REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2010
[Arising out of S.L.P. (C) No. 4038 of 2009]
MEWAR POLYTEX LTD. .... Appellant
Versus
UNION OF INDIA & ORS ....Respondents
JUDGMENT
Dr. MUKUNDAKAM SHARMA, J.
1. Leave granted.
2. The assessee (appellant herein) seeks to challenge the
judgment of the High Court of Rajasthan at Jodhpur in
Central Excise Appeal No.9 of 2006. By its judgment and
order dated 26.8.2008, the High Court dismissed the
appeal, affirming the order of the Tribunal dated 4.7.2005,
which had allowed the appeal of the Revenue and set aside
the order of the Commissioner (Appeals), who in turn had
set aside the order in original. By the order in original, the
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Assistant Commissioner had disallowed the Modvat credit of
` 5,37,799, and confirmed the recovery thereof, and also
imposed a penalty of ` 50, 000 under Rule 173 Q (1) (bb) of
the Central Excise Rules, 1944 (for short “the Rules”).
3. The necessary facts, in brief are, that the show cause notice
dated 15.2.1999 was issued to the assessee alleging that it
had wrongly taken credit to the extent of ` 5,37,799 under
Rule 57A of the Rules, during August 1998. The notice also
called upon the assessee to show cause and explain as to
why the aforesaid credit, wrongly taken by the assessee
should not be disallowed/recovered under provisions of
Rule 57-I, and also why penal action under Rule 173Q
(1)(bb) should not be taken, and interest should not be
charged under Section 11 AB.
4. The assessee is engaged in the manufacture of HDPE/PP
fabrics and bags, and was clearing the goods for home
consumption on payment of central excise duty, as well as
exporting the goods under bond without payment of duty,
and was availing Modvat credit on the inputs under Rule
57A. The Revenue alleged that the assessee vide
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declarations in Form AR4 dated 4.8.1998, 17.8.1998 and
22.8.1998 had exported certain quantity of fabrics in its
own account, and in the said AR4s had declared that the
assessee had manufactured the fabric as mentioned in AR4,
and that the benefit of Modvat under Rule 57A has not been
availed, and also that it had not availed the facilities under
Rule 12(1)(b) and 13(1)(b) of the Rules, and that export was
made in discharge of export obligation under “advance
licence” file.
5. It was alleged by the Revenue that the same was a false
declaration, as the assessee has been availing Modvat credit
on the inputs under Rule 57A. Likewise, in column 4 of the
Form, the assessee had further declared that the export is
under duty draw back, while on examination of Central
excise records and R.T.12 returns of the assessee, it was
found that the assessee had taken Modvat credit on the
inputs used in the manufacture of exported goods, and they
had not received any duty free consignment of PP Granules
(Inputs) from anyone for exporting the goods on its behalf
till the date of above-said exports, and that they had also
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not reversed any credit taken on the inputs used in the
goods exported vide above referred AR4s. Thus, the
assessee, it was alleged, had wrongly taken credit of
Modvat, to the tune of ` 5,37,799, which was not
admissible.
6. The Assessing Officer confirmed the demand, which was set
aside in appeal, and was reconfirmed in further stages of
appeal, as delineated above.
7. The High Court dismissed the appeal, holding that the
assessee had resorted to subterfuge and impermissible
technicalities in attaining its desired end to claim the
Modvat credit. While the High Court admitted that the
assessee had not indeed claimed the Modvat credit on the
inputs at the date when Form AR4s were submitted and the
goods were exported, it was held by the Hon’ble Court that
the said line of argument could not make a case in favour of
the assessee. The High Court arrived at this conclusion on a
reading of the provisions enshrined in Rule 57A, Sub-rules
(1) and (2), and on interpreting the declarations made under
Form AR4 in context of the case. The High Court held:
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“A reading of the [Rule 57A] does make it clear, that
the Modvat credit is to be utilised towards payment
of duty of excise, leviable on final products.
Obviously therefore, the sine qua non for entitlement
of Modvat credit is, that the final product should
have suffered the incident of excise duty, and it is
from out of that excise duty, that the credit of Modvat
is availed by the assessee. In the present case,
admittedly, the finished products have not suffered
any excise duty, may be on account of resorting to
any contrivance, or subterfuge, but the hard fact
remains, that the finished goods have not suffered
any excise duty, and therefore, per force the
language of Rule 57-A, the assessee was not entitled
to claim the credit of Modvat.
[…] the declaration was required to be considered in
the right perspective, in as much as, the benefit of
Modvat credit should not have been availed, not only
at the precise point of time when the declaration is
given, but the benefit should not have been availed
with respect to the inputs used in manufacture of the
finished products, which was sought to be exported
under AR4. Obviously, not only at the cut off time of
giving declaration AR4, but also at any time in
future.”
Based on this line of reasoning, the High Court deemed it fit to
dismiss the appeal preferred by the assessee. Aggrieved by the
decision of the High Court the appellant-assessee has
approached this Court by way of this Special Leave to Appeal,
on which we have granted leave.
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8. The appeal was listed for hearing and we heard the learned
counsel appearing for the parties who have ably taken us
through all the relevant documents on record and also
placed before us the various decisions which may have a
bearing on the issues raised in the present appeal.
9. Before we outline the arguments led by the parties to this
appeal, it would be appropriate to outline some of the facts
which are beyond dispute. It is well-settled that the
assessee had not claimed Modvat credit at the time when
the declarations under Form AR4 were made. However, the
assessee had in fact, claimed Modvat credit subsequently
on the inputs used for the very same manufactured goods
that were exported under AR4. In effect, the assessee had
used indigenous duty-paid inputs, and the finished
products were exported without payment of excise duty and
subsequently, Modvat credit was claimed on such inputs.
To explain further, we may elaborate briefly on the
technicalities that made this possible for the assessee.
10. In the normal course, an assessee is entitled to Modvat
credit on the duty paid in the manufacture of finished
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products and it is from out of that excise duty, the Modvat
credit is availed of by the assessee. In the case of imported
raw materials, a countervailing duty (CVD) has to be paid,
equal to excise duty on such goods. On the other hand, an
assessee who manufactures finished goods to be exported
out of imported input material is given an “Advance
License” to import the inputs required for the manufacture
free from duty.
11.The case that is then made out by the assessee in the
present appeal is that the goods exported by the assessee
were manufactured out of indigenous goods, and hence
Modvat credit could be claimed. At the same time, however,
credit for the CVD was availed of by the assessee in respect
of the goods imported to be used in manufacture. Therefore,
the crux of the entire case at hand is whether the assessee
has been at the receiving end of a double benefit, having
claimed credit twice for the raw materials used.
12.To fortify its stance, the assessee contended before this
Court that it had taken credit of the duty on indigenous
inputs only after the replenishment arrived. That is to say,
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the assessee had not claimed Modvat credit at the time the
declarations under the advance license scheme were filed,
but only later. It was further contended by the assessee that
it has not gained any extra benefit except as provided under
law. While fulfilling the export obligation under the Advance
Licensing Scheme, the assessee contends that it was
entitled to avail credit on duty paid on indigenous inputs as
well as on CVD in lieu of excise duty paid on imported,
replenished material. On this count, it is the submission of
the assessee that it has only availed Modvat credit on
indigenous inputs and availed drawback on the export
consignment as no credit was availed on CVD paid for the
imported material. Therefore, any action that could have
been taken against the assessee should have been made
under the Customs and Central Excise Duties Drawback
Rule, 1971 which was not done in the present case.
13.For its part, the Revenue has contended that the assessee
has resorted to technicalities in order to avail the
aforementioned double benefit. The essence of the argument
led by the Revenue is that the Modvat credit availed relates
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to the same inputs which were used in the manufacture of
exported goods under AR4. Since the assessee had exported
the goods under AR4, claiming that no excise duty was
payable on the exported goods, it was contended by the
Revenue that no Modvat credit could be claimed in line with
the provisions of Rule 57A.
14.In sum and substance, we are faced with a claim of the
assessee that, in order to meet the exigency of the export
order, the assessee used indigenous inputs for the
manufacture of the export goods. Subsequently, when the
`replenishment’ arrived in the form of imported goods, the
assessee availed the drawback duty for the same. However,
the question to note is whether there were two separate
duties that arose, for the assessee to claim credit on both,
or if the entire process is to be considered as a single cycle,
which culminated in the export of goods under the Advance
Licensing Scheme?
15.The statutory position regarding the specified benefits is
postulated in Rule 57A of the Rules.
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“Rule 57A. Applicability.-(1) The provisions of this
section shall apply to such finished excisable goods
(hereafter, in this section, referred to as the final
products) as the Central Government may, by
notification in the Official Gazette, specify in this
behalf for the purpose of allowing credit of any duty
of excise or the additional duty under Section 3 of the
Customs Tariff Act, 1975 (51 of 1975), as may be
specified in the said notification hereafter, in this
section, referred to as the specified duty) paid on the
goods used the manufacture of the said final
products (hereafter, in this section, referred to as the
inputs)
2) The credit of specified duty allowed under sub-rule
(1) shall be utilised towards payment of duty of
excise leviable the final products, whether under the
Act or under any other Act, as may be specified in
the notification issued under sub-rule (1) and subject
to the provisions this section and the conditions and
restrictions, if any, specified in the said notification.”
A literal reading of the aforestated provision makes it amply
clear that an entitlement to Modvat credit will arise only if
excise duty is incident upon the final product. The final
product in this instance refers to the finished goods (PP
fabrics) that were exported under the Advance Licensing
Scheme without any payment of duty. Therefore, the attempt
of the assessee to justify its availing of Modvat credit is
seriously undermined by the provisions in Rule 57A.
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16. Subsequently, it is to be seen whether the claiming of
Modvat credit after filing the declarations in Form AR4
would entitle the assessee to Modvat credit on the
indigenous inputs. The declarations filed under AR4s
entitled the assessee to import inputs on payment of the
CVD, which subsequently was permitted to be drawn back.
Therefore, the assessee had utilized the specified
mechanism to avail of a benefit on the imported inputs,
while availing of Modvat credit on the indigenous raw
material used in the manufacture of the same, exported
goods. In effect, the assessee has not only availed of Modvat
credit on the indigenous input, but also drew back
countervailing duty paid on imported inputs that were mere
stock replenishments, which amounts to a double benefit.
That the Modvat credit was technically claimed only
subsequent to the filing of AR4 declarations, although the
indigenous goods were used in the manufacturing process
apriori does not also reflect well on the intention of the
assessee. The assessee has merely resorted to the
technicality of claiming Modvat credit subsequent to the
AR4 declarations, thereby entitling it to drawback.
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Subsequently, the Modvat credit has been availed on the
very same indigenous goods, which shows that the claim of
the assessee to be legitimately entitled to two separate
duties is but a fagade.
17.There can be no question of separate duties arising in this
case since the issue concerns the manufacture and export
of one and the same goods. The imported inputs were
primarily stock replenishments that were used in the
execution of other orders, and allowing the assessee to
claim Modvat credit on the indigenous input would
tantamount to giving a benefit twice for the same process
that began with the manufacture and culminated in the
export of the specified goods. The assessee cannot be held
to be not entitled to claiming Modvat credit on finished
goods where duty is not incident. Any attempt to avail it
subsequently, casts serious aspersions on the bonafide
intention of the assessee. The argument of the assessee that
action had to be taken under the Duties Drawback Rules,
1971 and not through reversal of credit does not bear merit.
The reversal of credit is meant to deny the assessee of a
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benefit that they would have otherwise enjoyed without
justification. The drawback equivalent to CVD is legitimately
permissible vide the process of AR4 declarations and thus,
it is the benefit that is enjoyed without justifiable basis that
has to be reversed.
18.In light of the aforesaid facts and circumstances, we find
that the contentions of the assessee are without merit. We
dismiss the appeal filed by the assessee, but leave the
parties to bear their own costs.
………………………………..J.
[Dr. Mukundakam Sharma]
…………………………………J.
[Anil R. Dave]
New Delhi
December 9, 2010.
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