ORDER
R. Jayaraman, Member (T)
1. All the three appeals listed above involve consideration of the same issues and hence were heard together. The appeals are against the Orders-in-Appeal indicated against each as below:
2.1 Appeal No. 300/93 is against the order-in-appeal No. P-64/93 dated 18-3-1993 passed by Collector of Central Excise (Appeals), Pune, Appeal Nos. 298/93 & 299/93 are against the order No. A-35/93 dated 18-3-1993 passed by the same Collector (Appeals), Pune.
2.2 The issue common to all the three appeals can be briefly stated as below : The appellants M/s. Bajaj Tempo are manufacturer of Motor Vehicles. They have more than one manufacturing unit. They receive inputs under Modvat scheme in respect of materials, which they utilise in the manufacture of Motor Vehicle parts and I.C. Engines. These motor vehicle parts and I.C. Engines are partly utilised in the further manufacture of motor vehicles in the same factory and partly sent under Chapter X Procedure for further utilisation in the manufacture of motor vehicles in another unit belonging to the appellants, in terms of exemption Notice 217/86 dated 2-4-1986 as amended by Notification 97/89 dated 1-3-1989.
2.3 The appellants M/s. Swil Ltd. are manufacturers of copper wire, copper rods, copper sheets and strips, stainless steel wire and nickel wire. They receive inputs under the Modvat scheme for the manufacture of their products. Part of these products are cleared to another factory belonging to the appellants under Chapter X procedure in terms of Notification 217/86 for further manufacture of dutiable products.
2.4 In the case of both the appellants, Department took objection that the products cleared from their factory under Chapter X procedure in terms of Notification 217/86 are exempted and hence in terms of Rule 57C of the Central Excise Rules, Modvat Credit taken in respect of duty paid on inputs utilised in the manufacture of these products cleared outside to another unit of theirs for further manufacture, is not admissible; because the goods cleared are final products and they are cleared at ‘nil’ rate of duty by availing exemption under Notification 217/86 and hence in terms of Rule 57C of the Central Excise Rules, modvat credit is not admissible. In view of this objection, Modvat credit taken on inputs utilised in the products cleared in terms of Notification 217/86 for captive consumption in another unit of the appellants was ordered to be reversed. The orders passed by the Assistant Collector were appealed against, before the Collector (Appeals), Pune who has rejected their appeals. Hence these three appeals are before us.
2.5 The issue involved in all the three appeals is whether Modvat credit can be denied, when goods manufactured utilising Modvat inputs in their factories but transferred to their another unit for further manufacture of dutiable final products in the said other unit.
3. The following facts emerge undisputed in all the three cases during the hearing:
(i) Inputs are received on filing declaration for utilisation of the declared final products, which per se are dutiable and duty in the normal course would have been paid in terms of Rules 9 & 49 of the Central Excise Rules, before their clearance for further manufacture either in the same unit or for removal outside to another unit for further manufacture of dutiable final products but for the exemption under Notification 217/86 as amended by Notification 97/89, dated 1-3-1989.
(ii) If these products are cleared otherwise than under Notification 217/86 (e.g. if I.C. Engines or motor vehicle parts are cleared as spares outside or the copper wire, copper sheets etc. are cleared to another manufacturer or for use otherwise), they are to pay duty at the appropriate rate, before such clearance.
(iii) The final products, namely motor vehicle manufactured in the other unit of M/s. Bajaj Tempo utilising the I.C. engines or motor vehicle parts and the final products such as wire mesh manufactured by the other unit of M/s Swil Ltd. utilising copper wires etc. are dutiable and are cleared only on payment of appropriate duty.
(iv) Prior to the amending Notification 97/89, dated 1-3-1989, these products were cleared on payment of duty on their removal to their other units and Modvat credit of duty paid on these products was taken in the other unit and utilised for payment of duty on the final products manufactured in their other unit.
4. In the context of the above undisputed factual position, the arguments of S/Shri C.S. Lodha and B.N. Rangwani for the appellants and Shri Ravinder Jain’s reply on behalf of the Department are required to be considered.
4.1 The main thrust of the arguments of the Id. Counsel Shri C.S. Lodha is as below:
(i) The terms inputs, intermediate products, final products are dependent on the level of manufacture undertaken by the manufacturer. What is input for one factory may be a final product produced in another factory. What is intermediate product in one factory may be a final product or input in another factory. There is no definition given either in Notification 217/86 or in Rule 57A as to what is an input or final product. If excisable goods are received for further manufacture of excisable goods, they are referred to as inputs and products occurring at intermediate stage in the line of manufacture are intermediate products.
(ii) Rule 57C stands attracted, where final product manufactured out of Modvat inputs is exempt from the whole of duty of excise leviable thereon or is chargeable to ‘nil’.rate of duty. No doubt Notification 217/86 is an exemption notification, granting exemption to products manufactured (referred to as inputs) consumed captively in further manufacture of dutiable products in the same factory or in another factory belonging to the same assessee, provided the final product manufactured out of such products are dutiable and are cleared on payment of duty. Such an exemption only contemplates postponing recovery of duty on the goods produced in the factory (referred to as inputs) to the stage of clearance of finished goods manufactured out of such input products either in the same factory or another factory belonging to the same assessee. This exemption cannot be equated with other exemptions, where products manufactured per se are exempted from the whole of duty of excises either conditionally or unconditionally. The question to be looked into is whether removal under Chapter X procedure is by way of granting duty remission on these products for their use as such or where they are used for further manufacture of final product and such final product manufactured out of such products attracts any duty. Only in the case of such exemption granting remission of duty, Rule 57C can be construed to apply. He referred to the following case laws to urge this point that in these cases, the same question has been raised and where it is established that further use in the manufacture of dutiable final products, credit or exemption given was not disturbed.
1984 (17) E.L.T. 166 – Hindustan Lever
1987 (32) E.L.T. 579 – Collector v. Madras Rubber Factory
1989 (40) E.L.T. 287 – Collector v. Jayant Oil Factory
1990 (50) E.L.T. 482 – M.R.F. Ltd. v. Collector
(iii) He seeks to point out that the decision taken in the case of Kirloskar Oil Engines Ltd. – 1993 (42) E.C.C. 153 (WRB) for referring the issue to a larger Bench is clearly distinguishable. In that case, the goods manufactured by the appellants were cleared under Chapter X procedure in terms of exemption Notification 217/85, dated 8-10-1985, where the part of I.C. engines are exempted from duty and there is no requirement to the effect that these parts should be utilised for further manufacture of dutiable I.C. engines. Many types of I.C. engines are wholly exempted and irrespective of the usage of the I.C. Engine parts even in exempted engines, the exemption Notification 217/85 is applicable. The exemption wholly remits the duty of I.C. Engine parts on condition that they are used either in the factory of production or elsewhere in the manufacture of diesel oil operated I.C. engines. It is not conditionally dependent on whether such I.C. engines are to be cleared on payment of duty. Hence this Bench was justified in taking the view that the I.C. Engine parts are exempted thereby attracting Rule 57C of the Central Excise Rules. In the case of Notification 217/86, it is only postponement of recovery of duty to the final stage of clearance of motor vehicles in the other factory. Hence the case is distinguishable.
(iv) Even in the above case of Kirloskar Oil Engines, this Bench has taken note of the position that the other Benches of the Tribunal and Delhi High Court have taken a view that reversal of credit taken for utilisation against dutiable final products is not permissible, merely because certain final products manufactured therefrom are cleared subsequently under exemption. They have held that since there is no one to one correlation and credit has been taken and utilised only against dutiable final products, reversal is not permissible, merely because certain final products are cleared under exemption. This Bench has differed from that view, drawing its support from the decision of the Bombay High Court and referred the issue to the larger Bench. But since the case of Kirloskar Oil Engines is clearly distinguishable as indicated above, he would not press for the arguments based on the decision of other Benches and Delhi High Court, since the issue can be independently decided, on its own, in this case.
(v) He also points out that while the scheme of Modvat to avert cascading effect of input taxation, Notification 217/86 is to avert scriptory work and payment of duty at each stage of manufacture and take credit at each stage for utilisation in the further stage of manufacture in the same factory or in another factory of the same manufacturer. Prior to amendment of Notification 217/86 by Notification 97/89 effective from 1-3-1989, they cleared I.C. Engines and M.V. Parts on payment of duty and took the credit of this duty in their other factory for utilisation towards the payment of duty on motor vehicles. Even now they can do this, in which case the credit is available throughout. The amendment dated 1-3-1989 is on account of representations made to the Government for averting payment of duty at each stage and scriptory work, by prescribing in bond procedure for movement of these goods to another unit of the same assessee, so that they can be utilised in further manufacture of dutiable final products. Hence, a beneficial provision introduced by this amendment cannot be construed to have taken away the existing benefit of Modvat Credit on these inputs. Such an interpretation would frustrate not only the Modvat Scheme but also the objective behind Notification 217/86. Law has to be construed for furthering the objective and not to frustrate the objective. In this context, he referred to the decision of the Apex Court reported in AIR 1986 SC 1499 – Girdlwrilal & Sons v. Balbirnath Mathur and Ors. and AIR 1992 SC 1846 in the case of Administrator, Municipal Corporation, Bilaspur v. Daltaraya Dahankar.
(vi) Finally he submits that Rule 57D(2) is to be construed applicable in this case in the context of Notification 217/86, by giving an extended meaning to the ‘factory of production’.
4.2 Shri B.N. Rangwani, the Id. Consultant for the other appellant, mainly pointed out that Notification 217/86 refers to exemption of products (referred to in this Notification as ‘inputs’) used in further manufacture of final products either within the same factory or in another factory of the same assessee. The inputs and final products figuring in the schedule to Notification 217/86 are the same as the ones notified under Notification issued under Rule 57A. The main condition is that these products (inputs) have to be used in the final products, which are to be cleared on payment of duty. If the final products manufactured using Modvat inputs, are exempted or cleared at Nil rate of duty, the exemption will not be available and such inputs would attract duty. Hence the question of recovery of Modvat Credit on basic inputs used in manufacture of products, which themselves are referred to as inputs in Notification 217/86 would not arise, so long as the final products manufactured out of the inputs referred to in Notification 217/86 pay duty.
4.3 He also seeks to adopt the other arguments of the Id. Counsel Shri C.S. Lodha.
5.1 Shri Ravinder Jain, in reply mainly pleads as below :
(i) Notification 217/86 is undisputedly an exemption Notification. Goods manufactured and declared as final products are cleared at ‘Nil’ rate of duty under the said notification. Hence Rule 57C is clearly attracted.
(ii) The term “wholly exempt from the duty of excise” in Rule 57C is in contradistinction to the partial exemption from duty of excise. It is to be read in the context of ‘Nil’ rate of duty following that term in the said Rule. Hence the kind of distinction sought to be made by Shri C.S. Lodha on the applicability of exemption notifications for interpreting Rule 57C cannot be accepted.
(iii) Specific provisions were made for allowing credit in respect of goods cleared under exemption for 100% E.O.U. in Rule 57C. Prior to that, such clearances attracting nil rate of duty under the exemption notification were held as not eligible for Modvat credit. Hence, what is not specifically provided in Rule 57C cannot be read into that rule. Rules are to be construed as per the wordings, where there is no ambiguity in the rules. Hence bringing in the objective of the scheme for interpreting the provisions of Rule 57C, where it is clear, is not permissible. Intendment cannot be imported for interpreting the provisions of the statute, where the provisions are clear.
(iv) This case is also analogous to the case of Kirloskar Oil Engines, where goods are cleared under Chapter X procedure in terms of an exemption Notification for use in further manufacture of goods. Hence following this ratio, the contentions raised by the other side call for rejection. If, however, this Bench feels that this case also calls for reference to larger Bench, because of the contra decisions on the question of reversal of Modvat Credit in such cases, he has no objection.
(v) He also referred to the provisions of Rules 57A, 57C, 57D, 57G and 57-I to urge the contention that in the context of these rules, duty credit taken on inputs and utilised in the declared final products, which are exempted on clearance from the factory, is to be reverted. In so far as the factory of manufacture of products (specified as inputs) in Notification 217/86 is concerned, they are the final products cleared at Nil rate of duty.
6.1 Having set out the undisputed factual position and the main tenets of equally attractive arguments from both the sides, we now proceed to examine the issue by an independent analysis of the provisions of Rule 57C vis-a-vis Notification 217/86.
6.2 Notification No. 217/86 grants exemption to products specified as inputs in Col. 2 of the schedule to this notification used in the further manufacture of final products specified in Col. 3 thereof within the factory of production. The benefit is also available if the inputs manufactured specified in Col. 2 of the Table, are removed under Chapter X procedure to another unit of the same assessee for further manufacture of final products specified in Col. 3. The inputs specified in Col. 2 and final products specified in Col. 3 of the Table annexed to the said notification are one and the same, as specified in the notification issued under Rule 57A of the Central Excise Rules. The exclusion clause, barring certain categories of inputs such as machinery, machines, packaging materials, whose value is not included, as is found in Rule 57A, is also noticed in this notification. Hence from this notification, it appears that where inputs notified under Rule 57A are manufactured in a factory and utilised captively in the manufacture of notified final products under Rule 57A, such inputs can be cleared from the place of manufacture for further use in the manufacture of final products within the factory or in another factory of the same manufacturer, without payment of duty, which, otherwise would be payable in terms of Rules 9 & 49 of the Central Excise Rules as amended.
6.3 Now, we look at Rule 57C. As per this Rule, no credit on inputs should be allowed, if the final product is exempt for the whole of the duty of excise leviable thereon or is chargeable to ‘nil’ rate of duty. What would be the consequence in a situation as is seen in the cases before us, when Rule 57C is applied in the manner as pleaded by J.D.R.? To illustrate, taking the case of Bajaj Tempo, they bring duty paid steel materials from outside declaring them to be inputs for the product ‘Motor Vehicle Parts’ or T.C. Engine’ and take Modvat credit. But these motor vehicle parts or I.C. Engines manufactured in their Pune factory are themselves inputs for the further manufacture of Motor vehicle in their factory at Pune as well as in another factory belonging to them, where such motor vehicle parts/I.C. Engines are cleared under Notification 217/86. In such a situation, if motor vehicle the ultimate final product is cleared free of duty, the consequence would be to deny the exemption availed of in respect of M.V. parts or I.C. engines. Thus duty payable on such motor vehicle parts or I.C. engines used in the manufacture of exempted Motor Vehicle is required to be paid at the time of clearance of exempted motor vehicle. This is what Notification 217/86 envisages. As regards Modvat credit taken on steel materials, if Rule 57C is applied at the stage of clearance of motor vehicle parts or I.C. engines on the ground that they are exempted, it would amount to denial of Modvat credit otherwise available on the steel materials used in the manufacture of motor vehicles, since the steel materials also are eligible inputs for the motor vehicle. Whether such a denial is permissible? This is the hot question debated before us, which is to be considered.
7.1 First we consider this question from the pleadings made by the Id. JDR and the objections taken by the department. Going by these objections, if we order reversal of credit taken on basic input materials in terms of Rule 57C, then they have the choice to clear the M.V. parts or I.C. engines or copper wires/rods etc. on payment of duty, in which case they can take credit of the duty paid on these items in the other factory and utilise the same for payment of duty on Motor vehicles or wire mesh as the case may be. No objection can be taken on this, as agreed to by the Id. JDR. Thus, by sending the same inputs under Chapter X procedure in terms of Notification 217/86 they cannot be visualised as having agreed to forego this credit on basic input materials, nor can the Notification 217/86 or Rule 57C be construed to force such a situation on them. This is evident from the scheme of Modvat and also from Notification 217/86 as discussed below.
7.2 Under the Modvat scheme, credit of duty paid on notified inputs is to be given for payment of duty on the notified final products, if such inputs are used in or in relation to the manufacture of final products and such inputs are not hit by explanation to Rule 57A. This same concept is clearly discernible in Notification 217/86. This notification is mainly intended to avert payment of duty at each intermediate stage and take credit of such duty at each subsequent stage, starting from the basic materials, turning out components and finally ending with the ultimate final product. Such a vertical integration of production line can be in one and the same factory or spread over two or more factories of the same manufacturer. In such cases Notification 217/86 can be availed. They also can take Modvat credit on primary inputs used in the manufacture of secondary inputs (M.V. parts, I.C. engines) so long as the final product namely Motor vehicle pays duty. Hence, we are to agree with the Id. counsel Shri Lodha that Notification 217/86 stands on a different footing, when it comes for consideration for purposes of applying Rule 57C. It is not like any other exemption, where intention is to forego the levy on the products cleared from the factory.
7.3 But the Id. JDR points out the decision of this Bench in Kirloskar Oil Engines – 1993 (42) ECC 153 (WRB). We have carefully looked in that decision. That case related to clearances of diesel engine parts free of duty in terms of Notification 217/85 under Chapter X procedure for use elsewhere in the manufacture of I.C. engines. It is not a case, where the assessees cleared the goods to another factory belonging to them, where dutiable engines were manufactured from those parts and such engines cleared on payment of duty. It was a case of clearance of the parts of I.C. engines to various other manufacturers, many of whom used these parts for manufacture of exempted I.C. engines. It was never claimed before us in that case that the parts of engines were utilised only in assembly of dutiable I.C. engines. In the circumstances, the present issues were never before us for consideration in that case. The main point pleaded in that case was that they had taken credit on inputs and utilised the inputs in the manufacture of I.C. engine parts as per declaration filed and hence subsequent reversal of credit is not permissible under Rule 57C read with Rule 57-1. Apart from the fact that the case of Kirloskar Oil Engines is clearly distinguishable on facts, even as a proposition of law. Exemption Notification 217/85 is not on par with Notification 217/86. The latter notification is esoteric to Modvat scheme and is entirely based on that concept, whereas Notification 217/85 is a notification foregoing revenue on I.C. engine parts used in I.C. Engines irrespective of whether they are dutiable or exempted.
7.4 Another argument of Id. JDR is that in the case of exemption applicable to products removed to 100% EOU, a specific exception has been made in Rule 57C and in the absence of any such exception being provided in the case of Notification 217/86, such products cleared under Chapter X procedure for further manufacture of final products in terms of the above Notification 217/86, are only to be construed as goods exempted, thereby attracting Rule 57C. We have carefully considered this argument. But we find that in the case of exemption for goods removed to 100% EOU, such products are totally exempted and even the final export products turned out from these items in the 100% EOU are not to suffer any duty. Hence in that case, the Government, as a policy measure for freeing the export products from the burden of any input levy, have to specifically provide for an exception in Rule 57C. But in the case of Notification 217/86, the final products manufactured out of inputs are required to suffer duty and hence the chain of credit is extended upto the stage of final product, which is to be cleared on payment of duty. This is what emerges from a combined reading of Notification 217/86 and Rule 57C.
7.5 It is pleaded by Shri Jain, the Id. JDR that Rules are to be construed as they are worded and it is not permissible to impart objective or intention for construing the rule, where language is plain and straight. We have no dispute on the proposition in principle. But here is a case where a Notification 217/86 based on the concept of Modvat operating over a part of the sphere of production in the vertical integrated line of production and the availability of Modvat benefit in respect of duty paid on primary inputs received (where the Modvat scheme and the notification allows benefits for those primary inputs used in the ultimate final product) are required to be considered. In such a situation, the pertinent question to be asked is whether the ultimate final product suffers duty or not. If it suffers duty, credit from stage one is admissible, irrespective of the removals partly outside for conversion into dutiable final product. This concept is also recognised in another manner in Rule 57F(2), where inputs are received and duty credit taken and thereafter send such inputs to outside job workers for conversion into intermediate products or for further processing, to be utilised in the ultimate final product. It would therefore be more appropriate to treat Notification 217/86 as akin to situation under Rule 57F(2), but applicable only to cases, where inputs are sent to another factory of the same manufacturer.
7.6 Hence, the scope of Rule 57C in a situation like the present one, is to be construed in the context of the Modvat scheme and not to destroy that concept. Any interpretation in such a situation has to be to give effect to Notification 217/86 and not to take away the benefit of averting duty payment at each stage in the line of production. Hence, a mechanical application of Rule 57C, is to be avoided, since it destroys the very benefit, which is otherwise available under the scheme right from stage one to the final stage. In the case of disintegrated production, credit is available from stage one by paying duty at each finished stage and taking credit of such duty in the other units down the line, whereas in the case of vertically integrated production units the same benefit is sought to be conferred by averting payment of duty at each stage and postponing the availment of credit to the final stage of manufacture. This is how, we could interpret the provisions of Rule 57C in the context of Notification 217/86. Any other interpretation will frustrate the object of the scheme, apart from leading to discrimination between vertically integrated production line and laterally disintegrated production amongst different units.
7.7 For taking the above view, we also draw support from the citations made by the Id. advocate Shri C.S. Lodha, namely, AIR 1992 SC 1846 and AIR 1986 SC 1499. In the words of Lord Denning (relied upon by the Apex Court) -“whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts, which may arise and even if it were, it is not possible to provide for them free from all ambiguity. A Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of parliament and he must do this, not only from the language of the statute, but also from a construction of social conditions, which gave rise to it and of the mischief, which it was passed to remedy and then he must supplement the written word so as to give force and life to the intention of the legislature. A Judge should ask himself the question, how, if the makers of the Act had themselves come across the ruck in the context of it, they would have straightened it out? He must do what they would have done. A Judge should not alter the material of which Act is woven but he can and should iron out the creases”. We are to respectfully follow this principle in this case. Even if a view is taken as urged by the Id. JDR that an exception is to be provided for in Rule 57C for removals in terms of Notification 217/86, absence thereof has to be construed as leaving the situation ambiguous. Hence a harmonious construction to further the objective of both the Modvat scheme and Notification 217/86 is called for. That is what we have done.
7.7A We also find that the same approach has been adopted by the Tribunal in the case laws cited before us by the Id. counsel for the appellants. In the case of Hindustan Lever – 1984 (17) E.L.T. 166, the Tribunal held that the benefit of exemption would be available to V.N.E. oil cleared after hydrogena-tion under Chapter X procedure for manufacture of dutiable soap. In the case of Collector of Central Excise, Madras v. Madras Rubber Factory – 1987 (32) E.L.T. 579 (Tribunal), the Special Bench held that the benefit of set off in respect of raw materials classifiable under the erstwhile Tariff Item 68 is available, notwithstanding the fact such raw materials are first used in the manufacture of masticated rubber (which was free of excise duty) and the masticated rubber was used in the dutiable final product. This was in the context of Notification 201/79 and in that case also the rubber was transferred to another unit of the assessee. The provision of Notification 201/79 with regard to denial of credit being analogous to Rule 57C, the said decision seems to be squarely applicable in this case.
7.8 Thus viewed from all angles, we are not persuaded to accept the plea of the Id. JDR to interpret Rule 57C in the manner as pleaded by him. We are also not persuaded to treat the facts as well as the issue in this case as analogous to the case of Kirloskar Oil Engines calling for a reference to the larger Bench.
8. In the result, the appeals are allowed with direction to restore credit.