1994 (6) TMI 22 - AT - Central Excise

Summary

Issues Involved:
1. Whether MODVAT credit can be disallowed by reversing the credit of duty on inputs used in the manufacture of final products cleared free of duty under an exemption notification.

Summary:

1. Purpose and Scheme of MODVAT Credit:
The MODVAT Credit Scheme aims to mitigate high costs and ensure complete reimbursement of duty paid on inputs. The scheme allows manufacturers to obtain instant and complete reimbursement of excise duty paid on components and raw materials. The Chartered Accountant argued that once MODVAT credit is correctly taken, it should not be reversed even if some inputs are used in exempted products, as credit and utilization are governed by different rules.

2. Exemptions and Utilization of Credit:
The Chartered Accountant contended that exemptions under Notifications 217/85 and 75/86 are conditional and not absolute, implying that final products are not fully exempt from duty. Therefore, reversal of MODVAT Credit in such cases is unjustified. He cited various tribunal decisions supporting this view.

3. Revenue's Argument:
The Learned JDR argued that Rule 57C creates a condition precedent for allowing MODVAT Credit, stipulating that no credit shall be allowed if the final product is exempt from the whole of the duty or chargeable to nil rate of duty. If credit was wrongly allowed, it must be reversed/recovered under Rule 57-I.

4. Tribunal's Analysis:
The Tribunal noted that the MODVAT scheme avoids cascading effects of duty, provided the final product is dutiable. Rule 57C bars credit on inputs used in fully exempt final products. The Tribunal highlighted that there is no direct High Court decision on this MODVAT issue but referenced decisions on the Proforma Credit Scheme under Rule 56A. The Bombay High Court in Geoffrey Manners Ltd. v. UOI held that credit cannot be claimed on inputs used in exempted goods. The Delhi High Court in Goodyear India Ltd. v. UOI provided a nuanced view but did not specifically address Rule 57C.

5. Contrasting Tribunal Decisions:
The Tribunal acknowledged conflicting decisions from different benches. The SRB in Premier Tyres Ltd. allowed credit utilization for exempted final products, while the ERB in East India Pharmaceutical Works Ltd. took a contrary view, emphasizing strict correlation between input credit and final product duty status.

6. Conclusion:
The Tribunal concluded that appellants are not entitled to MODVAT Credit u/s 57C for inputs used in fully exempt final products. Any wrongly taken credit must be adjusted or recovered as per Rule 57-I. The Tribunal answered the question posed by the WRB accordingly.