Supreme Court Allows Assessee in MODVAT Credit Reversal for Exempted Final Products Under Central Excise Rules, 1944. Reversal by debit entry before removal of exempted final products permitted, satisfying condition under Notification No.69/86-CE as amended that no credit of duty paid on inputs used in exempted products has been taken under Rule 57A.

Case Note & Summary

The dispute arose under the Central Excise Rules, 1944 regarding MODVAT credit and exemption for final products cleared at nil rate of duty. The appellant, a manufacturer of enamelled copper winding wire and other copper products, challenged an order of the Customs, Excise & Gold (Control) Appellate Tribunal. The respondent was the Collector of Central Excise (referred to as Collector O in the cause title). The core issue was whether reversal of MODVAT credit entries by a debit in the credit account before removal of exempted final products was permissible, and whether the assessee could claim exemption under Notification No.69/86-CE as amended. The appellant manufactured enamelled copper winding wire from duty-paid copper wire bars falling under Chapter Heading 7403.12 of the Central Excise Tariff Act, 1985. It sent copper wire bars for job work under Rule 57F(2) to convert them into copper wires above 6 mm diameter (Chapter Heading 7408.11). The job work was undertaken with due permission and under Notification No.214/86-CE. From these copper wires, the appellant manufactured various final products, including copper wires below 6 mm (Chapter Headings 7408.11 and 7408.19), copper strips (Chapter Heading 7408.90), and enamelled copper winding wires (Chapter Heading 8544.00). The appellant availed MODVAT credit of duty paid on copper wires above 6 mm received from job workers and either sold them on payment of duty, converted them into wires below 6 mm, or captively consumed them in the enamelling section. Enamelled copper winding wires were cleared either at nil rate of duty or on payment of appropriate duty under Notification No.69/86-CE dated 10.02.1986. When clearing copper wires of less than 6 mm internally for enamelling, the appellant reversed the MODVAT credit availed on the copper wire above 6 mm in the RG.23 Part-II Register maintained for Chapter 74. The exemption under Notification No.69/86-CE was amended by Notification No.106/88 dated 01.03.1988, which exempted copper winding wires from whole of duty subject to the condition that final products were manufactured from copper wire bars of over 6 mm and that no credit of duty paid on inputs used in their manufacture had been taken under Rule 57A. The main legal issues were whether reversal of MODVAT credit entries before removal of exempted final products was permissible, and whether such reversal satisfied the condition in the exemption notification. The appellant contended that reversal by debit entry was allowable and thereafter no credit remained taken under Rule 57A. The Department argued that once credit was taken in the statutory register, no rule permitted reversal; and since separate accounts were not maintained, the exemption must be denied. The Supreme Court noted that Rule 57C specifically disallowed credit when final products were exempt. Faced with this, the appellant reversed the credit entries. The Department's contention that reversal was not permitted required serious consideration. The Court referred to a Ministry of Finance circular which clarified that where a manufacturer produces both dutiable and exempted final products and it is not reasonably possible to segregate inputs, the manufacturer may take credit of duty paid on all inputs used in manufacture of final products, provided that credit of duty paid on inputs used in exempted products is debited in the credit account before removal of such exempted final products. The Court held that this circular applied squarely. Therefore, the assessee could make a debit entry in the credit account before removal of the exempted final product. Once such debit entry was made, the credit entry for duties paid on inputs utilised in manufacture of exempted final product would stand deleted, and it could not be said that the assessee had taken credit under Rule 57A. Consequently, exemption under Notification No.69/86-CE as amended could not be denied. The Supreme Court allowed the appeal, set aside the order of the Customs, Excise & Gold (Control) Appellate Tribunal dated 17th May, 1995, and ordered no costs.

Headnote

Issue of Consideration

Final Decision

Appeal allowed; order of Customs, Excise & Gold (Control) Appellate Tribunal dated 17th May, 1995 set aside; no order as to costs.

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