Judgment:
K.A. Puj, J.
1. At the instance of the Collector of Central Excise, Baroda, The Customs, Excise & Gold (Control) Appellate Tribunal, Bench-C has referred to the following questions of law for the opinion of this Court.
i. Whether on the facts and circumstances of the case, the Tribunal has erred in holding that Modvat Credit of duty paid on basic inputs used in the intermediate product (intermediate inputs) cannot be denied by applying Rule 57 C of the C. Ex. Rules, 1944, in respect of removal of inputs from one factory to another under the provisions of Notn. No. 217/86 CE, as amended by Notn. No. 97/89-CE by following Chapter X procedure of the C. Ex. Rules, under which payment of duty on the ultimate final products is ensured.
ii. Whether on the facts and circumstances of the case, Rule 57C has to be strictly construed disregarding the fact that Notn. No. 217/86 is essentially based on Modvat scheme and the amendment carried out by way of Notn. No. 97/89-CE was to facilitate such removal from one factory to another of the same manufacturer without payment of duty, so long as it is ensured that the ultimate final products pay duty ?
iii. Whether on the facts and circumstances of the case, removal under Notn. No. 217/85-CE can be construed to be analogous to the removal of intermediate inputs under Notn. No. 217/86-CE, for applying the ratio of the larger Bench decision of the Tribunal in Kirloskar Oil Engines reported in 1994 (73) ELT 835(Trib.).
2. The brief facts giving rise to the present reference are that, M/s. Unique Chemicals, a Division of M/s. J.B. Chemicals and Pharmaceuticals, Ankaleshwar was engaged in the manufacture of Glyoxal 40%, part of which was transferred under Chapter X procedure to Belapur, which was then used within the factory at Belapur in the manufacture of Metronidazole attracting duty at the rate of 5% basic excise plus 5% special excise duty, so that modvat credit was not required to be reversed for the inputs used in the manufacture of Glyoxal 40%. On claiming exemption by the Company ' M/s. Unique Chemicals, the Assistant Collector found that when any goods are transferred under Chapter X procedure, modvat credit has to be reversed, as no duty is payable.
3. Being aggrieved by the said decision of the Assistant Collector the respondent Company filed an Appeal before the Collector of Customs and Central Excise (Appeals) Bombay. On adjudication, the Collector of Customs and Central Excise (Appeals) framed question whether modvat credit is required to be reversed in respect of the product Glyoxal 40% manufactured by the respondent Company and cleared by their unit at Thane, under Notification No. 217/86-C, as amended, by following Chapter X procedure for the manufacture of final product cleared on payment of duty. It was the claim of the respondent Company that concessions available under Second Proviso to Notification No. 217/86 CE dated 2.4.1986, as amended, on following the procedure outlined in Chapter X of CCE Rules, 1944. The Collector of Customs and Central Excise (Appeals) came to the conclusion that the respondent Company was clearing their final product from both the factories on payment of duty and that wherever intermediate product was cleared under Notification No. 147/84, they invariably reversed the credit, and hence set aside the order of the Assistant Collector and allowed the Appeal in favour of the respondent Company.
4. Being aggrieved by the order of the Collector of Customs and Central Excise (Appeals), the Collector Central Excise, Rajkot filed an Appeal before the Customs, Excise and Gold (Control) Tribunal Bench at New Delhi and the Tribunal concurred with the view taken by the Collector of Customs and Central Excise (Appeals) and dismissed the Appeal filed by the Collector of Central Excise.
5. Being aggrieved by the said order of the Tribunal the Collector of Central Excise filed a Reference Application framing certain issues of law, which have already been referred to the Bombay High Court in the case of Bajaj Tempo 1995 (80) ELT 54 (Tribunal) and accordingly the above questions of law were referred to this Court for its opinion.
6. Ms. Manisha Lovkumar, learned Standing Counsel appearing for the Central Excise Department has submitted that the Explanation Clause (a) to Rule 57-A stipulates that inputs which are manufactured and used within the factory of production, in or in relation to, the manufacture of final products. She has, therefore, submitted that if such inputs were not used in or in relation to the manufacture of final product, within the factory of production the modvat credit is not allowable to the respondent assessee. The credit under the modvat scheme is available to the manufacture of final product subject to the condition of Modvat Credit Rules. Here, in the present case admittedly intermediate product was not used within the factory and hence the learned Assistant Collector has rightly rejected the said claim of the respondent assessee. She has, therefore, submitted that the language of the Statute is very clear and there is no ambiguity therein. The claim of the respondent assessee should not be allowed on the basis of Notification No. 217/86 which has no direct bearing on the issue involved in the present reference.
7. We have heard learned Standing Counsel appearing for the Central Excise Department and we have also perused the orders passed by the authorities below. There is no independent reasoning in the impugned order of the Tribunal. It simply relied on the order passed in the case of Bajaj Tempo v. Collector of Central Excise, Pune . The issue involved in that case before the Tribunal was whether modvat credit can be denied, when goods manufactured utilizing Modvat inputs in their factories but transferred to their another unit for further manufacture of dutiable final products in the said other unit. The Tribunal has considered Notification No. 217/86 in great detail and observed that Notification No. 217/86 grants exemption of products specified as inputs in Column-2 of the Schedule to this Notification used in the further manufacture of final products specified in Column-3 thereof within the factory of production. The benefit is also available if the inputs manufactured specified in Column-2 of the Table, are removed under chapter X procedure to another unit of the same assessee for further manufacture of final products specified in Col.3. The inputs specified in Col.2 and final products specified in Col.3 of the Table annexed to the said notification are one and the same, as specified in the notification issued under Rule 57A of the Central Excise Rules. The exclusion clause, barring certain categories of inputs such as machinery, machines, packaging materials, whose value is not included, as is found in Rule 57A, is also noticed in this notification. The Tribunal was, therefore, of the view that where inputs notified under Rule-57A are manufactured in a factory and utilized captively in the manufacture of notified final products under Rule 57A, such inputs can be cleared from the place of manufacture for further use in the manufacture of final products within the factory or in another factory of the same manufacturer, without payment of duty, which, otherwise would be payable in terms of Rules 9 & 49 of the Central Excise Rules as amended. Even after considering the provisions contained in Rule-57C of the Rules, the Tribunal observed that the scope of Rule 57C is to be construed in the context of Modvat Scheme and not to destroy that concept. Any interpretation in such a situation has to be to give effect to Notification 217/86 and not to take away the benefit of averting payment at each stage in the line of production. Hence, a mechanical application of Rule 57C, is to be avoided, since it destroys the very benefit, which is otherwise available under the scheme right from stage one to the final stage. In the case of disintegrated production, credit is available from stage one by paying duty at each finished stage and taking credit of such duty in the other units down the line, whereas in the case of vertically integrated production units the same benefit is sought to be conferred by averting payment of duty at each stage and postponing the availment of credit to the final stage of manufacture.
8. It is necessary to make a reference of Tribunal's decision in the case of National Aluminium Co. Ltd. v. Commissioner of Central Excise wherein it is held that Notification No. 217/86 C.E. is sui generis in giving relief to a manufacturer utilizing the duty paid inputs in manufacture of dutiable final product through the process of wholly exempted intermediate products. Its purpose is to avoid scriptory work when the wholly exempted intermediate product is utilized captively by the same manufacturer (either in the same factory or in another factory) in manufacture of dutiable final product. IN the scheme of Notification No. 217/86 C.E., if for the purpose of consumption of intermediate inputs, both factories are treated as one, they have to be treated as one for the purpose of utilization of modvat credit. If this is not allowed, the purpose of Notification No. 217/86- C.E. will be defeated and it cannot be given effect in such cases.
9. We are, therefore, in total agreement with the view taken by the tribunal and held that the Modvat credit of duty paid on the basis of inputs used in the intermediate product cannot be denied by applying Rule 57C of the Central Excise Rules, 1944, in respect of removal of inputs from one factory to another under the provisions of Notification No. 217/87 CE. as amended by Notification No. 97/89-Ce, by following Chapter X procedure of the Central Excise Rules, under which payment of duty on the ultimate final product is ensured. The question No. 1 is, therefore, answered in negative i.e. in favour of the respondent assessee and against the Central Excise Department. We are also of the view that Rule 57C should not be strictly construed disregarding the fact that the Notification No. 217/86 is essentially based on Modvat scheme and the amendment carried out by way of Notification No. 97/89-Ce was to facilitate such removal from one factory to another of the same manufacturer without payment of duty, so long as it is ensured that the ultimate final products pay duty. The question No. 2 is, therefore, answered in negative i.e. in favour of the respondent ' assessee and against the Central Excise Department.
10. So far as question No. 3 is concerned, the Tribunal in Bajaj Tempo's case (Supra) rightly observed that the said case related to clearances of diesel engine parts free of duty in terms of Notification No. 217/85 under Chapter X procedure for use elsewhere in the manufacture of I.E. Engines. It is not a case, where the assessees cleared the goods to another factory belonging to them, where dutiable engines were manufactured from those parts and such engines cleared on payment of duty. It was a case of clearance of the parts of I.C. Engines to various manufacturers many of whom used these parts for manufacture of exempted I.C. Engines. The Tribunal further observed that the main point pleaded in that case was that they had taken credit on inputs and utilize the inputs in the manufacture of I.C.Engine parts as per declaration filed and hence subsequent reversal of credit is not permissible under Rule 57C read with Rule 57-I. Thus, the said decision is clearly distinguishable on facts. Thus, the question No. 3 is answered in negative i.e. in favour of the assessee and against the Central Excise Department.
11. We are, therefore, of the view that in cases where intermediate products manufactured from the inputs are sent to another factory without payment of duty under Chapter X for further utilization in production of the ultimate final product the Modvat in respect of inputs originally taken was still available for payment of duty on the final products.
12. This reference is accordingly disposed of without any order as to costs.