993 (45) ECR 185, wherein the battery cells supplied along with the Quartz clock, have been held to be eligible inputs under Modvat scheme. He also referred to the decision of the Supreme Court in the case of Jay Engineering reported in 1989 (20) ECR (3) (SC) wherein the name plates attached to electric fans have been held as components of fans for purpose of Not. No. 201/74. He also referred to the decision of the East Regional Bench in the case of TELCO -1991(32) ECR 165 to point out that Tool kit and jack assembly supplied along with motor vehicles have been held to be eligible for modvat credit. He also pointed out that another Collector (A) in the case of the same item 'droppers' for medicinal drops has allowed modvat benefit. Because of this decision, other similarly placed manufacturers get the benefit, whereas, the credit is being denied in their case. He refers to the order of the Collector (Appeals) reported in I.D.M.A. bulletin in the case of V.S.Vitamins (Copy filed in paper book) to plead that the Collector has accepted the contention that in the case of drugs, even repacking into retail packs amounts to manufacture and in the case of dropper assembly, it is packed with bottle of drops for serving as a cap to the container and for administering the prescribed dosage of the drops to the patients. Hence he has allowed the credit following the ratio of the decision of the Supreme Court in East End Paper Industries. He would therefore plead for allowing the appeal.
6. Shri Mondal, the ld. SDR, in reply stated that the basic question to be asked is whether it is used in or in relation to the manufacture of the final product. It is not used either in the manufacture or in relation to the manufacture of Pediatric drops. It is merely placed in the cartons alongwith the sealed bottle of drops. Sealed bottle of drops is the final product to be marketed and it is ready foe marketing even without the dropper. Dropper is not a packing material used in relation to the packing of the Pediatric drops. It is facility given to the consumer for using it, after they open the bottle for use. It is not a component as in the case of dry cells considered in Jayshree Industries case. It is also not like 'name plate' in Electric fans as in the case of Jay Engineering. Name plate is required to be affixed as per Rule 51 of the Central Excise Rules, to show the name of the manufacturer, running serial number etc. It is a necessary component for marketing the electric fan. Packing of a dropper alongwith the bottle of pediatric drop is not a 'must' nor can it be stated that it is a component of such drops or a packing material for drop. Hence, the basic requirement of Rule 57A is not satisfied. As against the decision of TELCO cited by the ld. counsel, Shri Mondal points out the decision of South Regional Bench in the case of Sundaram Clayton wherein, the South Regional Bench has disallowed the Modvat credit on tool kits etc.
supplied alongwith motor vehicles. Even the Board's earlier clarification allowing modvat credit on such tool kits, jack etc.
supplied with motor vehicle has been since rescinded. Hence, when the items are not in any way used either in the manufacture or in relation to the manufacture of the final product, modvat cannot be admissible, merely because they are sent with the final product, including their value.
7. After hearing the equally attractive arguments from both the sides, we would prefer to look at the issue from a slightly different angle.
We agree with Shri Mondal that dropper cannot be said to be used in the manufacture of Pediatric drops; because the drops manufactured are put up in sealed bottles and could be marketed as such. But can we say that it is not used in relation to the manufacture of pediatric drops marketed at the factory gate. The terms 'in relation to' has a wider connotation and is not restricted to the physical presence of the input in the final product nor is it to be confined to usage only in the process of manufacture prior to the emergence of the final product. It can even be posterior to the emergence of the final product, but before marketing at the factory gate. The final product in this case is 'Pediatric drops' . The very name suggests that it is to be administered in drops of prescribed quantity. The Collector (Appeals) feels that this can be achieved by dropping it in a measuring glass independently procured by the buyer. We agree that it is possible. But when a facility in the form of a dropper is supplied alongwith the medicine for proper administration of the dosages, can we discard it as an optional accessory? If it were so, their value need not be included.
The fact that its value is included and is marketed at the factory gate, packed in a carton alongwith dropper as part of the bottle of medicine is not in dispute. Both the sides agree to treat it as part of pediatric drops cleared from the factory for purposes of valuation of the final product. Shri Naik has shown before us that the cost of dropper is included for arriving at the maximum retail price declared under the Drugs (Price Control) Order.
7.2 Under Section 4 of the Central Excise Act, value of the goods is the price at which the goods are ordinarily sold at the factory gate.
Here, the value component of dropper is added to the value of pediatric drops for purpose of levy of Central Excise duty on the final product.
The Apex Court in the case of East End Paper Industries held that anything which goes to render the goods marketable at the factory can be regarded as component. Though we might agree with Shri Mondal that Pediatric drops may be marketed without dropper, but when they are actually marketed with dropper and their value is added to the value of the final product, can we reject it as an optional accessory for purposes of Modvat benefit? 7.3 Dropper is connected with the administration of prescribed dosage of drops and it is not a complementary gift given alongwith the bottles of drops. In a sense, as functionally designed, it is an attachable component of the bottle containing drops. Hence, even otherwise, it can be construed as an attachable component of the bottle but supplied separately. If we choose to call it an optional accessory and not a component, corollary of this proposition would lead to exclude the value thereof, being only an optional accessory. If the value of the dropper is not included; then there can be no case for allowing modvat credit for dropper. But when its value is included and is marketed at the factory gate only in the form of a pack with bottle of drops and dropper, it has to be construed as a component of the final product, more so because it is construed as a component for purposes of valuation of the final product. Hence, in such cases, the pertinent question to be asked is whether the value of the item supplied with the final product is included in the value of the final product. We consider this question relevant in the context of the objective of the Modvat Scheme.
7.4 A question may be raised that Rule 57A is to be considered de hors Section 4. We have thought of this but we find that the concept of value addition is built in the scheme. Modvat scheme, as the Hon'ble Finance Minister referred to in his Budget Speech, is a modified form of value added Tax system. It is essentially a system based on the concept of value addition at the manufacturing stage. Whatever goes into the making of the value of the final product as delivered at the factory gate and on which value, Central Excise duty is levied, would therefore be relevant for consideration. Because, credit of duty paid on inputs is to be utilised towards the duty payable on the final product, calculated on the assessable value of the final product, in the form in which it is cleared at the factory gate. If the value of the dropper goes into the value of the pack of medicine cleared at the factory gate, the duty suffered on dropper would get stuck to the final product, leading to cascading effect of the input duty on dropper, if the duty is not given credit. If we view the issue from this angle, we are to construe the dropper as a component, whose value is included in the value of the final product. Hence, Modvat credit of duty paid on dropper would be eligible.
7.5 Incidentally, we also find that the Department does not appear to have challenged the decision of another Collector (Appeals), where the same item 'dropper' has been allowed Modvat credit. If that be so, denial of modvat credit in this case would amount to discriminatory treatment leading to unfair competition among similarly placed manufacturers. This is not desirable in the field of indirect taxation.
8. In the result, we hold the view that following the ratio of the Supreme Court judgment in the case of East End Paper Industries and having regard to the basic concept of value addition in the Modvat Scheme, if the value of dropper is included in the value of the pediatric drugs and it is marketed at the factory gate in the form of pack with dropper, it has to be construed as a component more so in the context of the provisions of valuation as laid down in Section 4 of the Central Excise Act. Being a component, contributing to the value addition of the final product, duty paid thereon would be eligible for Modvat credit. In this view of the matter, we allow the appeal with direction to restore the credit after ensuring that the value of dropper is included in the retail price of the final product declared under the Drugs (Price Control) Order in all the cases of the show cause notices covered by the impugned order.
9. While concurring with the reasonings given and the conclusion drawn by my learned Brother, because a sensitive issue is involved, having possibility of wide ranging repercussions, I deem it expedient to record separately my own approach to the problem.
10. The MODVAT (Modified Value Added Tax) Scheme, has been introduced as an alternative to the VAT (Value Added Tax), which could not be brought on account of some constitutional impediments arising out of apportionment of Tax collection powers between the Union Government and the State Governments, has its nexus, besides streamlining the Tax structure and making the Revenue collection easy, to evading cascading effect on the price structure of a commodity manufactured, where the ultimate beneficiary is the consumer.
11. It is also a universally recognised dictum that in interpreting any tax laws, one should have one eye over the aspect of benefit intended to be given, with other eye on the aspect where the benefit so intended is not misused to the detriment of the Revenue collection.
12. With the main object of the MODVAT Scheme, being averting the cascading effect, and, with certain reservation as specified, to see that the final product put in the market and made available to the consumer, is not saddled with double duty, provision is made in Rule 57A of the Rules, that credit of duty paid on whatever is used "in or in relation" the final product, could be taken and utilised for payment of duty on the final product. For technical purpose those items have been described as "input". The definition of the word "input" is also diversified as is evident from the Explanation to Rule 57A, where, paints, packaging material, and the items manufactured within the factory and used in or in relation to the manufacture of final products are included, and further, specific exclusion clause is added excluding certain items from availment of benefit thereunder. When an exclusion clause is incorporated, ordinay presumption (though rebuttable) could be raised that items other than those specified in the exclusion provision, are included for availment of benefit.
13. Clear indications are available from the entire MODVAT Scheme, and from the provisions of Rule 57A itself that the availment of credit has a direct nexus with the assessable value. This is evident from Exclusion clause (iii) Rule 57A, where, in reference to the packaging material, it is provided that the credit benefit would not be available, if the value of the packaging material is not included in the assessable value.
14. The Supreme Court have in Collector v. Eastend Paper Mills -1989 (43) E.L.T. 201 (SC) have even gone to the extent of holding that anything required to make the goods marketable must form part of the manufacturing activity, and any material used, would be deemed to be the component part of the end-product.
15. With the basic concept of MODVAT being averring of cascading effect, and when the value of whatever goes with the final product marketed at the factory gate, being the criteria in ascertaining the assessable value, and when the value of the dropper is included in the assessable value of the pediatric drops under considerations, there could be no reason to deny the credit for the same. If that is not done, the very object of averting cascading effect is frustrated, and the effect could be that the customer would either be required to pay more, or would be deprived of having measuring dropper alongwith the drops.
16. It may also be noted, that the dropper supplied is fitted with caps which is used as a cap in the bottle after the filterproof caps are removed before taking the bottle in use. Thus, it has also the element of packaging material.
17. I therefore concur with the view expressed by my learned brother and hold that the appeal is allowed, subject to the qualification as indicated by him.