IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN

AT JODHPUR

JUDGMENT

CENTR.EXCISE APPEAL No. 9 of 2006

MEWAR POLYTEX LTD

V/S
UNION OF INDIA

Date of Judgment : 26.8.2008

PRESENT
HON'BLE SHRI N P GUPTA,J.
HON'BLE SHRI KISHAN SWAROOP CHAUDHARI,J.

Mr. Ramit Mehta, for the appellant / petitioner

Mr. Rishabh Sancheti for Mr. V.K. Mathur, for the respondent

BY THE COURT : (PER HON'BLE GUPTA,J.)

This appeal by the assessee seeks to challenge the order of the Tribunal dated
4.7.2005, allowing the appeal of the Revenue, and setting aside the order of the
Commissioner (Appeals), who in turn had set aside the order in original, whereby (by order
in original), the Assistant Commissioner had disallowed the modvat credit of Rs.5,37,799/-,
and confirmed the recovery thereof, and also imposed a penalty of Rs.50,000/- under Rule
173 Q (1)(bb) of the Central Excise Rules, 1944. The appeal was admitted on 7.4.2006, by
framing the following substantial question of law:-

“(1) Whether modvat credit could be availed on indigenous inputs used in manufacture of
goods exported to discharge the export liability under Advance Licence Scheme, after raw
material imparted against such export replenished the stock of inputs with the manufacture on
payment of CVD?

(ii) Whether availing of draw back under the Export Scheme in respect of the export
transaction results in forfeiture of claim to avail modvat credit in respect of replenished raw
material under the Central Excise Act, 1954?”

The necessary facts, in brief are, that the show cause notice dated 15.2.1999
was issued to the assessee alleging to have wrongly taken credit to the extent of Rs.5,37,799/-
under Rule 57A of the Central Excise Rules, 1944, during August 1998, and calling upon the
assessee to show cause and explain, as to why aforesaid credit, wrongly taken by assessee
should not be disallowed/recovered under provisions of Rule 57-I, and penal action under
Rule 173Q (1)(bb) should not be taken, and interest should not be charged under Section 11
AB. This is the precise show cause notice given. To show as to how the modvat credit was
wrongly availed, it was mentioned in the notice, that the assessee is engaged in the
manufacture of HDPE/PP fabrics and bags, and 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 is availing modvat credit on the inputs under Rule 57A. It was alleged, that the
assessee vide AR4s dated 4.8.1998, 17.8.1998 and 22.8.1998 had exported certain quantity of
fabrics in his own account, and in the said AR4s had given declaration, that the assessee have
manufactured the fabric as mentioned in AR4, and that the benefit of modvat under Rule 57A
has not been availed, and have not availed the facilities under Rule 12(1)(b) and 13(1)(b), and
that export is discharge of export obligation under advance licence file, which was a false
declaration, as the assessee has been availing modvat credit on the inputs under Rule 57A.
Likewise, in column 4, the assessee had further declared, that the export is under duty draw
back, while on examination of Central excise records and R.T.12 return 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 have not received any duty free consignment of PP Granules
(Inputs) from anyone, for exporting the goods on his behalf till the date of above-said
exports, and they have also not reversed any credit taken on the inputs used in the goods
exported vide above referred AR4s. Thus, the assessee was found to have wrongly taken
credit of modvat, to the tune of Rs.5,37,799/-, which was not admissible.

The Assessing Officer confirmed the demand, which was set aside in appeal,
and was reconfirmed in further appeal, as mentioned above.

Arguing the appeal, it was contended by learned counsel for the assessee, that
there was no wrong declaration made in AR4, inasmuch as, as on the date of making
declarations AR4s, no modvat credit had been claimed, and since the goods were exported in
discharge of export obligation under advance licence file, and were being exported against
bond, the goods were not leviable to excise duty, and since the duty paid indigenous goods
had been used as inputs, in manufacture of the exported goods, there was nothing wrong on
the part of the assessee in subsequently claiming modvat credit, admissible under Rule 57A,
as Rule 57A does not prohibit availability of modvat credit against the goods, which are
exported. Thus it was contended, that the show cause notice proceeds basically on a wrong
premise, about AR4 being wrong declaration, and about ineligibility of the assessee to avail
modvat credit under Rule 57A on the goods, which are exported. Then it is submitted, that
may be that subsequently the assessee availed the draw back on the replenished imports,
which are imported on the CVD, and such availment of draw back may be a wrong availing
of the draw back, but then, for that purpose, the department could have taken proceedings
under the draw back rules, being Customs and Central Excise Duties Draw Back Rule, 1971,
that admittedly has not been done. In that view of the matter, the issue could not be mixed up
by the department, to deny the modvat credit to the assessee, and to order recovery thereof.

The learned counsel for the Revenue, on the other hand, supported the
impugned order, and contended, that the assessee has played very smart, by exporting the
goods under AR4, and a bond under Rule 13, giving out, that modvat credit has not been
availed, but then modvat credit was availed, may be hyper technically, subsequent in point of
time, but then, it did relate to the same inputs. It was contended, that may be that the
department could have taken proceedings under the Customs and Central Excise Duties Draw
Back Rule, 1971, but then, since the modvat credit was wrongly taken, he was rightly called
upon to reverse it, and recovery has been rightly ordered. It is contended, that under the
scheme of things, rather on the face of the language of Rule 57A, modvat credit is available,
as a credit, to be utilised towards payment of duty of excise, leviable on the final products,
whether under the Act, or under any other Act, and subject to the provisions of this section,
and the conditions and restrictions if any specified in the said notification. In that view of the
matter, since the assessee had exported the goods under AR4, claiming that no excise duty
was payable on the exported goods, obviously on the face of the language of Rule 57A, the
modvat credit could also not be claimed, as it could be claimed only towards the payment of
excise duty, and thus, the orders impugned passed, by the learned Assistant Commissioner,
and the Tribunal, do not require any interference.

We have heard learned counsel for the parties, and have considered the
submissions, and have also gone through the impugned orders, the provisions of the Act, and
the Rules.

The present one is a typical case, where, by resorting to subterfuge, and

impermissible technicalities, the modvat credit has been wrongly claimed by the assessee.
This much is of course true, hyper technically, that as on the dates when the AR4s were
submitted, and the goods were exported, the assessee had not claimed the modvat credit on
the inputs, and had not availed the facilities under Rule 12(1)(b) and 13(1)(b). But then, that
is not the end of the matter.

This much is not in dispute, that if the goods were to be indigenously sold, and
were to be sold without AR4, the goods were liable to levy of excise duty, and it is only on
account of the assessee having submitted AR4s, and the bond under Rule 13, that excise duty
was not paid. In respect of the exports made under AR4 and under bond, excise duty is not
leviable, but the corresponding benefit is that the manufacturer is permitted to import inputs
on payment of CVD (countervailing duty), and after processing and manufacture of final
product, from out of import, the assessee is permitted to avail the draw back, to the extent of
the said CVD. Thus, the import on CVD, of inputs, its processing and manufacture of final
product, and export thereof under AR4, is a complete cycle by itself, while manufacturing
final product with indigenous inputs, which are duty paid, and removal thereof by payment of
leviable excise duty, and availing modvat credit there-from, is another cycle, and the two
cannot be mixed up, for the purpose of, either enjoying holiday in payment of excise duty, or
availing modvat credit, which is not available in the other case. As against this, this precisely
has been done in the present case by the assessee, inasmuch as, by using indigenous duty paid
inputs, the finished products have been manufactured, which has been exported under AR4,
without payment of excise duty, and then subsequently modvat credit has been claimed on
such inputs. On the face of it, in our view, that is not at all permissible.

One aspect of the matter, or say one line of reasoning, for non-entitlement of
the assessee to claim modvat credit, in such circumstances, is clear from a bare reading of
Rule 57A, sub-rule (1) and (2), which read as under:-

“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 in 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 on 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
of this section and the conditions and restrictions, if any, specified in the said notification.”
 A reading of the above provisions 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. Thus, the credit has been wrongly availed, and was required to be
reversed, and has rightly been ordered to be recovered.

The other line of reasoning is, that may be, that hyper technically in the
declaration AR4, it was declared by the assessee, that the assessee has not availed the benefit
of modvat credit, under the provisions of Rule 57A, but then, the declaration was required to
be considered in the right perspective, inasmuch 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. In other words, the
declaration is required, to the effect of having not availed the modvat credit with respect to
inputs used in manufacture of the finished products exported under the declaration, and
cannot be confined to the precise point of time of having submitted the declaration, i.e. not
having availed the modvat credit till the time of submitting the declaration. If the
interpretation as sought to be put by the assessee, about correctness of not having availed the
benefit till the point of time of submitting declaration is accepted, it would open flood gates
of availing modvat credits, not otherwise admissible, inasmuch as, in any number of cases the
things may be managed in the manner, that modvat credit is availed, right in the next second
of submitting the declaration, even on the same date, which cannot be said to be the intent
and purpose of the declaration, contemplated in form AR4.

Thus, may be that the authorities proceeded on certain additional grounds, of

the assessee having subsequently taken the benefit of draw back, on the replenishment of
goods, imported against the goods exported, which might not have been available to the
assessee, but then, it cannot be said, that the modvat credit was rightly availed by the
assessee, and since the thrust of the show cause notice is as under:-

“Whereas it appears that M/s Mewar Polytex Ltd., Village Nai, District Udaipur (hereinafter
referred to as an assessee) engaged in the manufacture and export of HDPE/PP Fabric and
bags failing under heading No.3926 & 3923 of the schedule to Central Excise Tariff Act,
1985 have wrongly taken credit to the extent of rs.537799/- under Rule 57-A of Central
Excise Rules 1944 during the August 1998...”

And for this allegation, the assessee was called upon to show cause. In our
view, from the discussion it is clear, that the assessee has wrongly taken the credit under Rule
57, may be for different, and/or additional grounds we, find that the authorities below, being
the Assistant Commissioner, and the CESTAT, were right in holding, that the assessee had
wrongly availed the modvat credit, and have rightly confirmed the demand, and imposed the
penalty.
 Thus, the two questions framed are answered as above. The appeal thus, has
no force and is dismissed.

(KISHAN SWAROOP CHAUDHARI),J. (N P GUPTA),J.

/tarun/