ORDER
G.R. Sharma, Member (T)
1. The Collector, Central Excise, Meerut has filed this appeal against the order of Collector (Appeals). The Collector (Appeals) in his order held “Rule 57C prohibits allowing of credit on final products which are exempt from whole of duty of Excise leviable thereon or are chargeable to nil rate of duty. There is no specific provision in this Rule for disallowing the modvat credit correctly taken and utilised but for becoming the final products exempt from payment of duty at a later stage. In the instant case the credit was correctly taken as per provisions of Rules 57A and 57G and utilised for payment of duty on final products as per provisions of Rule 57F. The ratio of judgments as cited above is squarely applicable in this case. In view of the above facts, I find that the impugned order is not maintainable. It is, therefore set aside.”
2. Briefly stated the facts of the case are that M/s. S.N.T. Plywood Industries are manufacturers of wood and articles of wood and were availing modvat credit of duty paid on inputs used in the manufacture of the final products. During the year 1990-91, the respondents were availing the benefit of Notification No. 175/86, dated 1-3-1986. After availing full exemption limit under this notification, the respondent opted for modvat from 25-5-1990. At the end of the financial year 1990-91, on 21-3-1991, the respondent intimated the department that they would be opting out of modvat scheme with effect from 1-4-1991, as they intended to avail exemption of duty of Excise under Notification No. 175/86. On 1-4-1991, the respondent had an opening balance of stocks of inputs as Nil and had some goods as final products and goods under process in which some inputs were used on which the respondent had availed modvat credit. The respondents were accordingly asked to pay back a sum of Rs. 96,444.53 as it had utilised this amount for payment of duty whereas the inputs on which this modvat credit was taken were used in manufacture of final products which were later on cleared without payment of duty under Notification No. 175/86. Accordingly a show cause notice was issued to them. In reply to the show cause notice, the respondent submitted that co-relation of 1:1 has been dispensed with by amendment of Rule 57F(3); that modvat scheme provided for taking credit as soon as the inputs are received; that modvat scheme does not provide any condition as to consumption of the inputs; that the product they manufactured between 25-5-1990 and 31-3-1991 was dutiable and not exempt; that the clearances of the final product manufactured during the preceding financial year out of duty paid inputs without payment of duty was in order; that contravention of Rule 57C applies only when the product is initially exempt from duty; that Notification No. 175/86 was a conditional notification.
3. Shri V.K. Sharma, the ld. SDR appearing for the appellant submitted that Rule 57C provided “No credit of the specified duty paid on the inputs used in the manufacture of final product other than those cleared either to a unit in a free trade zone or to a 100% export oriented unit shall be allowed if the final product is exempt from the whole of duty of excise leviable thereon or if chargeable to Nil rate of duty.” He submitted that in the instant case the inputs were used in the manufacture of the final product which became exempt under Notification No. 175/86 and were chargeable to nil rate of duty and therefore he submitted that no credit of duty on inputs can be allowed. He further submitted that the contention of the respondent that Notification No. 175/86 was conditional was not correct. Elaborating it further he submitted that the notification relied upon by the respondent was a notification which, if opted, prescribed the rate as nil rate of duty. Referring to Rule 57F(3), the ld. SDR submitted that Rule 57F(3) lays down “Credit of specified duty allowed in respect of any inputs may be utilised towards payment of duty of Excise, (i) on any of the final products in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under Sub-rule (1) of Rule 57G, or (ii) on the waste if any arising in the course of the manufacture of the final products; or (iii) on the inputs themselves if such inputs have been permitted to be cleared under Sub-rule (1). The ld. SDR submitted that Rule 57F(3) is to be read with Rule 57C. Rule 57C clearly stated that no credit will be allowed if the final product happens to be exempted or is chargeable to nil rate of duty. Only for further clarification it has been clarified under Rule 57F(3) as to how the credit so taken shall be utilised. The ld. SDR submitted that in the instant case there is no dispute that the credit of duty was taken on the inputs and was fully utilised for payment of duty on the finished product as perhaps the duty on the finished product was higher than the duty on the inputs. Though some inputs will remained utilised in the finished product in stock as well as in the finished product in the pipeline but there was no credit of inputs due in the RG 23A Part II. In this view of the matter, the ld. SDR submitted that when the finished product was exempt modvat credit of duty used in this finished product will not be admissible to the respondent in view of the specified provision of Rule 57C. Referring to the various case law relied upon by the appellant, the ld. SDR submitted that the facts in the cases cited and relied upon by the respondent were different from the facts in the instant case. Reiterating the findings of the Additional Collector in the Order-in-Original, the ld. SDR submitted that the demand for duty was justified and valid in law.
4. Shri Kamaljeet Singh, the ld. Advocate appearing for the respondent submitted that there is a catena of decisions given by the Hon’ble Tribunal whereunder it has been specifically laid down that 1:1 co-relation was not necessary; that there was no provision under Rule 57 which provides that modvat credit legally taken at the time of taking the credit can be reversed. In support of his contention, the ld. Advocate for the respondent relied upon the case law contained in the judgment of the Tribunal in the case of (1) CCE v. Premier Tyres, reported in 1992 (62) E.L.T. 104 and (2) CCE v. Wipro Information Technology, reported in 1988 (33) E.L.T. 172.
5. Heard the submissions of both sides and considered them. In the case of Collector of Central Excise v. Premier Tyres, reported in 1992 (62) E.L.T. 104, the Tribunal observed that
“In the present case it is not the case of the Revenue that the finished product for which the inputs were received were exempt from payment of duty as such; that it is possible that in some cases the finished product as such may be chargeable to duty but the same may be cleared without payment of duty under certain conditions as is the case here. Such cases cannot be taken to be covered by Rule 57C and Rule 57C can be taken to be applicable only in cases where at the time when the inputs were received and when the credit is to be taken the finished specified goods can be cleared under a general exemption notwithstanding the same being specified under Rule 57A. As mentioned earlier, we, therefore, hold that the credit taken was correctly taken and the only fault that can be found by the authorities is with reference to the utilisation of the same. The manner of utilisation of the credit is specified under Rule 57F and under Rule 57F(3)(i) the same can be used for payment of duty on any of the final product in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under Sub-rule (1) of Rule 57G. It would be seen that all that the assessee has to show is that the credit has been utilised towards payment of duty of the final product which were declared under Rule 57G(1).”
6. From this judgment of the Tribunal, I find that the finished product was having conditional exemption. Finished product if sold to the users of original equipment was exempt, but if sold otherwise was not exempt. Therefore, the Tribunal, examining the material on record, rendered a finding that modvat credit was correctly taken for eligible inputs and final product as declared. No 1:1 co-relation was either prescribed between inputs and final product for the purpose of utilisation of credit.
7. In the case of Collector of Central Excise, Bangalore v. Wipro Information Technology, reported in 1988 (33) E.L.T. 172, the Tribunal considered the applicability of set off under Rule 56A. Rule 56A covered different situations though some of the situations were identical to the situations of modvat credit. In this order, under Para 19, the Tribunal held
“This would mean that in utilising the credit, the question of correlation in the manner relevant where there is a provision for set off would not arise. According to our understanding, it is a standard practice in such cases that the amount of duty available through proforma credit could be fully utilised against the duty payable on finished goods provided that as a genus, they are the goods in the manufacture of which the inputs are utilised.”
8. In the above two cases, I find that some of the situations are similar to the case before me but some situations are different in as much as in the first case, the exemption of the finished product was conditional and in the second case the examination was limited to the provision of Rule 56A. The basic issue is as to how to reconcile with Rule 57C read with Rule 57A and 57G. Rule 57A and 57G provide that modvat credit of duty paid on inputs can be taken if the inputs as well as the finished product are specified and a declaration has been filed declaring the inputs as well as the finished product. In the instant case, the conditions under Rules 57A and 57G are fully met. Only the manner of utilisation under Rule 57F and the taking of credit under Rule 57C is contested. Rule 57C provides that no credit of duty shall be allowed if the final product is . exempt. Taking of modvat credit and allowing of modvat credit are two different aspects whereas taking of modvat credit is left to the manufacturer, the allowing of modvat credit is the exclusive preserve of the Department. Allowing of this credit is dependent on the final product. The nexus between the inputs and the final product is necessary. A final product will be cleared only after the inputs are used in or in relation to the manufacture of the final product. It is nobody’s case that the final product in the instant case was cleared on the date of taking credit on inputs. The case is that the final product was cleared under the exemption when there was no corresponding balance of duty paid on inputs available in the RG 23A Part II. In the circumstances, the question of utilising the modvat credit under Rule 57F is not the situation in the case before me. Entire modvat credit was utilised in payment of duty on the final product though still the inputs on which modvat credit was taken were still available used in or in relation to the manufacture of the finished product in the pipeline. Having regard to these facts and circumstances, I hold that the demand for duty is sustainable. In this view of the matter, the impugned order is set aside and the appeal is allowed.