Commissioner of Central Excise vs Happy Forging Ltd.

Adarsh Kumar Goel, J.—This appeal has been preferred by the revenue u/s 35G of the Central Excise Act, 1944 (for short, "the Act") against the order of the Customs, Excise & Service Tax Appellate Tribunal, New Delhi dated 21.1.2010 proposing to raise following substantial questions of law:

(i) "Whether goods cleared without payment of duty under notification No. 214/86-CE dated 25.03.86 are not ''exempted goods'' as mentioned in the Rule 6 of the Cenvat Credit Rules 2004?

(ii) Whether provision of Rule 6 of the Cenvat Credit Rules 2004 regarding disallowance of Cenvat Credit on the inputs used in the manufacture of final product which are exempt from duty, are not attracted in case of goods cleared without payment of duty under notification No. 214/86-CE dated 25.03.86?"

The Assessee availed Cenvat Credit as per Cenvat Credit Rules, 2004 (for short, "the Rules") in respect of inputs in manufacture on job work basis. The department raised an objection that the Cenvat Credit was not permissible on inputs used in the manufacture of exempted goods in view of Rule 6(1) of the Rules. Accordingly, proceedings were initiated u/s 11A of the Act. Stand of the Assessee was that under notification No. 214/86-CE dated 25.03.86, exemption was available subject to the condition that supplier of raw material will either use the goods in manufacture of final product or clear the goods on payment of appropriate excise duty. Reliance was, inter-alia, placed on a larger Bench judgment of the Tribunal in Sterlite Industries Ltd. v. CCE, Pune 2005(68) RLT 25 and judgment of the Hon''ble Supreme Court in Escorts Ltd. Vs. Commissioner of Central Excise, Delhi, and also decision of Commissioner (Appeals) in another case. The adjudicating authority upheld the objections of the Assessee with the following observations:

6.5 Thus, the Noticees have rightly availed the CENVAT credit on furl used in the manufacture of forged products and normalization undertaken on job-work basis as duty is to be paid on these goods by the supplier of rawmaterial and show cause notice issued ignoring this position merits to be set aside.

6.6 The Commissioner (Appeals), Central Excise Commissionerate, Ludhiana has already in an another case of the Noticees relating to earlier periods allowed their appeals vide Order in Appeal No. 350-351/CE/Appl/Ldh/04 dated 19.04.2004 (copy enclosed) and set aside the orders-in-original demanding reversal of credit. The same view is also taken in the case of Modi Sales, Ludhiana vide Order-in-appeal No. 139/CE/CHD/06 dated 27.02.06. In the case of Modi Sales, their earlier order-in-original on the same issue has already been accepted by the department as mentioned in this order-inappeal. In addition to this, the Ld. Assistant Commissioner, Central Excise Division-I, Ludhiana has already in case of M/s Ludhiana Steel Rolling Mills, Ludhiana dropped the demand under similar set of circumstances vide order-in-original No. 75/CE/AC/LDH-I/05 dated 30.12.2005. In view of these judgments, the show cause notice does not stand and the same merits to be dropped.

The view of the adjudicating authority was upheld by the Commissioner (Appeals) and the Tribunal.

We have heard learned Counsel for the Appellant.

Learned Counsel for the Appellant submits that Cenvat Credit has been availed by the Assessee in violation of Rule 6(1) of the Rules and the adjudicating authority was not justified in dropping the proceedings. The Commissioner (Appeals) as well as the Tribunal erred in upholding the view taken by the adjudicating authority. Reliance has also been placed on judgment of the Hon''ble Supreme Court in Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd., .

We are unable to accept the submissions. While there is no dispute that under Rule 6(1) of the Rules, Cenvat Credit cannot be availed in respect of inputs used in manufacture of exempted goods, the same has to be read with the notification referred to above. Learned Counsel for the Appellant is not able to assail the finding that under the notification, availing of Cenvat Credit is permissible by job worker, subject to the final manufacturer paying the duty. In such a situation, matter is covered against the revenue by Escorts, wherein it was observed:

It is to be seen that the whole purpose of the notification and the Rules is to streamline 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 57-D(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 an intermediate product comes into existence, even though no duty has been paid on the intermediate product as it is exempted from whole of the duty or is chargeable to nil rate of duty, credit would still be allowed so long as duty is paid on the final product.

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 57-C 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 Appellants from claiming benefit of Notification No. 217/86-CE dated 2-4-1986. 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.

Mr Lakshmikumaran relied upon the decision of this Court in the case of Collector of Central Excise, New Delhi Vs. Hindustan Sanitaryware and Industries, , wherein in respect of this very notification, this Court has held that so long as duty is paid on the final product, the mere fact that duty was not paid on the intermediate product would not disentitle the manufacturer from the benefit of Notification No. 217/86-CE dated 2-4-1986. In that case, the input was plaster of Paris, the intermediate product was moulds made out of the plaster of Paris, the final product was sanitaryware. In our view, the facts of that case are identical to the facts of the present case. The ratio laid down therein fully applies to this case.

In this view of the matter, we set aside the impugned judgment and the order of the Commissioner of Central Excise. It is held that the Appellants will be entitled to MODVAT credit on duties paid for the inputs used for manufacture of parts, so long as the parts are used in the manufacture of tractors on which duty is paid. We clarify that in respect of parts which are sold in the open market and/or used for manufacture of tractors on which no duty is paid, the benefit of Notification No. 217/86-CE dated 2-4-1986 may not be available.

As regards the judgment of the Hon''ble Supreme Court in Ballarpur Industries Ltd., therein the issue was not of effect of the notification dated 25.3.1986, which has been invoked in the present case. The said judgment is, thus, distinguishable.

No substantial question of law arises.

The appeal is dismissed.