TMI Blog2011 (7) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... em, had to be laid on Rule 57 CC (9) - A bare perusal of the show cause notice would show that it is replete with allegations that respondent/assessee diverted modvatable inputs in manufacture of exempted finished goods - Appeal is allowed by way of remand - CEAR No.4/2004 - - - Dated:- 7-7-2011 - MR JUSTICE SANJAY KISHAN KAUL, MR JUSTICE RAJIV SHAKDHER, JJ. For the Petitioner : Mr. Satish Kumar For the Respondent: Mr. Pradeep Jain RAJIV SHAKDHER, J (ORAL) 1. By an order dated 26.05.2004 in a reference application preferred by the revenue, this court had directed the Central Excise Service Tax Appellate Tribunal (hereinafter referred to as the Tribunal‟) to refer following question of law to this court :- Whether CEGAT is correct in holding that exemption under Notification No.4/97-CE dated 01.03.1997 was available to the manufacturer, when statutory provisions contained in Rule 57CC (9) of the Central Excise Rules, 1944 were not followed by the party . 2. Before we proceed further, it would be useful to refer to facts necessary for adjudication upon the question referred to us. These facts being as follows :- 2.1 The respondent/assessee at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential duty in respect of excess stock found in unit nos.1 and 2. For the sake of brevity, we are not detailing out herein the discrepancies as they have been set out in the show cause notice issued by the revenue. 2.5 It may only be noted at this stage that the show cause notice dated 02.03.1998 was not filed by the revenue in the captioned appeal. A copy of the same has, however, been handed over by the counsel for the revenue during the course of the hearing. 2.6 In the interregnum, the revenue had recorded the statements of the officers of the respondent/assessee under section 14 of the Central Excise Act, 1944 (hereinafter, referred to as CE Act‟). The statement recorded were those of one Sh. R.K. Chawla, Dy. General Manager (Commercial); Sh. Vijay Gupta, Assistant Manager (Excise); Sh. Vivek Nagpal, Chairman and Managing Director; Sh. Ashok Arora, General Manager; Sh. Raghunath Sharma, Assistant Accounts Manager; Sh. P.K. Jain, Chief Executive Officer, Sh. R.L. Gupta, Assistant Manager; Sh. Rakeshwar Dayal, General Manager (Purchase) and Sh. Rajneesh Kalra, Assistant Manager (Distribution). 2.7 Since it is necessary for the purpose of adjudication of the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich they had voluntarily debited from the PLA. He further deposed that both modvatable and non-modvatable raw material were stored together and as such both category of goods, i.e., dutiable or exempted goods could be manufactured from a particular lot of plastic granules and it also happened in practice. He also stated, inter alia, that they had not entered the receipt of master batches in the Form-IV Register and admitted the mistake. On perusal of Form IV Register and Rg.23A Pt.I Register for the year 1996-97 he admitted that even though excess quantity of duty paid inputs was issued, yet far less quantity of finished goods, cleared on payment of duty were accounted for in the RG-I Register. Failing to explain this discrepancy, he stated that since both the modvatable and non-modvatable inputs were kept together, apparently excess quantity of modvat inputs issued from RG-23A Pt.I were diverted for the manufacture of exempted goods. Sh. Ashok Arora, General Manager He further stated that they had taken modvat credit on entire master batch and PP bags etc. received in the factories and had entered the same in RG-23 Part I registers although some of these inputs were also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued . By virtue of the said show cause notice, the respondent/assessee was called upon to respond as to why Central Excise Duty amounting to Rs.7,69,90,751/- ought not to be imposed on the alleged ground of diverting raw material / inputs on which modvat has been availed for the purposes of manufacturing goods cleared at nil rate of duty under the aforementioned exemption notification. In addition, the respondent/assessee was also called upon to respond as to why the interest ought not to be levied at the rate of 20% under the provisions of Section 11 AB of the CE Act, as also as regards the proposal to levy penalty under the relevant rules. The respondent/assessee was also put to notice with regards to confiscation of seized plastic containers valued at Rs.68,98,764/- and plastic granules (raw materials) valued at Rs.1,27,400/-. The show cause notice further proposed appropriation of Rs.50 Lakhs deposited by the respondent/assessee on 22.10.1997 in the form of advance towards excise duty demanded. Furthermore, the respondent/assessee was also directed to show cause as to why land, building, plant, machinery, material conveyance and any other thing used in the manufacture, produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while, on behalf of the respondent/assessee, arguments were addressed by Mr. Pradeep Jain. 5. Mr. Kumar submitted that the Tribunal had erred in dismissing the appeal of the revenue in as much as it came to the conclusion that the condition prescribed in the exemption notification for keeping separate inventory‟ of finished goods which were chargeable to duty and those which were exempted from imposition of duty did not include separate storage. Mr. Kumar submitted that the provisions of Rule 57 CC (9) obliged the respondent/assessee to store finished goods on which modvat had been claimed separately from those which were cleared by taking recourse to the exemption notification. It was submitted that this was also the understanding of the respondent/assessee which is demonstrable from the fact that during the search carried out at the respondent/assessee‟s premises, the revenue obtained copies of undertaking filed by the respondent/assessee alongwith classification list and declarations, etc. whereby, it had been undertaken by the respondent/assessee that not only will it keep separate records of inputs but would also store those inputs separately, on which, it di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption notification. Mr. Jain, in these circumstances, relied upon the judgments of the authorities below and pressed for the dismissal of the revenue‟s reference. 7. We have heard the learned counsels for both the revenue and the respondent/assessee. In order to understand the contours of the controversy in issue, one would first have to examine in the first instance the relevant terms of the exemption notification. These being as follows :- In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts excisable goods of description specified in Column (3) of the Table below or column (3) of the said table read with the relevant list appended hereto, as the case maybe, and falling within the chapter, heading no. or sub-heading no. of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), (hereinafter referred to as the said Schedule), specified in the corresponding entry in column (2) of the said table, from so much of the duty of excise leviable thereon which is specified in the said Schedule, as is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h no modvat is claimed and are used in manufacturing finished goods cleared under the exemption notification. The result would turn perhaps on the meaning of the word inventory‟. The word inventory‟ by itself when compendiously used could refer to not only the raw materials, supplies, finished goods and work-in-progress and merchandise in hand, or in transit and owned, but could also include the aggregate value of such material; the process of counting, listing, pricing and itemizing such material and physical inventory as well (see Dictionary for Accountants ERIC L. KOHLER 5th Edition Page 271). Therefore, the argument made on behalf of the respondent/assessee that separate inventory could never include separate storage is not an argument which would find favour with us. We are in fact supported by the observations made by the Supreme Court in this regard in the case of Chandrapur Magnet Wires (P) Ltd. wherein, the Supreme Court while observing that the assessee ought to have maintained not only separate accounts‟ but also segregated inputs utilized for manufacture of dutiable goods and duty free goods, allowed the assessee‟s appeal on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail of the benefit of the exemption notification. The authorities below have merely examined the issue from the point of view of the interpretation which according to them, had to be laid on Rule 57 CC (9). We are unable to persuade ourselves that this is the correct approach to be adopted in the matter. Notwithstanding the fact that no physical segregation of inputs was carried out by the respondent/assessee, it was still open to the respondent/assessee based on the records and evidence available in that regard, that it had not used inputs (raw material) for manufacture of finished goods (which were cleared by taking recourse to the exemption notification) on which modvat credit had been claimed. What surprises us is that even though both in the show cause notice as well as in the order of the Commissioner, there is extensive reference to the statements of the officials and the records, which show prima facie diversion of modvatable inputs for manufacture of goods cleared under the exemption notification, no effort whatsoever has been made to determine as to what is the exact extent of the diversion. The extent of the diversion would have determined the finished goods in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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