TAX CASE No.7 OF 2001
(In the matter of an application from the Order NoA-48/Cal dated
12.1.2001 passed by Smt. Archana Wadhwa, Member (Judicial) and
Dr. S.N.Busi, Member (Technical) of Custom, Excise & Gold
(Control) Appellate Tribunal, Eastern Bench Calcutta in Appeal No.E-
486/2000 (Commissioner Central Excise, Patna vs. Lumbini
Beverages (P) Ltd.)
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LUMBINI BEVERAGES PRIVATE LIMITED, H-2 EPIP, INDUSTRIAL AREA,
HAJIPUR 844101, BIHAR
——————————Appellant
Versus
THE COMMISSIONER OF CENTRAL EXCISE, PATNA, CENTRAL
REVENUE BUILDING, BIRCHAND PATEL PATH, PATNA
————————Respondent
For the Appellant : Mr. J.P.Khaitan,
Senior Advocate
Mr. Rajeev Ranjan Prasad, Advocate
For the Respondent : Mrs. Archana Meenakshi,
Senior Standing Counsel
Mrs. Archana Sinha,
Junior Standing Counsel.
——–
PRESENT
THE HON’BLE ACTING CHIEF JUSTICE
THE HON’BLE DR. JUSTICE RAVI RANJAN
———-
C.K.Prasad,ACJ: Appellant Lumbini Beverages Private Limited
(hereinafter referred to as the „assessee‟) purchased capital
goods from indigenous manufacturers/suppliers. In these
purchases, invoices were in the assessee‟s name. Assessee
also imported capital goods from foreign countries and got those
cleared from the customs by filing bills of entry and paying the
duties thereon. The assessee availed modvat credits of Central
Excise duties paid on the indigenous capital goods and
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countervailing (additional) duties paid on the imported capital
goods. The total modvat credits taken by the assessee on the
said capital goods is to the extent of Rs.68,27,831.24/-. A show
cause notice was issued to the assessee, inter alia, alleging that
the aforesaid credits were taken without satisfying the procedure
provided under Rule 57R (3) of the Central Excise Rules, 1944
and the assessee was required to show cause as to why the
said credits be not disallowed. Assessee filed its reply, inter alia,
contending that all the capital goods in question were directly
purchased or imported by it on principal to principal basis and
were not acquired by it on lease, hire-purchase or loan
agreement nor these were acquired by any financing company
and it being the owner of the said goods the procedure under
Rule 57R (3) of the Central Excise Rules, 1944 (hereinafter
referred to as the „Rules‟) is not required to be followed. The
Deputy Commissioner rejected his submission and disallowed
the modvat credits.
Aggrieved by the same, the assessee filed appeal
before the Commissioner (Appeals), Customs and Central
Excise, Patna, who allowed the appeal, inter alia, observing that
the assessee is the owner of the capital goods and it being so
the procedure of Rule 57R (3) of the Rules was not required to
be complied with. It also held that IDBI and IIBI are not covered
by the expression “financing company” as used in Rule 57R (3)
of the Rules.
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The Commissioner of Central Excise, aggrieved by
the order of the Commissioner (Appeals) in so far as it relates to
the modvat credits of Rs.68,27,831.24/-, filed appeal before the
Customs, Excise & Gold (Control) Appellate Tribunal, which
accepted its plea that the procedure laid down in Rule 57R (3) of
the Rules is required to be followed irrespective of the ownership
of the goods. It further observed that since the assessee had
taken the loans from IDBI and IIBI, which are covered by the
expression “financing company” as used in Rule 57R (3) of the
Rules and, accordingly, set aside the order of the Commissioner
(Appeals).
Assessee thereafter has preferred this application
under Section 35(G) of the Central Excise Act, 1944.
By order dated 5.5.2004, this Court had directed the
Customs, Excise and Gold (Control) Appellate Tribunal to refer
the following questions of law :
“1. Whether on a true and correct
interpretation of the provisions relating to
allow ability of modvat credit on capital
goods, the Tribunal was correct in law in
holding that the procedure under Rule 57R
(3) of the Central Excise Rules, 1944 has to
be followed irrespective of as to whether the
assessee is the owner of the goods ?
2. Whether the procedure under Rule 57R
(3) has to be followed in a case where the
assessee directly and in its own name
purchases the capital goods from the
manufacturers/suppliers thereof and also
pays for the same simply because a general
financial loan agreement was entered into
between the assessee and the banks ?”
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Accordingly, the Tribunal had referred the aforesaid
questions of law for our determination.
It is evident from the record that the assessee has
entered into a loan agreement with two major financial
institutions viz. IDBI and IIBI for the establishment of the plant.
According to the loan agreement, the loan is secured “by a first
charge by way of hypothecation in favour of the lenders in all
borrower‟s movable machinery, machinery spares, tools and
accessories, present and future”.
Mr. J.P.Khaitan, appears on behalf of the assessee,
whereas the revenue is represented by Mrs. Archana
Meenakshi.
Mr. Khaitan, submits that the assessee is the owner
of the capital goods and, as such, procedure as required under
Rule 57R (3) of the Rules is not required to be followed.
According to him, capital goods have not been acquired by the
assessee on lease, hire-purchase or loan agreement from a
financing company, but under a loan agreement from the bank,
money has been used for the purchase of the capital goods and
those capital goods have been hypothecated to the bank.
According to him, in case of loan agreement, the financing
company would be the owner and the term agreement with the
banks is not with specific reference to the capital goods. To
support his contention that in case of hypothecation of the
capital goods, assessee shall not be ceased to be the owner of
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the capital goods and, as such, the provisions of Rule 57R (3) of
the Rules shall not be attracted, placed reliance on a judgment
of the Gujarat High Court in the case of Bank of Baroda,
Ahmedabad v. Rabari Bachubhai Hirabhai and others [AIR 1987
Gujarat 1] and our attention has been drawn to the following
passage from paragraph 6 of the said judgment, which reads as
follows :
“The hypothecating Bank, a creditor, had
merely advanced a loan against the
security of that vehicle and had a special
right to recover its dues in the event of
default by, if need be, the sale of the
vehicle. It had, therefore, no title over the
vehicle. It was not even in constructive
possession of the vehicle but it had merely
a right to recover its dues by the sale of that
vehicle. So long as there was no default in
the payment of the loan amount, it could not
exercise that special right to sell the vehicle
for realization of its dues. Under the
circumstances, we feel that the view taken
by the Claims Tribunal is contrary to law
and ignores the elementary fact that under
the agreement of hypothecation neither the
title in the property nor the possession
thereof stands transferred to the creditor
Bank. The Claims Tribunal has betrayed
total non-application of mind as regards the
jural relationship which comes into
existence on the hypothecation of the
vehicle for securing the debt. We are,
therefore, of the opinion that the Claims
Tribunal committed a gross error in law in
holding that the hypothecating Bank had
stepped into the shoes of the owners for
having advanced a loan against the security
of the vehicle in question.”
To drive home his point, Mr. Khaitan states that
hypothecation is the pledging of something as security without
delivery of title or possession.
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Mrs. Archana Meenakshi, appearing on behalf of
the Commissioner of Central Excise, Patna (hereinafter referred
to as the „revenue‟) submits that the provisions of Rule 57R (3)
of the Rules shall be attracted in case the capital goods have
been brought under a financial arrangement for financing the
cost of the same.
Having appreciated the rival submission, I do not
find any substance in the submission of Mr. Khaitan and the
authority relied on in no way supports his contention. It is not
dispute that the assessee has entered into a financial
arrangement with the banks for financing the cost of capital
goods. In my opinion, hypothecation of the machine does not
change the ownership of the capital goods to the lender
inasmuch as hypothecation is only as security for repayment of
loan within a time frame. When the loan is not returned within
the time stipulated, the ownership is transferred from the
borrower to the lender in case the clause of the agreement so
provides. Rule 57R (3)(II)(A) of the Rules requires the
manufacturer availing credit of duty paid on the capital goods,
who has entered into a financial arrangement, for financing the
cost of such capital goods to produce a copy of the invoice
evidencing of payment of specified duty along with the copy of
the agreement entered by it with the financing company. Further
Rule 57R (3) (II)(B) of the Rules requires production of a
certificate from the financing company to the effect that duties
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specified on such capital goods have been paid by the
manufacturer to such financing company prior to the payment of
first instalment of repayment of loan. Accordingly, I am of the
opinion that provision of Rule 57R (3) of the Rules is required to
be followed even when the capital goods were acquired by the
assessee under a loan agreement from the bank.
In view of the discussion aforesaid, my answer to
question no.1 set out above is in the affirmative, in favour of the
revenue and against the assessee and it is held that the Tribunal
in the facts and circumstances of the case is correct in law in
holding that the procedure under Rule 57R (3) of the Rules is
required to be followed.
Now referring to the decision of the Gujarat High
Court in the case of Rabari Bachubhai Hirabhai (supra), same
has no bearing in the facts and circumstances of the case. In
this case the question before the Court was as to whether the
hypothecating bank, a creditor of the owner of the vehicle had de
jure or de facto possession or title over the vehicle and it has
been held that the bank can only recover its dues, in the event of
default, by sale of the vehicle and the bank can never be taken
to step into the shoes of the owner and consequently not liable
to pay compensation to the victims of an accident caused by the
owner. Here in the present case, I am not concerned with the
liability of the bank to the payment of compensation under the
Motor Vehicles Act and, as such, the decision relied on has no
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bearing in the facts and circumstances of the case.
In view of the discussion aforesaid, answer to the
second question has also to be rendered in favour of the
revenue and against the assessee that in view of the financial
loan agreement between the assessee and the bank, assessee
was required to follow the procedure under Rule 57R (3) of the
Rules.
Reference is answered accordingly.
Tax case stands disposed off.
Let a copy of our opinion be sent to the Custom,
Excise & Gold (Control) Appellate Tribunal, Eastern Bench
Calcutta.
(Chandramauli Kr.Prasad, ACJ.)
Dr. Ravi Ranjan, J : I agree.
( Dr. Ravi Ranjan, J.)
Patna High Court,
Dated, 15th January, 2009.
AFR/ Narendra/