Decided on January 21,1991



K. Sankararaman, Member (T) - (1.) THIS is an appeal filed by M/s. East India Pharmaceutical Works Ltd., Calcutta challenging the order-in-appeal, dated 16-11-1989 passed by the Collector of Central Excise (A), Calcutta whereby he rejected their appeal before him and upheld the order-in-original, dated 2-2-1989 passed by the Assistant Collector of Central Excise, Calcutta 'C' Division. In terms of his said order, the Assistant Collector had disallowed Modvat Credit of Rs. 2,28,323.49 which amount had been paid as duty on inputs which were used in the manufacture of two final products; Locula and Cortola-M which became exempt from duty with effect from 1-3-1988. The Assistant Collector had based his decision on the provisions of Rule 57C of the Central Excise Rules, whereunder no credit of duty paid on inputs used in the manufacture of a final product shall be allowed if that final product is exempt from duty or chargeable to nil rate of duty. In their appeal before the Collector (Appeals) it was submitted by them that duty paid on the inputs received and utilised in the manufacture of final products which were cleared on payment of duty could not be disallowed on the ground that some inputs were in stock on 1-3-1988 and therefore, they were used only in the manufacture of exempted products. On the inputs required for the manufacture of the exempted goods which they received after 1-3-1988, they had not taken credit but the utilisation of credit before 1-3-1988 when the said goods were not exempted was correct and legal. They had referred to the decision of the South Regional Bench of the Tribunal in Collector of Central Excise v. Wipro reported in 1988 (33) ELT 172 and claimed that going by the ratio of the said decision their appeal should be allowed. The Collector (Appeals) upheld the order of the Assistant Collector observing, inter alia, that the appellants' reliance on the Wipro decision of the Tribunal was not relevant since the facts were different. Thereby the present appeal.
(2.) In their appeal before us, the appellants have referred to their submissions made before the lower authorities and contended that the provisions of Rule 57C came into play in their case only with effect from 1-3-1988. When the products in question became exempt from duty, only the inputs required for their manufacture received after 1-3-1988 became ineligible for grant of Modvat benefit. The credit on the inputs received prior to that date and also utilised before the said date cannot be disallowed on the ground that subsequently the final products became exempt. The utilisation of credit did not have to wait till the inputs were utilised in full as strict correlation of inputs and outputs had been dispensed with by the Government, as clarified in different instructions. Modvat Scheme provides for instant credit and specifies no condition as to consumption factor. No one-to-one correlation between input and final product is required in contrast to the set-off scheme. The South Regional Bench, in the Wipro case, had clearly held that proforma credit taken correctly on inputs is not liable to be disallowed even if subsequently the final products are exempted from payment of duty. When the appeal was posted for hearing, Shri S.N. Sinha Mahapatra, learned Counsel for the appellants, referred to the submissions made in their appeal memorandum. He urged that the lower authorities were clearly in error in their interpretation of the relevant provisions of the modvat scheme. They had failed to apply the ratio of the South Regional Bench decision in the Wipro Case which was squarely applicable to their case. He, therefore, pleaded that the appeal may be allowed and the impugned order set aside. He added, in conclusion, that the products which became exempt from duty with effect from 1-3-1988 leading to the present problem had again become dutiable subsequently and they are again availing themselves of modvat facility thereon since then.
(3.) SHRI M.N. Biswas, learned Senior Departmental Representative argued on behalf of the respondent Collector and opposed the Appeal. He strongly supported the impugned order. Rule 57C has correctly been applied in their case. Where the inputs are clearly used in the manufacture of exempted goods, there is no question of Modvat being admissible. If the credit had, however, been taken and utilised when the final products were dutiable without insisting on one-to-one correlation that was only a working arrangement granting procedural relaxation. Though one-to-one correlation was not to be insisted upon, there should be broad correlation. This, however, cannot be said to have been fulfilled when the goods became exempt. As long as the final products were dutiable, then the utilisation of credit for payment of duty thereon was allowed without insisting on strict correlation between the outputs and the inputs used for their manufacture. But, when the final products became exempt, the position completely changed and Rule 57C came into play. The demand for duty had been correctly raised and correctly upheld by the Collector (Appeals). He pleaded that the appeal may be dismissed and the order of Collector (Appeals) sustained.;

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