Union of India vs Bharat Aluminium Co. Ltd.

Dhirendra Mishra, J.—Revenue''s appeal u/s 35-G of the Central Excise Act, 1944 (for short ''the Act'') against the order dated 11-8-2006 of the Northern Bench of the Customs, Excise & Service Tax Appellate Tribunal, New Delhi (for short ''the Tribunal'') has been admitted on following substantial questions of law :-

(1) Whether the learned Appellate Tribunal has acted according to law in allowing the appeal of the respondent?

(2) Whether the learned Appellate Tribunal has in regard to availment of Modvat credit on the basis of invalid documents, erred in misinterpreting and misapplying the contents of the Notification No. 7/99-C.E. (NT.) dated 9-2-1999 and Board''s Circular No. 441/7/99-CX dated 23-2-1999, without appreciating the facts of the case enumerated above?

(3) Whether the learned Appellate Tribunal has correctly allowed the Modvat Credit to the respondent on the basis of documents, which were not merely invalid in certain terms, but were also not legal and genuine as the consignor had knowing fully well that the provisions of Cenvat Credit Rules had entrusted upon them the responsibility of passing on the genuine credit of duty, had passed on the irregular credit to the Respondent?

Briefly stated, facts of the case as projected in the Order-in-Appealpassed by the Commissioner (Appeals), are that the respondent availed input Modvat credit amounting to Rs. 22,81,835/- and Rs. 30,57,032/- on the strength of invoices issued by M/s. Bharat Petroleum Corporation Ltd., Vishak-hapatnam (in short "the supplier") during the months of November, 1995, September, 1995 and January, 1996. Eight show-cause notices were issued by the Revenue for disallowing credit on the ground detailed in the notices, and the Adjudicating Authority disallowed credit amounting to Rs. 15,67,942/- on the invoices dated 6-8-1995,10-6-1995 and 9-7-1995 and Rs. 6,74,209/- on the invoice dated 29-6-1995, and imposed penalty of Rs. 1 lac and Rs. 15,000/- respectively. The Commissioner (Appeals) vide order 13th January, 2004 (Annexure A/6) dismissed the appeal.

However, the Tribunal has allowed the appeal of the respondent with the following observations :

We find that in this case there is no dispute regarding duty payment and goods used in the final product. Therefore in view of the amendment made in Rule 57G of Rules which is applicable to the pending cases and in view of the board''s circular, the impugned order is set aside and the appeals are allowed.

Shri Bhishma Kinger, learned counsel for the appellant/Revenue would argue that the Tribunal has passed the impugned order on the basis of amendment in Rule 57G and in view of the Circular dated 22-3-1999 issued by the Central Board of Customs and Excise (for brevity "Board"). However, the provisions relied upon by the Tribunal also stipulate that "wherever the Assistant Commissioner, after making due enquiry, is satisfied that the Modvat credit taken by the assessee is incorrect, adjudication proceedings in the normal course should be initiated." On verification of the documents submitted by the respondent, it was found that the supplier did not submit the subject invoices along with their monthly return and the details of the goods received and sold were not entered in RG-23D Register, as informed by the jurisdictional Central Excise Officer of the supplier vide letter dated 9-8-1999. The respondent was furnished with the copy of the letter dated 9-8-1999 received from the Superintendent of Central Excise Range, ID, Rajendra Nagar at the appellate stage, however, no evidence was adduced by the respondent to counter the version of the jurisdictional Central Excise Officer. For the aforesaid reasons, it was held that the documents furnished by the respondent-assessee were improper and not valid documents for availing duty of credit under the Modvat Scheme.

Reliance is placed on the decision of the Supreme Court in the matter of Mangalore Chemicals and Fertilisers Ltd. Vs. Deputy Commissioner of Commercial Taxes and others, and decision of Delhi Tribunal in the case of 2003 (156) ELT 861 .

On the other hand, Shri Manish Panda, learned counsel for the respondent/assessee, would argue that Modvat credit was held to be inadmissible only on the ground of procedural lapses on the part of input supplier. There was no dispute regarding payment of duty on the inputs and its utilization in the manufacture of final product by-the respondent. From perusal of the three show-cause notices issued in March and May, 1996 for disallowing Modvat credit, it would be evident that the department''s contention was that the invoices were not proper documents as prescribed under Rule 57G of the Central Excise Rules (in short "Rules"). However, show-cause notices did not dispute that the supplier had paid duty on the furnace oil and the said furnace oil was actually received by the respondent and used in manufacture of dutiable final product. The Central Government vide Notification dated 9-2-1999 amended Rule 57G of the Rules and inserted sub-rule (11), which provides that the duty should not be denied to an assessee on the ground that any document referred to in sub-rule (3) does not contain the particulars required to be contained therein. If the documents contain the details of payment of duty, description of goods, assessable value, name and address of the factory or the warehouse and if the inputs received were duty paid and they have been actually used in the manufacture of final product by the recipient, credit of duty should not be denied. The Board, pursuant to the amendment in Rule 11, issued Circular on 23rd February, 1999 and directed the department to allow Modvat credit of the duty paid on inputs/capital goods ignoring the minor procedural lapses in filing declaration or in the invoice or document, based on which credit is to be availed, after ensuring that inputs or capital goods have suffered duty and the same are being used or are to be used in the process of manufacture by the recipient. The circular further clarifies that the pending cases were also to be disposed of in accordance with the above circular by applying the amendment dated 9-2-1999 made to Rule 57G.

Modvat credit to the tune of Rs. 22,81,835/- has been disallowed and penalty of Rs. 1,15,000/- has been imposed on the ground that the Range Superintendent of Central Excise, Vishakhapatnam reported that the supplier had not entered the details of goods sold to the respondent in its RG 23D Register, as required under Rule 57GG of the Rules. However, the above allegations do not find place in the original show-cause notices and the only allegation mentioned in the show-cause notices was that "transporters'' copy" was handwritten/printed in the invoice at the place of "extra copy/octroi". This was the sole allegation made out in the show-cause notice.

Relying upon various decisions of the Supreme Court, it was argued that the allegation, which was not part of the show-cause notices issued to the assessee, cannot be made a ground for confirming the demand or denying the benefit to the assessee. It was further argued that it has not been disputed by the Revenue that the inputs received by the respondent were not duty paid at the hands of supplier and that the inputs have not been used by the respondent for manufacture of their dutiable final product. It is also not the case of the Revenue that the invoices, on which Modvat credit has been availed, do not contain details of payment of duty, description of goods, assessable value, name and address of the factory or the warehouse, as would be evident from the Order-in-Original or the Order-in-Appeal. The Joint Commissioner as well as the Commissioner (Appeals) did not follow the Circular dated 23rd February, 1999 issued by the Board after amendment in Rule 57G by the Central Government and insertion of sub-rule (11).

The objection raised by the Superintendent, Central Excise Range-1, Vishakhapatnam, is confined to the limited technical lapses on the part of the supplier in maintaining its RG 23D Register and in not submitting duplicate copy of the invoices raised by the respondent in the Range Office. The department has not disputed that the supplier has paid duty on the HSD Oil supplied to the respondent or that the invoices raised by the supplier did not contain the details of payment of duty, description of goods, assessable value, name and address of the factory or the warehouse. The lapses, if any, are on the part of the supplier for not complying with the provisions of Rule 57GG and the same cannot be a ground for denial of Modvat credit to the respondent. The department, without initiating any proceedings against the supplier for lapses on their part under Rule 57GG and without joining the supplier as a party, have initiated proceedings against the respondent, which is not tenable.

It is further submitted that decision of the Hon''ble Supreme Court in the matter of Mangalore Chemicals & Fertilizer Ltd. (supra) has no application to the facts of the present case as the same relates to interpretation of exemption notification, wherein it has been held that while interpreting an exemption notification, non-compliance of substantive conditions of mandatory nature will render the availment of exemption nugatory. However in the instant case, the respondent has complied with the substantial condition and breach alleged in the show-cause notices was only with respect to procedural condition, whereas the Tribunal''s decision in Tide Water Oil Ltd. (supra) is not a good law inasmuch as the Tribunal has failed to consider amendment to Rule 57G notified on 9th February, 1999 as well as Circular of the Board dated 23rd February, 1999.

We have heard learned counsel for the respective parties and perused the material available on record, including the orders of the forums below.

From perusal of the show-cause notices dated 17th May, 96 (Annexure A/2), 26th March, 96 (Annexure A/3) & 26th March, 96 (Annexure A/4), we observe that the ground proposed for denial of credit was that the documents were improper as they were tampered with inasmuch as at the bottom of the invoice, the terms occurring as "EXTRA COPY/OCTROI" and at the top "TRANSPORTER COPY" was typed or handwritten. Subsequent to issuance of show-cause notices, it appears that some enquiries were made at the supplier''s end by the Superintendent, Central Excise, Vishakhapatnam, and it was discovered that the supplier did not submit the subject invoices along with their monthly return and details of the goods received and sold were not entered in their RG 23D Register.

In the matters of Commissioner of Central Excise v. Gas Authority of India Ltd. reported in 2008 (232) E.L.T. 7 (S.C), the short question before the Hon''ble Supreme Court for determination was - whether the Lean gas was a by-product or a final product? Without examining the above issue, it was observed thus :

As repeatedly held by this Court, show cause notice is the foundation of the Demand under Central Excise Act and if the show cause notice in the present case itself proceeds on the basis that the product in question is a byproduct and not a final product, then in that event, we need not answer the larger question of law framed hereinabove. On this short point, we are in agreement with the view expressed by the Tribunal that nowhere in the show cause notice it has been alleged by the Department that Lean Gas is a final product. Ultimately, an assessee is required to reply to the show cause notice and if the allegation proceeds on the basis that Lean Gas is a byproduct, then there is no question of the assessee disputing that statement made in the show cause notice.

In the instant case also, the respondent was served with show-cause notices with the only allegation that the invoices furnished by the assessee were found to be tampered with. There was no allegation in the show-cause notices that necessary particulars, as required under Rule 57G, were not available in the invoice or that the supplier had not paid duty on the product and that the respondent received the product in its premises in the mentioned quantity and the same was not used or was not to be used for manufacture of final dutiable product. From bare perusal of sub-rule (11) of Rule 57G, inserted by amendment dated 9th February, 1999, it is manifestly clear that credit is not to be denied under sub-rule (2) on the ground that any of the documents mentioned in sub-rule (3) does not contain all the particulars required to be contained therein under this rule. If such document contains details of payment of duty, description of goods, assessable value, name and address of the factory or the warehouse, and the Assistant Commissioner having jurisdiction over the factory of manufacture intending to take credit, is satisfied that duty on the input has been paid and such input has actually been used or are to be used in the manufacture of final product, credit of duty cannot be denied to the assessee.

Paras-2 & 3 of the guidelines of the Circular dated 23rd February, 1999 of the Board also provide as under;

The Assistant Commissioner, before issuing Show Cause Notice for wrong availment of Modvat credit by the assessee on any procedural grounds, shall conduct enquiries with regard to duty paid nature of the goods as the suppliers send, ensure that necessary information as mentioned in the Notification are available on the invoice and satisfies himself whether the goods have been used or are intended to be used as contemplated in the Modvat Rules. In case the assessee''s invoice contains the details viz. description of goods, assessable value, name and address of the factory or the warehouse where the goods are to be received, and if the assessee has filed a declaration as contemplated in the Modvat rules, the Assistant Commissioner having jurisdiction over the factory would allow the credit of duty so paid after making enquiries as above.

In should hereafter be ensured that Show Cause Notices are not issued for procedural lapses as mentioned in the Notification without making proper enquiries. Wherever the Assistant Commissioner, after making due enquiry, is satisfied that the Modvat credit taken by the assessee is incorrect, adjudication proceedings in the normal course should be initiated. Efforts, however, should be directed towards reduction of litigation.

Modvat credit was denied to the assessee by the Joint Commissioner and confirmed by the Commissioner (Appeals) only on the basis of information furnished by the Superintendent, Central Office, Vishakhapatnam, on 9-8-1999 to the effect that the supplier did not submit the subject invoices along with their monthly return and details of the goods received and sold were not entered in RG 23D Register. The above procedural lapse, if any, is attributable to the supplier. The ratio of law laid down by the Hon''ble Supreme Court in Man-galore Chemicals & Fertilizers Ltd. (supra) is not applicable to the facts of the present case as in the cited judgment, while considering the entitlement for exemption and refund, it was held that there is a distinction between non-observance of a procedural condition of a technical nature and non-observance of a substantive condition. Non-observance of procedural condition of technical nature is condonable, whereas non-observance of substantive condition would disentitle the assessee any exemption and refund under the Statute. In the present case, the Tribunal has held that there is no dispute regarding duty payment and use of goods in manufacture of final product and the credit has been denied only on the ground that necessary particulars were not mentioned in the invoices and the supplier, which issued those invoices, did not enter the particulars in their statutory records. The appeal has been allowed in view of the amendment made in Rule 57G and the Board''s Circular, which was issued in light of the amended rules.

On the basis of aforesaid discussions, we are of the opinion that there is no illegality, infirmity or jurisdictional error committed by the Tribunal while passing the impugned order. We answer the substantial questions of law in favour of the assessee and against the Revenue, and dismiss the appeal accordingly.