1 mpt IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION CENTRAL EXCISE APPEAL NO.9 OF 2009 The Commissioner of Central Excise Thane – 1 Commissionerate, 4th floor, Navprabhat Chambers, Ranade Road, Dadar (West) Mumbai 400 028. .. Appellant versus M/s.Nicholas Piramal (India) Ltd. Mumbai – Agra Road, Balkum, Thane 400 608. .. Respondents ... Mr. M.I. Sethna, Sr. Counsel with J.B. Mishra for the appellants. Mr.V. Sreedharan with Mr.Prakash Shah and Mr.Jas Sanghavi for respondents. CORAM : FERDINO. I. REBELLO AND D.G. KARNIK, JJ DATED : 14th August 2009 2 JUDGEMENT (Per FERDINO I. REBELLO, J) 1. This appeal was admitted on the following question : “Whether the Hon’ble Tribunal was right in allowing the assessee for reversal of credit taken, instead of insisting upon the assessee to pay an amount equal to 8% or 10% of total price of the exempted goods as per the Rules 6(3)(b) of Cenvat Credit Rules 2002? 2. A few facts relevant for discussion need to be stated before we proceed to answer the issue. The respondents are engaged in the manufacture of Vitamin A falling under Chapter Heading 29.36. and animal food supplement falling under Chapter Heading 23.02 of the Schedule to the CETA 1985. Vitamin A is liable to Central Excise Duty. Animal food supplement is not liable for payment of Central Excise Duty since Heading 23.02 attracts nil rate of duty. 3. According to the Respondents, they first used the inputs in the manufacture of Crude Vitamin A which is an intermediate product. 3 Crude Vitamin A is further used in the manufacture of (i) Vitamin – A, being a dutiable final product cleared on payment of Central Excise Duty and (ii) Animal feed supplement being an exempted final product cleared without payment of Central Excise Duty. 4. Respondents took cenvat credit for duty paid on inputs received in the factory. Prior to the removal of animal feed supplement, the respondents, in their cenvat credit, debit/reversed the credit to the extent inputs are used in the manufacture of crude Vitamin A which is in turn is used in the manufacture of animal feed supplement. According to respondents thus, at the earliest available opportunity they have surrendered the credit going into the exempted final product. The respondent thus did not take advantage of the credit availed on inputs used in the manufacture of exempted final product. 5. Three show cause notices covering the period March 2002 to December 2003 were issued to the respondents in a sum of Rs. 4,85,79,644/-. Subsequent to the show cause notice and after hearing parties, the Commissioner by his order dated 31st January 2005 confirmed the said sum as paid by the assessee and imposed equal penalty. The petitioner preferred an appeal to CESTAT. As there were 4 conflicting views of CESTAT, the matter was referred to a Full Bench. The Full Bench of CESTAT by an order dated 12th August 2008 by a majority of 2:1 answered the matter in favour of the assessee. The present appeal by the Revenue is to assail the order of CESTAT. 6. It is submitted on behalf of the appellant that on a perusal of Rule(6) of the Cenvat credit rules 2004 and a literal construction, would make it clear that whenever inputs are used both for manufacture of exempted products as also dutiable products, a person seeking to avail of credit on inputs in respect of dutiable products would have to comply with the requirements of Rule 6(2) of the Rules. On failure to maintain separate accounts for receipt, consumption and inventory of inputs and inputs services meant for use in the manufacture of dutiable final products etc, the assessee who opts not to maintain separate accounts will have to pay duty as set out under Rule 6(3). In the instant case, the majority judgment of CESTAT has not considered this aspect. The judgment therefore clearly discloses an error of law which is apparent and consequently, is liable to be set aside and the order in original to be restored. . On the other hand on behalf of the respondent, their learned 5 counsel submits, that as the inputs are used firstly in the manufacture of an intermediate product, it is not possible for the assessee to maintain books as required. In these circumstances, it is submitted that once the assessee reverses the cenvat credit in so far as exempted products are concerned before the goods leave the factory, what would be attracted is Rule 6(1) of the Rules. At any rate, it is submitted that if Rule 6(2) is construed in the manner sought to be contended on behalf of Revenue, it will cause great hardship to a manufacturer and in such an event, the Court considering the object of the Rule and the apparent provision should give a meaning which can give effect to the purpose of the Act and the rule itself. In that context, it is submitted that the Tribunal was right in taking the alternative view that as the petitioner has complied with the requirements of Rule 6(1) no duty was payable in terms of Rule 6(3). 7. To understand the issue in its correct perspective, we may gainfully refer to the relevant provisions of Rule 6 Rule 6. Obligation of manufacturer of dutiable and exempted goods – (1) the CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2). 6 (2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. (emphasis supplied) (3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:- (a) if the exempted goods are - (i) goods falling within heading No.22.04 of the First Schedule to the Tariff Act; (ii)Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity (iii)Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertiliser, (iv)tyres of a kind used on animal drawn vehicles or handcarts and their tubes, 7 falling within Chapter 40 of the said First Schedule; (v)newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule; (vi)final products falling within Chapters 50 to 63 of the said First Schedule; The manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relatin to, the manufacture of such final products at the time of their clearance from the factory; or (b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. Explanation I. The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise 8 Explanation II. If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken. 8. The position prevailing prior to 1st September 1996 may be considered to better understand the controversy. Rule 57A of the erstwhile Central Excise Rules, 1944 allowed credit of specified duties paid on inputs used in the manufacture of finished excisable goods (hereinafter referred to as final products). Rule 57C of the erstwhile Central Excise Rules, 1944 read as under: “Credit of duty not to be allowed if final products are exempt. - No credit of specified duty paid on the inputs used in the manufacture of final product (other than those cleared either to a unit in a Free Trade Zone or to a hundred percent Export Oriented Unit or to a unit in Electronic Hardware Technology Park or to a unit in Software Technology Parks) shall be allowed if the final product is exempt from the whole of duty of excise leviable thereon or is chargeable to Nil rate of duty". 9 Practical accounting difficulties were faced in those cases where a manufacturer produced dutiable final product say car and also exempted final product say tractor. In such case, in law, no credit is available on input used in the manufacture of tractor. It was not reasonably possible to separate the inputs like steel sheet, paints etc, to be utilized in manufacture of both the final products, say car and tractor. In that context, it was clarified by the Central Government vide Circular No.5/87 dated 7.1.1987 as under: “A reference is invited to Board’s instructions F. No. B. 22/3/86-TRU, dated the 10th April, 1986, wherein it has been clarified with regard to Point No. 5 that Modvat credit is not available if the final products are exempt or are chargeable to nil rate of duty. However, where a manufacturer produces along with dutiable final products, final products which would be exempted from duty by a notification (e.g. an end-use notification) and in respect of which it is not reasonably possible to segregate the inputs, the manufacturer may be allowed to take credit of duty paid on all inputs used in the manufacture of the final products, provided that credit of duty paid on the inputs used in such exempted products is debited in the credit account before the removal of such 10 exempted final products.” 9. We may next consider the position prevailing post 1.9.1996 on Introduction of Rule 57CC and the Budget Circular explaining the rationale behind it. Rule 57CC was introduced w.e.f. 1.9.1996 in the erstwhile Central Excise Rules, 1944. For gainful reference, we may reproduce the relevant portion of Rule 57CC. They read as under:- RULE 57CC. Adjustment of credit on inputs used in exempted final products or maintenance of separate inventory and accounts of inputs by the manufacturer – (1) Where a manufacturer is engaged in the manufacture of any final product which is chargeable to duty as well as in any other final product which is exempt from the whole of the duty of excise leviable there on or is chargeable to nil rate of duty and the manufacturer takes credit of the specified duty on any inputs (other than inputs used as fuel) which is used or ordinarily used in or in relation to the manufacture of both the aforesaid categories of final products, whether directly or indirectly and whether contained in the said final products or not, the manufacturer shall, unless the provisions of sub-rule(9) are complied with, pay an amount equal to eight per cent of the price (excluding 11 sales tax and other taxes, if any, payable on such goods) of the second category of final products charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. (2) The amount mentioned in sub-rule(1) shall be paid by the manufacturer by adjustment in the credit account maintained under sub-rule(7) of rule 57C or in the accounts maintained under Rule 9 or sub-rule (1) of rule 173G and if such adjustment is not possible for any reason, the amount shall be paid in cash by the manufacturer availing of credit under rule 57A. (9) In respect of inputs (other than inputs used as fuel) which are used in or in relation to the manufacture of any goods, which are exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty, the manufacturer shall maintain separate inventory and accounts of the receipt and use of inputs for the aforesaid purpose and shall not take credit of the specified duty paid on such inputs. (emphasis supplied) 10. The relevant portion of explanatory Notes to Budget changes 1996-97 issued by Central Government explaining the rationale for the introduction of Rule 57CC [1996 (15) RLT M71, is as under: 12 “At present a manufacturer manufacturing both fully exempted and dutiable final products avails the credit of the duty paid on inputs at the time of the receipt of the goods in the factory. When he clears the fully exempted final product, he is required to reverse the credit taken on inputs contained in the exempted final product. This procedure is quite cumbersome and many a time, in the absence of any input-output correlation, it is difficult to determine whether the reversal of credit has been correct or not. In order to circumvent this problem, a provision has bee made by inserting a new rule 57CC so as to prescribe that an amount equal to 20% of the value of the exempted goods is reversed in the modvat credit account at the time of clearance of the exempted final product whether or not the inputs on which modvat credit has been taken is used or contained in the exempted final product. This will eliminate the problem of determination of input duty credit used or contained in the exempted final product.” Though in the budget it was proposed at the rate 20% it was reduced to 8% when Rule 57CC came into force with effect from 1.9.1996. 11. In the Budget Speech of 1996-97 the Finance Minister explained important changes in excise duty. Gainful reference may be made to paragraph 73.4 73.4 At present a manufacturer manufacturing both fully exempted and dutiable final products avails the credit of the duty paid on inputs at the time of the 13 receipt of the goods in the factory. When he clears the fully exempted final product, he is required to reverse the credit taken on the inputs contained in the exempted final product. This procedure is quite cumbersome and many a time, in the absence of any input-output correlation, it is difficult to determine whether the reversal of credit has been correct or not. In order to circumvent this problem, a provision has been made by inserting a new rule 57CC so as to prescribe that an amount equal to 20% of the value of the exempted goods is reversed in the modvat credit account at the time of clearance of the exempted final product whether or not the inputs on which modvat credit has been taken is used or contained in the exempted final product. This will eliminate the problem of determination of input duty credit used or contained in the exempted final product.” 12. To complete the background Rule 57 AD considering similar provisions like Rule 57CC was introduced with effect from 1.4.2000. Between 1.7.2001 till 28.2.2002 what was relevant was Rule 6 of the Cenvat Credit Rules 2002. This position continued under Rule 6 of Cenvat Credit Rules 2002 as also Rule 6 of Cenvat Credit Rules 2004. From 10th September 2004 the amount payable under Rules 6(3)(b) 14 has been fixed at 10%. 13. On a consideration of Rule 57CC, it is clear that if inputs are used in the manufacture of goods, which are chargeable to duty as well as exempted goods such manufacturer shall pay an amount equal to eight percent of the price (excluding sales tax and other taxes, if any payable on such goods) of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory unless the manufacturer in terms of sub Rule (9) maintain separate inventory and accounts of the receipts and of use of inputs in the manufacture of exempted goods. This rule as both the explanatory note to the Finance Bill and the Budget speech was introduced on the realization that the procedure was cumbersome and it was difficult to determine whether the reversal of credit was proper or not. The delegate making the rule as also the Finance Minister were aware of the practical difficulties faced by the Industry. Thus if the manufacturer uses inputs in respect of both, manufacture of exempted goods and dutiable goods, then if a separate inventory is maintained for receipt and use, the manufacturer in respect of dutiable goods could take credit of the specified duty paid 15 on such inputs, otherwise pay 8% of the price in terms of Rule 57CC. 14. Respondent relies on the judgement in Chandrapur Magnet Wires Pvt.Ltd. Vs. Collector of Central Excise reported in 1996(81) E.L.T 3(SC), in support of their contention that Rule 6(1) should not be read literally but is capable of an alternative consideration, namely that if an assessee reserves the credit on inputs used in the manufacture of final products before the goods leave the factory, then Rule 6(1) is complied. 15. We may set out a few facts to consider the ratio of the judgment in Chandrapur Magnets. The company manufactured enameled winding wire from duty paid copper wire bars. They manufactured two types of enameled copper wire. Those exceeding 6 mm diameter and those which were less than 6 mm diameter. Winding wires of copper was dutiable under sl.no.1(ii) of Notification No. 69/86-CE. Winding wires were also exempt from duty vide Sl.No. 1(i) of Notification No.69/86 providing interalia, if no modvat credit is taken under Rule 57A or Rule 56A. Thus, the exemption was available on fulfilling the condition that credit was not availed or inputs used in manufacture of such exempted final product. 16 Chandrapur Magnets has not considered either the interpretation of Rule 57C or Rule 57CC. The issue for consideration was whether availing of modvat credit on inputs used in the manufacture of exempted final product in terms of the rules as then in force. In that context, the Supreme Court was pleased to hold that if the credit is reversed before the goods leave the factory that would amount to not availing of the credits. The ratio of the judgement in Chandrapur Magnets (supra) therefore cannot be applied to construe Rule 6. 16. The next judgment relied upon on behalf of the respondent in support of their case is the judgment in Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd, 2007(215) E.L.T. 489 (S.C.) 489 (S.C.) In paragraph no.2, the issue for consideration by the Court was “Whether in the absence of any “sale”, Rule 57CC of the Central Excise Rules 1944 would have any application or not. In that case, the respondent was manufacturing pulp which was captively consumed for the manufacture of paper in the factory. A small portion of the pulp according to the assessee was sent to the sister unit of the assessee at Asthi. Assessee’s contention was that there was no sale of pulp as alleged by the Department and the quantity of pulp 17 manufactured by the assessee was stock transferred to sister unit as Asthi. The Supreme Court noted that Rule 57CC was placed on statute book by Notification dated 23.7.1996. The Court also noted that object of Rule 57CC(1) was to recover a presumptive sum upon removal of exempted goods from a manufacturer who also manufactured dutiable goods by using common inputs for both dutiable as well as duty exempted goods and who took modvat credit on such common inputs. The Court then in paragraph no.19 observed as under:- “In cases where the manufacturer does not comply with Rule 57CC(9), he shall debit the presumptive sum equal to eight per cent of the value of the exempted goods at the time of clearance from the factory gate. This rule would apply to stock transfers also.” The object of Rule 57CC was explained as under. “In the circumstances, Rule 57CC is a provision which seeks to recover presumptive amount at the rate of eight per cent of the price of exempted final product at the time of removal for sale. In the circumstances, the Tribunal erred in holding that 18 Rule 57CC is not applicable to the present case as it involves stock transfer and not a sale. If the view of the Tribunal is to be accepted, then neither Section 4 of the 1944 Act nor the Valuation Rules, 1975 framed thereunder could apply. If the nature of the presumptive sum is kept in mind then there will be no conflict between our view and the view expressed by the Central Board of Excise and Customs vide Instructions based on Circular No.B-42/1/96-TRU; dated 27-9-1996. We have enunciated the above principles concerning Rule 57CC on account of the total confusion both in the industry as well as in the Department. The ratio of this judgment also will not assist in construing Rule 6 on the contra, the basis for the presumptive tax has been accepted. The construction now sought to be given to Rule 6(1) was not under consideration. 17. Learned counsel then sought to place reliance in the case of CCE Vs. Bombay Dyeing & Mfg. Co. Ltd, 2007 (8) SCC 177. The assessee there in one of its mills had a spinning section where yarn was spun from raw cotton and a weaving section where grey fabrics were woven from such yarn. The assessee opted for exemption under 19 which woven fabrics specified under Col.2 and not subject to any process are chargeable to Nil rate of duty subject to the condition that the said fabrics are made from textile yarn on which the appropriate duty of excise has been paid and no credit of duty paid on inputs or capital goods have been taken under Rule 3 or Rule 11 of Cenvat Credit Rules. The Supreme Court on the issue whether the assessee was availing of credit was pleased to hold that as the assessee was reversing the credit on input even prior to its utilization, the condition of notification about non-availability of credit stood fulfilled. This judgment in our opinion is of no assistance in construing Rule 6. 18. Let us now consider Rule 6. On a plain reading of Rule 6(1), it is obvious that if inputs are used in the manufacture of exempted goods, credit is not allowed except in the circumstances mentioned under sub-rule(2) which has already been reproduced. A manufacturer who avails of CENVAT credit in respect of inputs used in the manufacture of final products which are chargeable to duty as also exempted goods, the manufacturer has to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs used for the manufacture of exempted goods and takes CENVAT 20 credit only on that quantity of inputs which are used in the manufacture of dutiable goods. A plain reading of this rule does not lead to any ambiguity, absurdity or defeat the provisions of the Act. The submission on behalf of the respondents that this would defeat the provisions of the Act and the rules, atleast we are not in a position to understand on a clear and literal interpretation of Rule 6(2). Rule 6(1) and Rule 6(2) read together mean that inputs used in the manufacture of exempted products no cenvat credit is allowed. It may however happen that the inputs are used in the manufacture of both exempted and dutiable goods, in which event if the register as required is maintained the credit can be taken for the quantity of inputs used in the manufacture of dutiable goods. If records are not maintained as required, the duty has to be paid in terms of Rule 6(3). The presumptive tax payable in terms of Rule 6(3) has been recognised and accepted by the Supreme Court in