ORDER
C.N.B. Nair, Member (T)
1. The appellant purchases pig iron and foundry chemicals and manufactures castings out of them. All these items are notified for the purpose of Mod vat credit as inputs/final products. Accordingly, the appellant took the excise duty paid on the pig iron and foundry chemicals (inputs) as Modvat credit.
2. The manufactured castings were mostly sold after payment of excise duty. About 10% of the castings were also captively consumed in the manufacture of power driven pumps.
3. The captively consumed castings were exempt from duty under Notification Nos. 8/96 and 4/97. So were the power driven pumps (under Notification No. 16/96) or they were assessable at ‘Nil’ rate of duty.
4. While removing the castings for captive consumption, initially, the appellant worked out 8% of the value of PD pumps and reversed (debited) that amount from their outstanding Modvat credit. Subsequently, with the permission of the departmental authorities, amount of deduction was revised (reduced) to 8% of the value of the castings. The initially reversed credit of over Rs. 12 lakhs got reduced to Rs. 1.6 lakhs as a consequence of the revision. The period involved was from 1-9-96 to 31-3-97. The above adjustments of credit were done in terms of Rule 57CC of Modvat Credit Rules.
5. Subsequently, show cause notice dated 4-4-97 was issued alleging that the reversal must be @ 8% of the value of the PD pumps. The amount required to be reversed was worked out at about Rs. 32 lakhs and the appellant was directed to pay the same or reverse the same from the Modvat credit. The appellant resisted the notice and the adjudicating authority and first appellate authority held in favour of the appellant. Aggrieved by those orders, Revenue filed appeal before the Tribunal.
6. When the appeal was heard by a Division Bench of the Tribunal at Madras, it was noticed that the issue remained covered in favour of the appellant by the decisions of this Tribunal in the cases of PSG Industrial Institute v. CCE, Coimbatore 2005 (192) E.L.T. 220 and Patel Field MarsM Industries v. CCE and reversal of 8% of the value of castings was sufficient. However, the Division Bench felt that these decisions were not correct in law, inasmuch as casting was only an “intermediate product” in the present appellant’s case, while Rule 57CC required reversal of 8% value of the “final product”. Accordingly, the matter was referred to the Larger Bench. The issue has, thus come before us.
7. We have perused the record and heard both sides.
8. During the hearing, the ld. Counsel for the appellant has pointed out that, in addition to the two judgments noted by the Southern Bench, in a third case of Merind Ltd. v. CCE, Mumbai also the Tribunal took the same view and those decisions reflected a correct understanding of the legal provisions.
9. The submission of the ld. SDR is that in a catena of judgments, the Hon’ble Supreme Court as well as Tribunal have noticed the distinction between intermediate products and final products and have held that the emergence of an exempted intermediate product during the process of manufacture, (on account of exemption under Notification No. 217/86 etc.) did not make a difference to the question of what is the final product and eligibility to Modvat credit. Reliance is, in this connection, specifically placed on the decision of Hon’ble Supreme Court in the case of Escorts Ltd. v. CCE, Delhi , the judgment of the Tribunal in the case of Sudarshan Chemical Inds. Ltd. v. CCE, Mumbai (Tribunal). It is the contention of the ld. SDR that ‘final product’ in terms of Modvat Rules can only be the ultimate product manufactured and cleared by an assessee from its factory. He would also point out that any other view would create practical difficulties inasmuch as the measure of valuation under Rule 57CC is the ‘sale price’ of the exempted goods, which information would be absent in the case of a captively consumed intermediate product like the castings in the present case.
10. Rule 57CC relates to ‘adjustment of credit’ when final products are exempt. In the present case, the inputs in question – pig iron and foundry chemicals – are used only in the production of castings. Thus, their direct involvement is only in the manufacture of castings. The ultimate product viz. PD pump consists of several parts and items produced by the appellant or procured from outside. The casting acts only as the case (one component) in which other parts are fixed to assemble the PD pump. In this situation, the relation of pig iron and foundry chemicals to the manufacture of PD pumps is quite remote.
11. As already noted, pig iron and foundry chemicals are inputs only in the production of castings. The Revenue has no case that castings are not a final product. The appellant had declared both castings and PD pump as two different final products. There cannot also be a case that castings are not final products, inasmuch as such a view would lead to non-levy of duty on castings sold by the appellant.
12. During the relevant period, there was no definition of ‘final products’ under Modvat rules. The scheme was that, under a Notification No. (5/94 issued under Rule 57A), items figuring under the various excise tariff headings were mentioned both as inputs and final products. Under the later CENVAT Rules, ‘final products’ remains defined as “excisable goods manufactured or produced from inputs” [Rule 2(e)]. Thus, under the old rules as well as the CENVAT Credit Rules 2002, a ‘final product’ is an excisable item produced from inputs. Thus, the Rule recognized a direct input-output relationship between a final product and the materials going into its production. Viewed trom this angle, there would appear to be no scope for doubt that the final product manufactured by the present appellant from pig iron and foundry chemicals was castings only.
13. A contrary view (treating PD pumps as final product) would also not be in conformity with the scheme of taxation. As already noted, the castings going into the manufacture of PD pumps and PD pumps remained specifically exempted under notifications. The tax policy conveyed through these exemption notifications is that these items are not to bear any Central Excise duty. Charging 8% of the value of the PD pumps towards ‘adjustment of credit’ taken on the materials going into the manufacture of castings would have the effect of levying excise duty on the exempted PD pumps. This position is made clear from the record itself. The total Modvat credit taken by the appellant during the period in question on pig iron and foundry chemicals was only over Rs. 23 lakhs. Since 90% of these inputs went into the production of dutiable (sold) castings, the credit on inputs which went into the manufacture of captively consumed castings was only, on a proportionate basis, about 10% of the input credit i.e. about Rs. 2.3 lakhs. As against this, the duty demand raised by treating the PD pumps as the final product, works out to over Rs. 32 lakhs. Thus in effect, the levy is falling on the exempted PD pumps.
14. The above data also clearly brings out that what was proposed to be done under the show cause notice is not to “adjustment the Modvat credit taken on inputs” going into the manufacture of exempted goods. The absence of proportion between the credit (about Rs. 2.3 lakhs) taken on the inputs used in the exempted castings and the amount (Rs. 32 lakhs) sought to be recovered alone is sufficient to bring out that what is happening is not the adjustment of a debt owed. In the present demand, there is no relationship between the credit taken and the amounts sought to be recovered. On this ground also, the demand of the Revenue is not sustainable.
15. Revenue is also not right in relying on the judgments (para 9) of the Hon’ble Supreme Court and the Tribunal in support of its case. Those judgments do not relate to the adjustment of input credit in terms of Rule 57CC. They have no relevance to the present dispute. They are in a different context and relate to a different aspect, as to whether input credit is to be denied on the ground that exempt intermediate products come into existence. Rule 57D (2) specifically covers this aspect and Rule 57CC has no application in that area.
16. In view of what is stated above, we are of the opinion that in the present case, there is no justification for treating the PD pumps as ‘final product’ and seeking recovery from the appellant @ 8% of the value of the PD pumps. Adjustment of credit is required to be done by treating castings as the final product. We agree with the view taken by the Tribunal in its earlier decisions.
17. The reference is answered in the above terms and the appeal is returned to the referring bench for decision.
(Dictated & pronounced in open Court)