By TIOL News Service

NEW DELHI, AUG 29, 2013: THE respondent-company availed deemed MODVAT credit of Rs.77 ,546 /- during the quarter of March,2000 on the strength of invoices issued by M/s. Sawan Mal Shibhu Mal Steel Re-Rolling Mills,Mandi Govindgarh. During MODVAT verification it was found that the supplier of inputs had not discharged full duty liability for the period covered by the invoices. The Competent Authority was of the view that appropriate duty of excise had not been paid by the manufacturer of inputs under the invoices on the strength of which the respondent took the benefit of deemed MODVAT credit and it was obligatory on the part of the respondent to take all reasonable steps to ensure that the appropriate duty of excise had been paid on the inputs used in the manufacture of their final product as required under Rule 57A (6) of the Central Excise Rules,1944 read with notification No. 58/97-CE(NT) dated 30.8.1997. The adjudicating authority,by order dated 22.3.2002,disallowed the deemed MODVAT benefit earlier availed and ordered for recovery of the said sum along with interest,and,further imposed penalty of Rs.40 ,000 /-.

The Tribunal came to hold that the declaration given by the appellant therein satisfied the conditions enumerated in the notification for claiming the deemed MODVAT credit and,accordingly,quashed the orders passed by the adjudicating authority and that of the appellate authority.

Questioning the justifiability of the aforesaid order,Revenue preferred Civil Appeal No. 65 of 2006 before the High Court. The High Court reproduced the proposed substantial question of law,which reads as follows: -

"Whether the manufacturer of final products is entitled to deemed credit,under Notification 58/97-CE dated 30.8.97 when the manufacturer-supplier of inputs has not paid Central Excise Duty and given a wrong certificate on the body of invoices about duty dischargement under Rule 96ZP of Central Excise Rules,1944?"

While dealing with the aforesaid substantial question of law,the High Court referred to its earlier decision in Vikas Pipes and distinguished the decision in Collector of Central Excise,Vadodara v. Dhiren Chemical Industries and ultimately concurring with the view expressed by the tribunal dismissed the appeal.

Now the Revenue is in appeal before the Supreme Court.

It is relevant to refer to the notification issued under sub-rule (6) of Rule 57A on 30.8.1997. In the said notification iron and steel have been mentioned as goods notified for the purposes of credit of duty under MODVAT. The relevant clauses of the notification for the present purpose are clauses 2,4 and 5 and they are reproduced below: -

"2. The Central Government further declares that the duty of excise under the Central Excise Act,1944 (1 of 1944) (hereinafter referred to as said Act),shall be deemed to have been paid (hereinafter referred to as deemed duty),on the inputs declared herein and the same shall be equivalent to the amount calculated at the rate of twelve per cent of the price,as declared by the manufacturer,in the invoice accompanying the said inputs (hereinafter referred to as invoice price),and credit of the deemed duty so determined shall be allowed to the manufacturer of the final products.

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4. The provisions of this notification shall apply to only those inputs which have been received directly by the manufacturer of the final products from the factory of the manufacturer of the said inputs under the cover of an invoice declaring that the appropriate duty of excise has been paid on such inputs under the provisions of section 3A of the said Act.

5. The provisions of this notification shall not apply to inputs where the manufacturer of the said inputs has not declared the invoice price of the said inputs correctly in the documents issued at the time of their clearance from his factory.”

The Supreme Court noted that the controversy really rests on the understanding of the language employed in the notification. Clause (2) spells about the concept of deemed payment of duty on the inputs and further prescribes that it shall be equivalent to the amount calculated at the rate of twelve per cent of the price,as declared by the manufacturer,in the invoice accompanying the said inputs. Clause (3) deals with a different fact situation and,hence,it need not be dwelled upon. Clauses (4) and (5) are really relevant for the present purpose. On a plain reading of the said clauses it is clear that there are two mandates to avail the benefit of the said notification. One part is couched in the affirmative language and the other part is in the negative. As per the first part it is obligatory on the part of the assessee to produce the invoice declaring that the appropriate duty of excise has been paid on such inputs under the provision of section 3-A of the Act The second command,couched in the negative,is that the provisions of the said notification shall not apply to inputs where the manufacturer of the said inputs has not declared the invoice price of the said inputs correctly in the documents at the time of their clearance from his factory.

The Supreme Court observed,

"In the case at hand,there is no dispute that a declaration was given by the manufacturer of the inputs indicating that the excise duty had been paid on the said inputs under the Act. It is also not in dispute that the said inputs were directly received from the manufacturer but not purchased from the market. There is no cavil over the fact that the manufacturer of the inputs had declared the invoice price of the inputs correctly in the documents. It is perceivable from the factual matrix that the only allegation is that at the time of MODVAT verification it was found that the supplier of the inputs had not discharged full duty liable for the period covered under the invoices. This lapse of the seller is different and not a condition or rather a pre-condition postulated in the notification".

The counsel for the revenue has vehemently urged that it was requisite and,in a way imperative,on the part of the assessee to verify from the concerned authority of the department whether the excise duty had actually been paid or not. The Supreme Court was not impressed and observed,

"As we notice Rule 57A (6) requires the manufacturer of final products to take reasonable care that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods,has been paid. The notification has been issued in exercise of the power under the said Rule. The notification clearly states to which of those inputs it shall apply and to which of the inputs it shall not apply and what is the duty of the manufacturer of final inputs. Thus,when there is a prescribed procedure and that has been duly followed by the manufacturer of final products,we do not perceive any justifiable reason to hold that the assessee -appellant had not taken reasonable care as prescribed in the notification. Due care and caution was taken by the respondent. It is not stated what further care and caution could have been taken. The proviso postulates and requires "reasonable care” and not verification from the department whether the duty stands paid by the manufacturer-seller. When all the conditions precedent have been satisfied,to require the assessee to find out from the departmental authorities about the payment of excise duty on the inputs used in the final product which have been made allowable by the notification would be travelling beyond the notification,and in a way,transgressing the same. This would be practically impossible and would lead to transactions getting delayed. We may hasten to explicate that we have expressed our opinion as required in the present case pertaining to clauses 4 and 5 of the notification."

Consequently,the Supreme Court concurred with the view expressed by the High Court and accordingly the appeals,being devoid of merit,stand dismissed.

(See 2013-TIOL-41-SC-CX)