Full Judgment
The Commissioner (Appeals) overruled the findings of the Deputy Commissioner and held that the fact that the goods were charged to specific rate of duty has no relevance to the question of determining whether the cost of packing material was included in the final product or not. However he still held that the appellants were not eligible to take Modvat credit on a different reasoning. He referred to the Madras High Court decision in Ponds India v. CCE -1993 (63) E.L.T. 3 and observed that in the Ponds India case final product cream powder could not be sold by itself and in that context the packaging material was essential component part of the final product. The Commissioner (Appeals) found that in the present case the packaging material namely polyethylene bags cannot be considered to be so essential for the marketing of the final product.
2. The learned C.A. Shri Madhavan appearing for the appellants pointed out that the ground taken by the Commissioner (Appeals) for upholding the order denying Modvat on the packaging material is beyond the scope of the show cause notice issued by the adjudicating authority in the matter. The show cause notice was only on the ground that Modvat credit under Rule 57A applies to packing material and not the raw material for producing such packing material. Factually also the learned C.A. urged that the packing in polyethylene bags is essential for the yarn because such packing is the primary packing for the product which is thereafter packed in corrugated cartons before being stored in the bonded store room in their factory. The conclusions of the Commissioner (Appeals) also do not find support in the decisions of the Tribunal on this question. The decision of the Tribunal in the case of Shree Cement v.CCE -1994 (70) E.L.T. 799 was cited wherein it was held that HDPE bags used in packing cement was held to be an eligible input for Modvat. The Madras High Court in similar circumstances of packing of cement in bags held that Modvat credit was admissible as reported in the case of India Cement v. Assistant Commissioner - 1995 (75) E.L.T. 493. The learned C.A. further contended that in the Ponds India judgment of the Madras High Court it has been laid down that packing material is different from a package or a container and a container is also held to be a treatable component part of the final product. The Larger Bench of the Tribunal had followed the Ponds India decision in Ashwin Vanaspati v.CCE -1994 (70) E.L.T. 754. In that case the tin plates from which the containers are made for packing vanaspati levied to duty at specific rate were held eligible for Modvat. Shri Mewa Singh the learned SDR contended that factually the case law relating to Ponds India is different because in that case the cosmetics in question which were the final products could not have been marketed at all without being packed in plastic jars. In the present case the yarn becomes fully manufactured even without the packing and is packed according to customer's requirement so also in the packing of cement.
3. We have carefully considered the submissions made by both sides. The show cause notice to the appellant proceeded on the footing that LDPE granules declared as an input cannot be considered as such on the ground that these are not used in or in relation to the manufacture of final product but the granules are raw material for the packing material namely LDPE bags. The view taken by the Deputy Commissioner for denying Modvat is no more sustainable, in view of the decision of the Larger Bench of the Tribunal in Ashwin Vanaspciti case (supra) which had followed the Madras High Court judgment in Ponds India case.
The other ground taken by the Deputy Commissioner has already been overruled by the Commissioner (Appeals) that denial of Modvat credit cannot be on the ground that the final product is subjected to duty at specific rates and not ad valorem. The further ground taken by Commissioner (Appeals) at the appeal stage is a fresh ground not taken earlier by the department. However even this ground will not be a valid one for denying Modvat, in view of the decisions cited (supra) especially in the case of India Cement and Shree Cement as well as the Ponds India decision of the Madras High Court. The packing of the yarn first in the primary packing of plastic bags thereafter in corrugated cartons shows that the packing of the yarn in such manner is incidental and ancillary to the completion of the process of manufacture of the yarn at the hands of the appellants. The Larger Bench in Ashivin Vanaspati case had noted this aspect also while considering the eligibility for packaging material for Modvat under Rule 57A. Therefore in view of the ratio of the judgments of the High Court and Tribunal cited (supra) the grounds taken by the lower authorities for denying Modvat in this case for LDPE granules used in the manufacture of plastic bags into which the yarn is packed is not sustainable. In this view of the matter impugned order is set aside and the appeals are allowed.