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Sterlite Industries (I) Ltd. v. Commissioner Of Central Excise, Pune
Summary of Opinion — Larger Bench (Order per: Archana Wadhwa, Member (J))
Factual and Procedural Background
A Larger Bench was constituted to decide the referred question whether the law settled by the Tribunal in Jindal Polymers (which followed the earlier Tribunal decision in Bajaj Tempo) should be followed or whether the interpretation in Alfa/Alpha Lavan should prevail. The Bench heard Shri Vimlesh Kumar, SDR for the revenue, and Shri Vipin Kumar Jain, Chartered Accountant, for the appellant (assessee). The dispute concerns the entitlement to Modvat (input) credit by a job worker who receives goods from the manufacturer under Rule 57F of the Central Excise Rules and uses other inputs procured directly in the processing of those goods, and whether Rule 57C bars such credit where the processed goods were cleared without payment of duty at the job worker's end but ultimately returned to and taxed at the manufacturer's end under a special procedure.
The Tribunal in Jindal Polymers had followed Bajaj Tempo and held that a job worker receiving goods under Rule 57F is entitled to take credit of duty in respect of other inputs received directly and used by him in the manufacture of the said goods on job work basis. The Larger Bench was asked to resolve whether that approach or the interpretation in Alpha/Alfa Lavan should prevail. The Bench examined prior Tribunal decisions, Ministry/notification context (notably Notification No. 217/86 and the Modvat scheme), and the subsequent Supreme Court treatment of related Tribunal decisions (notably Escorts).
The Larger Bench ultimately answered the reference in favour of the assessee and directed that the papers be placed before the original Bench for passing appropriate orders.
Legal Issues Presented
- The referred question as framed for the Larger Bench: “Whether the law settled by Jindal Polymer [ (Tribunal) = 2001 (43) RLT 680] following Bajaj Tempo [1994 (69) E.L.T. (122)] should be followed or the interpretation as arrived at by Alfa Lavan [] should prevail.”
- Whether, under the Modvat scheme and Rule 57F of the Central Excise Rules, a job worker who receives goods from the manufacturer and uses other inputs procured directly is entitled to take Modvat credit of duty on those directly received inputs where the processed goods are returned to the principal manufacturer who ultimately pays the duty (i.e., whether Rule 57C operates to bar such credit when the processed goods were cleared without payment of duty at the job worker’s end but duty is paid at the manufacturer's end).
Arguments of the Parties
Revenue's Arguments
- The revenue denied Modvat credit to the job worker on the ground that the inputs were used in the manufacture of goods which were cleared without payment of duty (implying application of Rule 57C to bar credit in such circumstances).
Appellant's Arguments
- The appellant contended that Rule 57C debars taking of credit only where the final product is either (a) exempted from the whole of duty by a notification under Section 5A of the Central Excise Act, or (b) chargeable to nil rate of duty. The appellant argued that neither situation applied where a special procedure under Rule 57F(3) allowed clearance by the job worker without payment of duty at that stage but with duty ultimately paid by the principal manufacturer, and therefore Rule 57C should not operate to deny Modvat credit to the job worker in that context.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Jindal Polymers [(Tribunal) = 2001 (43) RLT 680 (Tri. - Delhi)] | Held that a job worker receiving goods under Rule 57F is entitled to take credit of duty in respect of other inputs received directly and used by him in manufacture on job work basis; followed Bajaj Tempo. | The Larger Bench noted that Jindal Polymers followed Bajaj Tempo and reached the conclusion favourable to the job worker; this line was approved and relied upon in answering the reference for the assessee. |
| Bajaj Tempo [1994 (69) E.L.T. (122)] | Interpreted Rule 57F and Rule 57C in the context of Notification No. 217/86 and the Modvat scheme; held that Modvat credit on notified inputs is to be given for payment of duty on the notified final products, and that Rule 57C must be construed in the context of the Modvat scheme so as not to destroy the scheme's purpose. | The Court relied on Bajaj Tempo's contextual interpretation of Rule 57C within the Modvat scheme and adopted its reasoning in concluding that mechanical application of Rule 57C should be avoided where it frustrates the Modvat benefit. |
| Orissa Synthetics Ltd. v. Collector of Central Excise [(Tribunal)] | Considered the expressions "chargeable to nil rate of duty" and "exempted from whole of duty"; held that export clearance under provision 191BB without payment of duty is not covered by those expressions; relied on Ministry of Law advice clarifying that "exempted" denotes an exemption notification by the Central Government. | The Larger Bench accepted the Tribunal's treatment that Rule 57C applies only where final product is exempt by notification or tariff rate is nil; clearances under export provisions without payment do not amount to "exempted" or "chargeable to nil rate." |
| Shakti Insulated Wires Ltd. v. CCE & C, Mumbai-V [(Tri.) = 2002 (51) RLT 115 (CEGAT-Mum)] | Adopted an approach identical to Bajaj Tempo/Jindal Polymers in allowing input credit in the described circumstances. | The Larger Bench recorded that this decision took an identical view and cited it as supporting the assessee's position. |
| CCEx, Jaipur v. Noorani Textiles Mills [(Tribunal)] | Recorded an identical view to the line of cases allowing Modvat credit to job workers under the special procedure. | The Larger Bench noted this case as another instance where the Tribunal took a view consistent with Bajaj Tempo/Jindal Polymers. |
| Escorts Ltd. v. CC Ex, Delhi [(Tri-Del.)] (Tribunal decision) | The Tribunal had rejected the claim for Modvat credit where parts were cleared without payment of duty to the appellants' other unit under Chapter X procedure, applying Rule 57C to deny credit. | The Court observed that this Tribunal decision was subsequently reversed by the Supreme Court and therefore could not stand as precedent against the assessee; the Larger Bench recited the reversal and its effect. |
| Escort v. C.C.Ex. [(Supreme Court)] | The Supreme Court reversed the Tribunal in Escorts, holding (paras reproduced) that the purpose of the notification and rules is to streamline duty payment and prevent cascading; intermediate products do not attract Rule 57C so long as duty is paid on the final product; parts cleared inter-factory do not disentitle the manufacturer from the Notification's benefits. | The Larger Bench applied the Supreme Court's ratio to conclude that Modvat credit on inputs used in manufacture of final product (even if intermediate goods were cleared without payment at an intermediate stage) is not hit by Rule 57C when duty is ultimately paid on the final product by the principal manufacturer. |
| Alpha/Alfa Lavan (as referred in the opinion) | Represents an alternate Tribunal interpretation that did not follow the Bajaj Auto/Bajaj Tempo line and which was adverse to the treatment adopted in Bajaj Tempo. | The Larger Bench concluded that Alpha/Alfa Lavan did not follow the Bajaj Auto decision and, in view of the Supreme Court's approval of the Bajaj Auto ratio in Escort, Alpha/Alfa Lavan is no longer good law. |
Court's Reasoning and Analysis
The Court's analysis proceeded by examining the statutory scheme (Modvat/Notification No. 217/86 and the relevant Central Excise Rules, in particular Rule 57F and Rule 57C) and the line of Tribunal and Supreme Court decisions dealing with inter-factory/job-worker clearances and entitlement to input credit.
- Rule 57F considered as a self-contained provision: The Court accepted the view that Rule 57F is a self-contained procedure under which goods processed by a job worker are returned to the principal manufacturer who ultimately pays the duty. Because the manufacturer pays duty on the returned goods, the objective behind the Modvat scheme remains satisfied.
- Contextual interpretation of Rule 57C within the Modvat scheme: Relying on Bajaj Tempo and Jindal Polymers, the Court emphasized that Rule 57C must be construed in the context of the Modvat scheme and Notification No. 217/86, which are intended to prevent cascading and to allow input credit to flow to the stage when duty is paid on the final product. A mechanical application of Rule 57C that would defeat the scheme’s purpose ought to be avoided.
- Distinction as to when Rule 57C applies: The Court accepted the appellant’s position that Rule 57C operates to debar credit only where the final product is either (a) exempted from duty by a notification under Section 5A of the Central Excise Act, or (b) chargeable to nil rate of duty. Clearances made under special export or other procedures without payment do not necessarily amount to “exempted” or “chargeable to nil rate” for the purposes of Rule 57C, as considered in Orissa Synthetics.
- Hypothetical practical illustration and purpose of Rule 57F(3): The Court illustrated that if the manufacturer debits Modvat credit and the job worker separately takes credit on inputs procured directly and clears processed goods back to the manufacturer on payment of duty (with the manufacturer thereafter taking credit), there would be no objection from the revenue—only added paperwork. Rule 57F(3) exists to avoid such administrative burden. Therefore denying credit on the ground urged by the revenue would frustrate the Modvat objective and create discriminatory outcomes depending on whether processing is done in-house or by a job worker.
- Precedent support and binding effect of Supreme Court reversal: The Tribunal decision in Escorts that denied credit was reversed by the Supreme Court, which held that intermediate products do not attract Rule 57C where duty is paid on the final product. The Larger Bench applied that Supreme Court ratio to hold that Modvat credit is not barred by Rule 57C in the circumstances under consideration.
- Status of Alpha/Alfa Lavan: Because Alpha/Alfa Lavan did not follow the Bajaj Auto/Bajaj Tempo approach, and because the Bajaj Auto line has received approval in the Supreme Court's decision in Escort, the Larger Bench concluded that Alpha/Alfa Lavan is no longer good law.
Holding and Implications
Holding: The Larger Bench answered the reference in favour of the assessee. The Bench held that a job worker who receives goods from the manufacturer under Rule 57F and uses other inputs procured directly is entitled to take Modvat (input) credit in respect of those directly received inputs when the processed goods are returned to the principal manufacturer who ultimately pays the duty; Rule 57C does not operate to bar such credit in the circumstances described.
Implications:
- Direct effect on the parties: The assessee (job worker/appellant) is entitled to the Modvat credit claimed on inputs procured and used in processing under Rule 57F where duty is ultimately paid by the principal manufacturer. The papers are to be placed before the original Bench for appropriate orders in light of this conclusion.
- Precedential consequence as recorded in the opinion: The Larger Bench treated the line of authority in Bajaj Tempo and Jindal Polymers as correct and considered Alpha/Alfa Lavan to be no longer good law in view of the Supreme Court's approval (in Escort) of the Bajaj line. The Court relied upon the Supreme Court's ratio in Escort to resolve the reference.
- No broader novel doctrine was proclaimed beyond applying the Modvat scheme and existing precedent; the decision affirms the established approach that Rule 57C must be read in context and should not be mechanically applied so as to frustrate the Modvat objective.
Order: The Larger Bench answered the reference in favour of the assessee and directed that the papers be placed before the original Bench for passing appropriate orders.
[Order per : Archana Wadhwa, Member (J)] . - This Larger Bench has been constituted to answer the following question referred to it.
“Whether the law settled by Jindal Polymer [ (Tribunal) = 2001 (43) RLT 680] following Bajaj Tempo [1994 (69) E.L.T. (122)] should be followed or the interpretation as arrived at by Alfa Lavan [] should prevail.”
We have heard Shri Vimlesh Kumar, SDR appearing for the revenue and Shri Vipin Kumar Jain, CA appearing for the appellant. It is seen that the Tribunal in the case of Jindal Polymers [ (Tribunal) = 2001 (43) RLT 680 (Tri. - Delhi), has followed the earlier order of the Tribunal in the case of Bajaj Tempo and has held that a job worker, who has received the goods from the manufacturer under Rule 57F, is entitled to take credit of duty in respect of the other inputs received directly and used by him in the manufacture of the said goods on job work basis. The main reason for arriving at this conclusion was of two fold. First that Rule 57F is a self-contained provision and the goods processed under the said rule were being returned to the principal manufacturer who was paying duty on the same. Secondly, it weighed with the bench that the provision of Rule 57C would not get attracted inasmuch as the removal of the goods was neither under the exempted notification nor the goods were chargeable to nil rate of duty. For arriving at the above conclusion reliance was placed upon the earlier decision of the Tribunal of Bajaj Tempo. In the case of Bajaj Tempo, provision of Rule 57F as also provision of Rule 57C were considered in detail along with the consideration of Notification No. 217/86. It was observed that under Modvat scheme, credit of duty paid on notified inputs is to be given for payment of duty on the notified final products, if such inputs are used in or in relation to the manufacture of the final products and such inputs are not hit by exemption to Rule 57A. Notification No. 217/86 [which laid down the procedure for sending the basic raw material to the job worker’s factory and receipt of the same in the manufacturer’s factory after processing for further utilisation in the manufacture of the final products on which duty is paid by the manufacturer. The notification is mainly intended to avert payment of duty at each intermediate stage and take credit of such duty at each subsequent stage, starting from the basic material, turning out components and finally ending with ultimate final product. Hence, the scope of Rule 57C in such a situation like this has to be constituted in the context of the Modvat scheme and not to destroy the basic concept.
2. The revenue is denying the Modvat credit to the present job worker on the grounds that the inputs were used in the manufacture of the goods which were cleared without payment of duty. Pausing here for a second, let us take a situation where the basic inputs is sent by the principal manufacturer after debiting the Modvat credit taken by him. The job worker takes the credit of the same his factory, utilises other inputs procured directly by him after taking the Modvat credit on the same and clear the processed goods to the principal manufacturer on payment of duty and the principal manufacturer takes the credit of the same in his factory and utilises such credit for payment of duty on his final products at the time of clearance. In such a situation, there can be no objection or dispute by the revenue as regards the admissibility of the credit on the inputs received directly by the job worker and utilised in his factory. The only effect of the above procedure adopted by the principal manufacturer and the job worker would be additional paper work. It is basically to avoid such a situation the procedure under Rule 57F(3) has been enacted. As rightly observed by the earlier decision’s the mechanical application of Rule 57C which destroys the basic benefit intended to be extended to the assessee should be avoided. If the interpretation adopted by the revenue is upheld, the benefit otherwise intended to be given will get frustrated apart from leading to discriminatory situation, where the manufacturer has himself processed the inputs and in the other case were he is sending it to the job worker.
3. We are also in agreement with the appellant’s contention that Rule 57C debars taking of credit in respect of the inputs used in the manufacture of the final product, if final product is exempted from the whole of duty of excise leviable thereon or chargeable to nil rate of duty. As such, to attract the provisions of Rule 57C, two situations in respect of the final product should be satisfied. Either the final product should be exempted, which situation can arise only when there is an exemption notification issued under Section 5A of the Central Excise Act or the final product is chargeable to nil rate of duty. Expression chargeable to nil rate of duty or exempted from whole of duty was considered by the Tribunal in the case of Orissa Synthetics Ltd. v. Collector of Central Ex. [ (Tri.)] and after taking note of the Ministries clarifications issued vide Circular No. 10/75/CX. 6, it was held that clearance under goods under provision of 191BB for export without payment of duty would not get covered by the above expression. Reference was made to the advice received from the Ministry of Law dealt in the paragraph of 9 in the said decision. It was opined in the said letter of the Law Ministry that the term ‘exempted’ has a definite connotation. The same as attributed to the notification issued by the Central Government. Similarly, the chargeable to nil rate of duty would refer to the tariff rate being nil and the goods cleared in terms of provision of Rule 199BB would not be covered by the said expression inasmuch as the same are not chargeable to nil rate. In the present case, we find the job worker could have cleared the goods on payment of duty and manufacturer could have claimed credit of the same. It is only under the special procedure laid down in terms of the Rule 57F(3) that the duty does not get paid at the job worker’s end at the time of clearance of the goods, but ultimately gets paid at the manufacturer’s end. In these circumstances, we are in agreement with the decision rendered in the case of Bajaj Tempo and Jindal Polymers.
3. Apart from the above two decisions, we also note that identical view was taken in the case of Shakti Insulated Wires Ltd. v. CCE & C, Mumbai-V [ (Tri.) = 2002 (51) RLT 115 (CEGAT-Mum)] & also in the case of CCEx, Jaipur v. Noorani Textiles Mills [ (Tribunal)].
4. In only case of Escorts Ltd. v. CC Ex, Delhi [ (Tri-Del.)] while interpreting Rule 57C of the Central Excise Rules, the Tribunal rejected the appellants claim of Modvat credit of duty paid on the inputs used in the manufacture of the parts, which were cleared without payment of duty to, appellant's other unit under Chapter X procedure and utilised in the manufacture of tractor which were cleared on payment of duty by observing that since no duty was paid on the part at the time of clearance, Rule 57C will apply and no Modvat credit would be admissible. However, the said decision was subsequently reversed by the Supreme Court as reported in Escort v. C.C.Ex. [ (S.C.)]. For appreciation, we reproduce paragraphs 8 & 9 of the said decision.
“8. It is to be seen that the whole purpose of the Notification and the Rules is to streamlines the process of payment of duty and to prevent the cascading effect if duty is levied both on the inputs and the finished goods. Rule 57D(2), which has been extracted hereinabove, shows that in the manufacture of a final product an intermediate product may also come into existence. Thus in cases where intermediate product may also come into existence. Thus in cases where intermediate product comes into existence, even though no duty has been chargeable to Nil rate of duty, credit would still be allowed so long as duty is paid on the final product.
9. In cases of manufacturers like the Appellants the final product is the tractor. The intermediate product would be parts which are manufactured for being used in the tractor. In such a case the parts would not be the final product. Thus Rule 57C would have no application. The mere fact that the parts are cleared from one factory of the Appellants to another factory of the Appellants would not disentitle the Appellant from claiming benefit of Notification No. 217/86-C.E., dated 2nd April, 1986. As stated above, the Notification itself clarifies that the inputs can be used within the factory of production or in any other factory of the same manufacturer.”
By applying the ratio of the above decision, it becomes clear that Modvat credit of duty paid on the inputs used in the manufacture of final product cleared without payment of duty for further utilisation in the manufacture of final product, which are cleared on payment of duty by the principal manufacturer, would not be hit by provision of Rule 57C. Inasmuch as, the matter stands decided by the Honourable Supreme Court, we would hold in favour of assessee.
5. As regards the decision in the case of Alpha Lavan laying down that the Modvat credit could be claimed in such a situation, we find the earlier decision of the Bajaj Auto was not followed. However, in view of the facts that the ratio of Bajaj Auto decision stands approved by the Supreme Court decision in the case of Escort Ltd. referred supra, we are of the view that the Alpha Lavan is no longer good law.
6. In view of the foregoing, we answer the reference in favour of the assessee. The papers may be placed before the original Bench for passing the appropriate orders.
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