2004 (12) TMI 88 - SC - Central Excise

Whether the appellants went on paying concessional rate of duty wilfully without availing of Modvat credit with intent to misutilise the Modvat scheme? Held that - The appellants never opted out of the Modvat scheme. They partly cleared the final products by paying duty at concessional rate without utilising the credit in the payment of duty on final product and partly on the basis of credit which was not admissible. It is important to note that the underlying object behind the notification was to utilise the credit against payment of duty on the final product. In the circumstances the demand for differential duty penalty and confiscation subject to payment of redemption fine is valid and justified. Accordingly we answer the above question in the affirmative i.e. in favour of the department and against the appellants. Before concluding we may clarify that our judgment is confined to the Notification No. 175/86-C.E. as it stood at the relevant time.

Summary

The core legal questions considered in this judgment are:

1. Whether the appellants, as small-scale manufacturers, were entitled to exemption under Notification No. 175/86-C.E., dated 1-3-1986, when they had availed or not availed Modvat credit on inputs used in manufacture of excisable goods.

2. Whether the appellants wilfully misutilised the Modvat scheme by clearing final products at concessional rates of duty without availing or reversing the Modvat credit, thereby causing wrongful benefit to themselves and their sister concern.

3. Whether invocation of the proviso to Section 11A of the Central Excises and Salt Act, 1944 (allowing extended period for demanding excise duty) was justified in the facts of the case.

4. The interpretation and application of Notification No. 175/86-C.E., particularly regarding the conditions for exemption and concessional rates vis-`a-vis availing of Modvat credit and limits on clearances.

Issue-wise Detailed Analysis

Issue 1: Entitlement to exemption under Notification No. 175/86-C.E. and Modvat credit eligibility

The relevant legal framework includes Notification No. 175/86-C.E., dated 1-3-1986, which provides exemption from excise duty for specified goods cleared by small-scale manufacturers, subject to conditions. The notification distinguishes between manufacturers who avail Modvat credit and those who do not, prescribing concessional exemption for the former and total exemption up to specified limits for the latter. The Modvat scheme, introduced w.e.f. 1-3-1986 and governed by Rules 57A to 57J of the Central Excise Rules, 1944, allows manufacturers to take credit for duty paid on inputs, which can be utilized against duty payable on final products.

The Court noted that under Rule 57G, a manufacturer must file a declaration to avail Modvat credit, and the credit is only permissible where both inputs and finished products are excisable commodities. Inputs exempted from duty cannot generate Modvat credit.

In the present case, the appellants used cast iron and castings (exempted inputs) and steel bars (duty-paid inputs). The Tribunal and Adjudicating Authority found that Modvat credit was inadmissible on exempted inputs and was not availed on steel bars. Therefore, the appellants were not entitled to the concessional exemption under the notification since such exemption is conditional on availing Modvat credit.

The Court emphasized that the notification envisaged a clear distinction: those availing Modvat credit get only concessional exemption, while those not availing credit get total exemption up to a limit. The appellants' failure to avail Modvat credit on admissible inputs disqualified them from the concessional exemption.

Issue 2: Wilful misutilisation of the Modvat scheme by clearing goods at concessional duty without availing or reversing credit

The Court examined whether the appellants acted wilfully in clearing final products at concessional rates without availing or reversing Modvat credit. The Additional Collector and Tribunal found that the appellants had not withdrawn their declaration under Rule 57G, thereby creating an impression of availing Modvat credit, but in fact did not utilize the credit in payment of duty on final products. They cleared goods at concessional rates in breach of the notification.

The Tribunal further found that the appellants suppressed these facts to enable their sister concern to take higher credit on the final products, which the sister concern used as inputs. This amounted to wilful misrepresentation and breach of the notification's conditions.

The Court held that the appellants partly cleared goods on inadmissible credit and partly on non-availment of credit but still claimed concessional exemption. This conduct was contrary to the object of the Modvat scheme, which is to reduce the cost of final products by allowing credit on inputs against duty on final products. The appellants' actions defeated this purpose and caused wrongful benefit.

Issue 3: Justification for invocation of proviso to Section 11A for extended period of duty demand

The appellants contended that since they had not withdrawn their declaration and the department was aware from their accounts that Modvat credit was not availed, the invocation of the extended period under proviso to Section 11A was improper. They argued absence of wilful suppression and knowledge by the department negated the extended period applicability.

The Court rejected this contention, finding that the appellants never opted out of the Modvat scheme and deliberately cleared goods at concessional rates without utilizing credit. This constituted wilful suppression and misrepresentation, justifying invocation of the extended period for recovery of duty.

Issue 4: Interpretation of Notification No. 175/86-C.E. regarding exemption and concessional rates

The Court analyzed the notification's provisions which provide for:

• First clearances up to Rs. 30 lakhs: total exemption if Modvat credit not availed, concessional exemption (10% less duty) if credit availed.
• Subsequent clearances up to Rs. 60 lakhs: concessional exemption (10% less duty) with minimum duty payable of 5% ad valorem.
• Aggregate clearance limit of Rs. 75 lakhs beyond which normal duty applies.

The notification clearly conditions concessional exemption on availing Modvat credit. The appellants cleared goods at concessional rates without availing credit, breaching the notification. The Court underscored that the notification's object is to incentivize credit utilization and prevent double benefit.

Application of Law to Facts and Treatment of Competing Arguments

The Court applied the notification and Modvat scheme rules strictly, holding that the appellants' failure to avail or reverse credit while claiming concessional exemption was a breach of statutory conditions. The appellants' argument that the department was aware of their non-availment of credit was rejected since the appellants did not withdraw their declaration and cleared goods at concessional rates, misleading the department and their sister concern.

The Court found the penalty, differential duty demand, and confiscation subject to redemption fine imposed by the Additional Collector and upheld by the Tribunal to be valid and justified.

Significant Holdings

"The appellants were not entitled to clear the final products at concessional rate of duty without availing or reversing the Modvat credit as per the conditions of Notification No. 175/86-C.E., dated 1-3-1986."

"The appellants wilfully suppressed facts by not withdrawing the declaration under Rule 57G and cleared final products at concessional rates, thereby misutilising the Modvat scheme and enabling their sister concern to wrongfully claim higher credit."

"Invocation of the proviso to Section 11A for extended period of demanding excise duty was justified due to wilful suppression and misrepresentation by the appellants."

"The object of the Modvat scheme is to reduce the cost of the final product by allowing credit on duty paid on inputs, which must be utilized in payment of duty on final products; failure to do so breaches the statutory scheme and conditions of exemption."

The Court affirmed the order imposing differential duty of Rs. 3.15 lakhs, penalty, and confiscation subject to redemption fine, dismissing the appeal with no order as to costs.