ORDER
R.K. Abichandani, J. (President)
1. This appeal is before us on a remand made by the Hon’ble High Court of Punjab and Haryana High Court by order dated 13.11.2006 made in Central Excise Appeal No. 55 of 2003, directing de novo consideration of the matter/contentions made by the party, while observing that the counsel appearing for both the sides were ad idem that the matter between the parties required re-consideration and that the Tribunal had not examined the matter in the right prospective.
2. By the remand order of the Tribunal made on 12.12.2001, which has been set aside by the High Court, the Tribunal in paragraph 3 of the order upheld the contention of the assessee that under the provisions of Rule 57(1)(ii) of the Central Excise Rules, 1944, the inputs in respect of which the modvat credit had been allowed may be removed from factory “as such” for home consumption or export, subject to the condition that the duty of excise shall not be less than the amount of credit that was allowed in respect of such inputs. The Tribunal found that the duty liability discharged by the assessee was higher than the amount of modvat credit initially taken, and following its decision in Kabra Investment (P) Ltd. v. CCE, Ahmedabad-II reported in 2002 (149) ELT 695, it was held that no further amount on account of disallowance of modvat credit was required to be paid.
3. The appellant was engaged in the manufacture of motor vehicle parts falling under sub-headings 8714.00 and 8708.00 and generator parts under sub-heading 8503.00 of the first Schedule to the Tariff Act and were also availing modvat credit of duty-paid inputs under Rule 57A of the said rules. While inspecting the records, the Revenue noticed that the appellant was receiving duty paying rotor oil filters and gear shaft drums in their factory and were taking modvat credit of the duty paid thereon, but were clearing them “as such” without using them in relation to the manufacture of any final product. It was alleged that the appellant willfully made a mis-declaration that rotor oil filters (RODs) and gear shaft drums(GSDs) were manufactured by them in their factory from the castings of rotor oil filters and the castings of gear shift drums. According to the Revenue, they had received fully manufactured rotor oil filters and gear shaft drums. The Revenue relied upon the statement of the authorized representative of the appellant in which he had admitted that rotor oil filters were received fully manufactured and were cleared after visual inspection.
4. The assessee contended that the manufacturing activity was done on these two items, as detailed in paragraphs 7 and 8 of their reply in which it was stated that these castings, as received could not be used without the operations carried out by the appellant such as, broaching and drilling on ROFs, and outer turning, four-hole drilling and tapping on GSDs.
5. The Commissioner on the basis of the material on record came to a finding that the appellant had mis-declared the critical raw material in their classification declarations, which were RDFs and GSDs and not their castings. It was held that even if they had received them in “semi-finished” state, the processes involved did not bringing about a new product. It was held that the mis-declaration was done with intent to take credit wrongly and therefore, the extended time limit of five years from the relevant date under Rule 57-I of the Rules read with Section 38A of the Act was applicable. The Commissioner, therefore, disallowed the modvat credit of duty paid on rotor oil filters and gear shaft drums to the tune of Rs. 2,56,55,259/- and confirmed the demand of that amount while imposing penalty of the like amount as well as ordering interest to be paid to the tune of Rs. 2,29,86,502/.
6. The learned Counsel for the appellant contended that manufacturing process as described was adopted on the semi-finished ROFs, and the statement of Mr. Karmakar that only visual inspection was done while clearing the goods ought not to be have been to infer as non-existence of the such broaching, drilling and tapping processes carried on the semi finished ROFs. Furthermore, the processes of outer dia-turning, drilling both sides, and tapping was undertaken on the gear shaft drum castings. Therefore, since manufacturing process was undertaken, the appellant was entitled to avail modvat credit paid on the inputs brought in the nature of castings. It was further argued that if there was no manufacturing process then there would obviously be no liability to pay any duty on the outgoing goods. Therefore, the question of denial of modvat credit would not arise in respect of finished goods, which would not be again excisable, since no manufacturing process was undertaken as per the stand taken by the Revenue. It was submitted that, in any event, the duty paid on the finished products was more than the modvat credit availed by the appellant and therefore, in view of the provisions of Section 57F(1), even if the removal was to be treated of the inputs “as such”, no liability arose on the part of the appellant to pay any further duty amount. Furthermore, since the amount of duty paid was higher than the modvat credit availed, there could be no intention to evade duty and, therefore, the extended period was erroneously invoked.
7. The learned Counsel for the appellant relied upon the decision of Hon’ble the Supreme Court Commissioner of Central Excise & Customs (Appeals), Ahmedabad v. Narayan Polyplast reported in 2005 (179) ELT 20 (SC), for pointing out from paragraph 6 of the judgment that, it was held in a case where a modvat credit was, according to the Revenue, wrongly availed by the assessee, but the equal amount of excise duty was paid during the relevant period, the Supreme Court dismissed the Revenue’s appeal on the ground that the issue would be the revenue neutral. Reliance was also placed on the division bench decision of this Tribunal in Vinayak Industries v. Commissioner of Central Excise, Rajkot in a similar context, the Tribunal held while dealing with the contention of the Revenue that the process carried by the assessee did not result in manufacture of goods, that: “if that be the case, there would be no case for payment of duty on flywheels by the appellant either, that renders the whole dispute academic as there would be no requirement to pay duty and the occasion to take modvat credit”. It was observed that credit , taken would also be a dead entry incapable of being used for any purpose.
8. There is no dispute over the fact that the amount of excise duty paid on the finished goods was higher than the amount of the modvat credit on the castings of ROFs and GSDs, which was availed in respect of the outgoing finished products. It is clear from the reply to the show cause notice that the assessee had in no uncertain terms claimed that broaching and drilling operations were carried out in relation to ROFs (semi-finished) to make them more suitable for use by the customers. These were used by one of leading manufacturers of automobile. The other item GSD castings were also subjected to the manufacturing processes of outer turning, hole drilling and tapping. The fact that processes such as broaching etc. were undertaken on ROFs and turning and drilling were undertaken in relation to GSDs, is amply borne out from the production log books of the relevant periods which indicate the nature of the manufacturing process as well as the machine on which it was done and the operators’ names, as also the quantity of the GSDs and ROFs subjected to such processes. It is not disputed that these production log books were before the Revenue authorities. There was no reason to discard such contemporaneous documentary evidence which indicated the manufacturing process of broaching, drilling, turning etc. on ROFs by simply relying on the bald statement made on the spur of the moment by the authorized representative of the appellant. It is nobody’s case that production log books have been subsequently prepared. The particulars mentioned therein which are brought to our notice clearly speak of manufacturing process to which ROFs (semi-finished) and GSD(castings) were subjected to. Unfortunately, this important documentary evidence has been overlooked by the learned Commissioner. It will also be noticed from Section Note 6 of Section XVI of the schedule to the Tariff Act that in respect of the goods covered by Section XVI (machinery and mechanical appliance etc.) conversion of an article which is incomplete or unfinished but having essential characteristic into complete or finished article shall amount to manufacture.
7. Apart from the fact that the assessee had satisfactorily established the nature of manufacturing processes to which these two items had undergone before they were removed on payment of excise duty on the value added basis, it is also not disputed that the total amount of excise duty paid was much higher than the modvat credit availed in respect of these items.
7.1 Under the proviso to Sub-rule (1) of Rule 57F, where the inputs were removed from the factory for home consumption on payment of duty of excise, such duty of excise shall be the amount of credit that has been availed in respect of such inputs under Rule 57A. Therefore, the rule contemplated removal of inputs in respect of which a credit of duty had been allowed where they are not used in relation to manufacture of final products with a condition that on their removal, the excise duty shall be paid to the tune of the credit availed under Rule 57A for such inputs. In the present case, admittedly by the excise duty paid on the ROFs/GSDs removed as finished goods was higher than the modvat credit availed on these inputs. Therefore, there was no liability to pay additional duty when these goods were removed. Even if it were to be held that no process was undertaken on these goods, then obviously there was no liability to pay excise duty on the footing that these goods were manufactured by the appellant, because if they were already brought as inputs from other manufacturer and no further process was undertaken, they would obviously be not liable for payment of excise duty on the ground that manufacturing process was undertaken. Therefore, in either event, no duty liability arose on the part of the appellant.
8. The facts would also indicate that since the amount higher than the modvat credit availed was paid by way of excise duty, then there could no intention to evade payment of duty. Obviously, therefore, there was no valid ground for invoking the extended period of limitation.
9. For the foregoing reasons, the impugned order cannot be sustained and is hereby set aside. The appeal is accordingly allowed.
[Dictated and pronounced in the open Court on 26.12.2006]