ORDER
Jyoti Balasundaram, Member (J)
1. The appellants herein are engaged in the manufacture of different models of tractors. Model Swaraj 720 and Swaraj 724 (of less than 25 HP) were exempted from payment of duty in terms of Notification 68/83, dated 1-3-1983 while Model Swaraj 735 and Swaraj 855 (of 25 HP or more) were leviable to duty. Prior to 1-3-1983, components used as original equipment parts (except bearings, bolts, screws, tools etc.) were wholly exempt from payment of duty vide Notification 167/79, dated 19-4-1979 and No. 249/82, dated 1-11-1982. The appellants standardised more than 600 out of 700 components used in their tractors and procured most of the components without payment of duty for fitment in the exempted and dutiable varieties of tractors. With effect from 1-3-1986, the benefit of exemption to components used in their manufacture of tractors was withdrawn; the exemption for tractors of below 25 HP continued. The benefit of Modvat Scheme which was introduced on 1-3-1986 in respect of components was not available if such components were fitted in the exempted variety of tractors in view of the language of provisions of Rule 57C which provides that “no credit of specified duty paid on the inputs used in the manufacture of a final product…shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty.”
2. The appellants had a genuine difficulty in segregating their components for the exempted variety and dutiable variety of tractors due to standardisation and hence requested the Collector by letter dated 25-3-1986 for permission to bring duty paid components, avail Modvat credit and debit duty payable on components used in exempted tractors whenever such tractors were cleared from the factory. Permission to maintain a common account of components, subject to the condition that duty leviable on components used in the manufacture of exempted variety of tractors would be debited in RG 23A was granted vide letter dated 27-3-1986 and the appellants started following this procedure. On 3-4-1986, Notification 239/86 granting exemption to parts of motor vehicles and tractors when used as original equipment parts falling under Chapters 45, 48, 68, 73, 85 or 87 of the Schedule to the Central Excise Tariff was issued. This notification restored the position exist prior to 1-3-1986 as regards the components. Due to procedural difficulties, the appellants sought permission to follow the procedure of paying full payment of duty even on components/parts used in the exempted Variety of tractors and taking Modvat credit of duty paid, irrespective of their use, in respect of components/parts purchased from units other than SSI units in view of Notification 239/86. The appellants were informed under cover of letter dated 17-4-1986 that their above request was being forwarded to the CBEC for consideration and thereafter, the appellants, followed the procedure set out in the. letter dated 11-4-1986 and filed monthly RT12 returns accordingly. The appellants were informed by letter dated 1-10-1986 that permission for allowing utilisation of credit of duty paid on inputs used in the manufacture of exempted tractors had been refused, and therefore, they made a representation to the CBEC once again requesting that the procedure suggested by them for procurement of components may be accepted; the representation was rejected and communicated to the appellants vide Government’s letter dated 3/13-12-1986. Since the appellants required sometime to switch over to new procedure for segregating inputs/components for fitment in the exempted tractors under Notification 239/86 and the dutiable variety (for which they were entitled to avail of credit), they requested permission to continue their earlier practice till 1-3-1987
3. The Department raised a demand for the period 1-4-1986 to 31-12-1986 by issue of show cause notice dated 6-4-1987 and another show cause notice for the period 1-1-1987 to 28-2-1987 was issued on 28-8-1987. By order dated 1-10-1987, the Assistant Collector confirmed the demand of Rs. 57,51,919.46 P raised in the first show cause notice and also imposed a penalty of Rs. 10 lakhs while the demand of Rs. 18,66,153.53 P raised in the second show cause notice was confirmed by the Assistant Collector’s order dated 7-12-1987. The appellants filed two separate appeals which were rejected by the lower Appellate authority who have reduced the penalty from Rs. 10 lakhs to Rs. 1 lakh. Hence these appeals.
4. We have heard Shri V. Lakshmi Kumaran, learned Advocate and Shri R.K. Sharma, learned DR. There is no dispute that the inputs in respect of which credit has been availed by the appellants, have been actually used in the manufacture of exempted variety of tractors. It is also a fact that according to the provisions of Rule 57C of the Central Excise Rules, no such credit is admissible if the final products are fully exempt from duty. Therefore, the demand for reversal of Modvat credit is sustainable, in the light of the Apex Court judgment in the case of Chandrapur Magnet Wires Pvt Ltd. 1996 (81) E.L.T. 3 (S.C.)- The same view has been taken by the Larger Bench of the Tribunal in the case of Kirlosker Oil Engines Ltd. reported in 1994 (73) E.L.T. 835 which view has been followed in the case of JCT Ltd. v. Collector of Central Excise, Chandigarh 1998 (99) E.L.T. 393. The appellants’ submission is that once credit is taken under the Modvat Scheme, the inputs are deemed to be manufactured by the appellants and thereafter, the demand on inputs, if any, would be in terms of Rule 57F(1)(ii) and applying the provisions of this Rule, there is no further requirement on the part of the appellants to follow Chapter X procedure to avail exemption under Notification 239/86 granting exemption to components, if used, in the manufacture of tractors of less than 25 HP and hence, once credit was taken, there was no need for any reversal. However, this submission is not well founded since Rule 57F(1)(ii) covers a case of removal of inputs while the appellants use the inputs in the manufacture of final products and therefore, it is Rule 57F(1)(i) which is attracted.
5. The appellants next contend that if the liability to reverse credit taken is upheld/they should be allowed to adjust the duty paid by them on components used in the manufacture of exempted variety of tractors, since Notification 239/86 was available to such components, out of the amount of credit directed to be reversed. In support of this proposition, they rely upon the Tribunal’s decision in the case of Union Carbide India Ltd. v. Collector of Central Excise, Bombay 1987 (31) E.L.T. 262, the case of IOC Ltd. v. Collector of Customs, Patna 1985 (21) E.L.T. 727 and upon the Apex Court decision in the case of Formica India Division v. Collector of Central Excise 1995 (77) E.L.T. 511.
6. We have considered the case law and find that it does not come to the aid of the appellants. In the IOC case, the Tribunal held that the appellants were entitled to refund of duty paid on light diesel oil consigned to L-6 license holder through ICC which claim had been rejected by the Revenue authorities on the ground that the assessee had not followed the procedure set out in Chapter X of the Central Excise Rules.
In the second decision relied upon by the learned Counsel, namely Union Carbide, the Tribunal held that Department had refused permission to the appellants to bring propylene required for setting up their petro-chemical plant without payment of duty under Chapter X Procedure and therefore, the condition of following of Chapter X procedure under Notification 276/67 was impossible to comply with, because of the action of the Revenue and such a condition should be taken to have been dispensed with so long as there has been substantial compliance with the requirement of Chapter X Procedure. It was in this background that the Tribunal held that refund of duty paid on propylene was admissible, even though the procedural requirement had not been fulfilled by the assessee.
In the Apex Court decision in the case of Formica India, the Supreme Court held that benefit of Notification 71/71-C.E. granting exemption to items such as rigid plastic boards, sheets etc. falling under Item 15A(2) subject to the condition that where in such manufacture, any plastic material, paper or cotton fabric on which duty had already been paid, was used the amount of duty should be adjusted towards duty payable on the final products, cannot be denied on the technical ground of non-compliance with the procedure set out in Rule 56A since the assessees had contested the correctness of the classification and dutiability of the intermediate product and thus they could not ordinarily comply with the procedure of Rule 56A. The Supreme Court set aside the Tribunal’s order and allowed the appeal of the assessees holding that they were entitled to avail of the benefit of the Notification by complying at that stage with the requirement of Rule 56A to the satisfaction of the Revenue Department.
7. As seen from the above, the facts of the present case are distinguishable. The issue before us is only as to whether the appellants are required to reverse credit taken on components admittedly used in the manufacture of exempted tractors, by applying the provisions of Rule 57C. The issue before us is not the eligibility to exemption in terms of Notification 239/86 to components used in the manufacture of exempted tractors. The case is also not one of impossibility of complying with the requirement of reversing credit of duty availed on inputs used in the manufacture of exempted tractors, as there was no such restriction or prohibition upon the appellants. It was only a case of difficulty expressed by the appellants of segregation of components used in the manufacture of both dutiable and exempted varieties of tractors. Further, there is no claim pending for refund of duty paid on components used in the manufacture of exempted tractors, in terms of Notification 239/86. In these circumstances, the question of appellants being permitted to adjust the duty paid by them on components used in the manufacture of but exempted tractors against the amount credited but directed to be reversed does not arise and the question of directing refund of the duty paid on such components also is ruled out since there is no claim for refund of such duty and the ground of such refund by the Tribunal would also be barred by limitation.
8. The plea of the appellants that the demands raised in the show cause notices are partly barred by limitation since the appellants had disclosed in their letter dated 11th April 1986 that they would procure components/parts purchased from units other than SSI, on full payment of duty and take full credit of excise duty irrespective of their use and hence they did not suppress any material facts is not tenable – there is nothing in the above mentioned letter to indicate or disclose that they would not reverse the credit of duty taken on components used in the manufacture of exempted variety of tractors, or clearance of the exempted variety and therefore, the department had no knowledge that the procedure prescribed by the Collector in his letter dated 27-3-1986 was not being followed by the appellants. It is only in November 1986 that the appellants Representative had informed the jurisdictional Range Superintendent that no debit of duty in respect of credit availed on components/inputs used in the manufacture of exempted variety of tractors was being made since April 1986, and it is also not denied that the credit so availed was not utilised by the appellants for payment of duty on other dutiable goods Therefore, we uphold the duty demand. Penalty is also warranted for contravention of the relevant Central Excise Rules in availing credit of duty on inputs used in the manufacture of exempted final products, in spite of denial of permission to do so, as seen from letter dated 1-10-1986 communicating the decision of the Collector of rejection of request for allowing of utilisation of credit of duty paid on inputs used in the manufacture of exempted tractors the appellants cannot take shelter under their further representation for reconsideration of this decision as they ought to have reversed the credit immediately on receipt of the letter dated 1-10-1986 referred to heroin above.
In the result, we uphold the impugned order and reject the appeals.