OCTOBER 18, 2011

By Akella A S Prakasa Rao, B.E.(Hons), LLB

IN the past, when an importer took a call to divert the imported consignment, he could endorse on the reverse side of the bill of entry with an endorsement from the customs officer so that the job-worker or loan licensee who was going to make use of the imported materials could avail input credit on such Bill of Entry. This practice has been ratified by the Board vide Circular No.179/13/96-CX dated 29.02.1996, wherein it was inter-alia clarified that

"4. Where the imported goods are still in Customs dock area and the manufacturer/importer decides to divert/transfer the goods, a declaration by the manufacturer/importer can be made on the reverse of triplicate copy of Bill of Entry/duplicate copy of the Bill of Entry generated on EDI system by the manufacturer/importer that consignments are being delivered to the unit (name of the unit for availing credit and endorsed by the Proper Officer of Customs for enabling the manufacturing unit to avail credit."

The Circular held the field till the law laid down by Larger Bench of the Tribunal in the case of Balmer Lawrie& Co. Ltd Vs Commissioner, Kanpur 2002-TIOL-155-CESTAT-DEL-LB emerged to confuse the minds. In this case, the Larger Bench held as follows:

"20. The argument of the counsel that issuance of the invoice for clearing the goods by the manufacturer from the factory or by the dealer while transferring the goods is only a procedural condition of a technical nature and as such its breach must be held to be condonable, under the law, cannot be attached any legal value. The provisions of Rule 57G after amendment on the issuance of Notification No. 15/94, dated 30-3-1994 are mandatory in nature as the words used therein are that no credit shall be taken unless the inputs are received in the factory under the cover of an invoice issued under Rule 52A. The endorsement of the invoice had not at all be provided in this Rule. Only the issuance of invoice or invoices had been made permissible as is further evident from the wording of Rule 57GG and even statutory obligation has been imposed on the person issuing the invoice or invoices to maintain stock account in form RG 23D and to make entry in that register at the end of the day on receipt of inputs of excisable goods. It is not only a procedural technical condition so as to hold that its violation by making endorsement on the invoice by not maintaining the relevant record as required under Rule 57G or Rule 57GG referred to above, is condonable under the law. A distinction has to be made between a procedural condition of a technical nature and a substantive condition. It is the non-observance only of former which is condonable while that of later is not condonable as the same is likely to facilitate commission of fraud and introduce administrative inconvenience and misuse of the Modvat credit."

(Emphasis provided)

But, in an earlier case in Superpax India Limited Vs. CCE, New Delhi 2002-TIOL-475-CESTAT-DEL, it was held that by the Tribunal that by endorsement the nature of the bill of entry does not change and it continues to be a duty paying document eligible for availing input credit. The Tribunal continued to hold this view, as is evident in a subsequent case of CCE, New Delhi Vs. Bharat Wire Products 2002-TIOL-473-CESTAT-DEL . However, this view was overruled by the Larger Bench in the matter of BalmerLawrie cited supra. However, the decision in BalmerLawrie was distinguished by the various benches of the Tribunal as can be seen from the following decisions:

CCE, Jamshedpur Vs. TISCO 2002-TIOL-474-CESTAT-KOL

Jewel Brushes Pvt Ltd. Vs. CCE, Vadodara 2008-TIOL-2854-CESTAT-AHM

Soorajmull Baijnath Industries P. Ltd Vs. CCE, Gurgaon 2008-TIOL-2852-CESTAT-DEL

In the meanwhile, in the case of Khandelwal Laboratories Limited Vs. Commissioner 2005-TIOL-1692-CESTAT-MUM, the Tribunal while relying on the Larger Bench decision in the matter of BalmerLawrie held that CENVAT/MODVAT credit was not available on the basis of endorsed Bill of Entry as there was no declaration on the reverse of the Bill of Entry to the effect that the assessee (M/s. Khandelwal Laboratories Ltd.) would be availing credit and distinguished the decision given in CCE, Jamshedpur Vs. TISCO cited supra.

Basing on this judgment of the Tribunal and taking advantage of the Rule 9(1) of the CENVAT credit Rules, 2004 the departmental audits have disallowed the input credit availed on such endorsed bills of entry in several cases. However, the plea that as per Rule 9(1) of the CENVAT Credit Rules, 2004 bill of entry is also a valid document and that there is no requirement anywhere in the law that it should be in the name of the person, who is actually receiving the goods for further processing and accordingly credit should be available to them, is falling on deaf ears. Fortunately, based on this very argument, the Mumbai High Court in Marmagoa Steel Limited Vs. UOI, 2005-TIOL-239-HC-MUM-CX held that in such instances credit cannot be denied to the assessee, in the process overruling the decision of Larger Bench in BalmerLawrie. The High Court observed:

"10. For availing the credit of duty, what is required to be established under Rule 57G is that the inputs received are in fact duty paid. The procedure set out in Rule 57G of the Central Excise Rules is to ensure that the credit is taken on the basis of duty paid documents. The bill of entry is one such document set out in Rule 57G. The said rule does not require that the bill of entry should be in the name of the person claiming credit of duty. It is not in dispute that the goods imported and cleared on payment of duty by one person can be used as inputs and credit of duty can be claimed by another person by establishing that the imported duty paid goods have been received as inputs and that the importer has not taken credit of that duty. In the present case, it is established that the duty paid goods are received as inputs, however, the credit is denied on the ground that the Bill of entry is not endorsed in the name of the appellant. Rule 57G does not require that for taking credit of duty, the bill of entry should be endorsed in the name of the claimant Thus, the appellant has established that the inputs received under the bills of entry were duty paid and, therefore, the authorities below were not justified in denying the credit of duty to the appellant. The two decisions relied upon by the Tribunal do not support the case of the revenue. In the case of Balmer Lawrie& Co. (supra), the issue was not relating to the endorsement on the bills of entry and, therefore, the said decision is distinguishable on facts. Similarly, the decision of the Tribunal in the case of Tata Iron & Steel Co. Ltd. (supra) is also distinguishable on facts as the said decision is based on erroneous concession made by the Counsel for the appellant therein, that in the case of BalmerLawrie& Co. it is held that the Modvat credit is not available on the basis of endorsed copies of bills of entry."

It may be noted that Supreme Court ratified the decision given by the Bombay High Court in Marmagoa Steel 2005-TIOL-239-HC-MUM-CX. Also, when M/s Khandelwal Laboratories appealed against the judgment of the Tribunal in the High Court of Bombay, the Bench comprising of Justice J.P. Devadhar and Justice R.M. Savant disposed of the case on 08.12.2010 by quashing the order of the Tribunal with a direction to reconsider the same in light of its decision given in Marmagoa Steel Ltd.

Therefore, it appears that the final word on this issue is the judgment of Bombay High Court in Marmagoa, which was also ratified by the Supreme Court. But the departmental authorities are still hanging on to the decision of the Larger Bench in BalmerLawrie and disallowing input credit availed on endorsed bills of entry even today. The authorities are of the view that the Tribunal on a direction from the High Court cannot overrule the earlier decision of a Larger Bench. Unfortunately, the authorities have completely ignored the judgment of Apex Court in Marmagoa Steel which ratified the decision of Bombay High Court wherein the judgment of Larger Bench was overruled (see the extract of the High Court judgment supra).

To set the matter to rest once and for all, the Board may issue a Circular in this regard on a pro-active basis to clarify and clear the confusion prevailing in the minds of the field officers especially from the audit wing. It is time to act, hope someone in the Board is listening there.

(The author is currently working in a 'Big 4' firm, and the views expressed are personal)