Commissioner of C. Ex. vs Home Ashok Leyland Limited

R. Jayasimha Babu, J.—The full Bench of CEGAT having held that Rule 57E of the Central Excise Rules, as it stood on 01-04-1987 is

merely clarificatory and procedural and would not affect the substantive rights of the manufacturer of a specified final product to claim Modvat

credit for the duty paid on the inputs subsequent to the date of the receipt of those inputs under the cover of a specified document at the instance of

the Revenue, the correctness of that decision has been referred to us for our opinion.

The respondent is a manufacturer of motor vehicles which is a specified final product. It had received inputs under the cover of specified

documents between 21-4-1986 and 2-4-1987. After receipt of those inputs and the entries required to be made in Register having been made, the

price for those inputs was revised by the manufacturer of the inputs and consequently additional duty that had become payable on the enhanced

price which was paid during the period from 19-12-1986 to 28-10-1987. The credit for the amount so paid was taken by the assessee in the

relevant registers between 16-8-1987 and 30-12-1987. The differential duty in respect of which credit was so taken was in the sum of Rs.

6,43,994.47.

The Modified Value Added Tax Scheme was introduced from 1-3-1986. Prior to its introduction, the scheme prevailed was Proforma Credit

Scheme. Under the Proforma Credit Scheme in the 3rd proviso under Explanation 2 to Rule 56A(2) it was provided that if the duty paid on the

material or on the components parts for which credit has been allowed under the Sub-rule be varied subsequently due to any reason resulting in the

payment of refund, to or recovery of more duty from the manufacturer or importer as the case may be of such material or component parts, the

credit shall be varied accordingly by adjustment in the credit account maintained under Sub-rule (3) or in the account current maintained under

Sub-rule (3) or Rule 9 or Rule 173G(1), or, if such adjustment be not possible for any reason, by cash recovery forms or, as the case may be,

refund to the manufacturer availing of the procedure contained in that rule. A corresponding provision had been omitted to be incorporated in Rule

57A, which deals with applicability of the Modvat scheme, and which rule is part of the rules set out in Chapter AA titled ""Credit of duty paid on

excisable goods used as inputs.

Rule 57E as it stood when the Modvat scheme was introduced provided for adjustment in duty credit, and it read thus :

If duty paid on any inputs in respect of which credit has been allowed under Rule 57A, is varied subsequently due to any reason resulting in

payment of refund to the manufacturer or the importer of the inputs, the credit allowed shall be varied accordingly by adjustment in the credit

account maintained under Sub-rule (3) of Rule 57G or in the accounts maintained under Rule 9 or Sub-rule (1) of Rule 173G or, if such

adjustment is not possible for any reason, by cash recovery from the manufacturer availing of the credit under Rule 57A.

That Rule was amended on 1-3-1997 to read as under :-

If duty paid on any inputs in respect of which credit has been allowed under Rule 57A, is varied subsequently :

(i) due to any reason resulting in payment of refund to the manufacturer or the importer of the inputs; or

(ii) due to change in the classification of the inputs on the basis of instructions issued by the Central Board of Excise and Customs constituted under

the Central Board of Revenue Act, 1963 (54 of 1963) resulting in recovery of more duty from the manufacture or the importer of the inputs,

the credit allowed shall be varied accordingly by adjustment in the credit account maintained under Sub-rule (3) of Rule 57G 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, by cash recovery from or, as the case

may be, refund to the manufacturer availing of credit under Rule 57A.

The amendment so effected underwent further change on 11-5-1987 when Rule 57E in the form it stood upto the date of introduction of the

Centralise Value Added Tax Scheme which was introduced and took effect from 15-4-2000. Rule 57E as it stood from 11-5-1987 till 15-4-

2000 reads :

(i) If a manufacturer of final products has taken credit on any inputs and subsequently it so happens that any refund of the duty paid by the

manufacturer of inputs or importer of inputs, as the case may be, is allowed to him for any reason, then the manufacturer of the final products shall

accordingly adjust the amount of credit in his credit account and if such adjustment is not possible for any reason, the manufacturer of the final

products shall pay the amount in cash equal to the amount of refund allowed to the manufacturer of inputs or importer of inputs.

(ii) If a manufacturer of the final products has not taken any credit or has taken credit on any inputs and subsequently it so happens that any

additional amount of duty is recovered by the manufacturer of such inputs or importer of such inputs in respect of such inputs, then the

manufacturer of the final products shall be allowed an additional credit equal to the amount of duty recovered, if the manufacturer or importer of

such inputs has passed on the incidence of the additional amount of duty to the manufacturer of final products.

(iii) The provision of Sub-rule (2) shall not apply in cases where the additional amount of duty became recoverable from the manufacturer or

importer of inputs on account of any short levy or non-levy by reason of fraud, collusion or any wilful mis-statement or suppression of facts or

contravention of any provisions of the Act or of the Customs Act, 1962 (52 of 1962) or rules made thereunder with intent to evade payment of

duty.

(iv) No additional credit under Sub-rule (2) shall be allowed to a manufacturer of the final products unless he produces a certificate issued by the

Superintendent of Central Excise having jurisdiction over the factory of the manufacturer of inputs or, as the case may be, by the proper officer in

the custom area, from where such inputs were originally cleared.

(v) The certificate required to be produced under Sub-rule (4) shall indicate the full description of the inputs, original duty paid and the particulars

of the documents under which the inputs were cleared from the factory or, as the case may be, from the customs area and also the particulars of

differential duty recovered from the manufacturer of the importer.

The Rule now explicitly recognises the right of the manufacturer to obtain the additional Modvat credit in respect of the inputs on which further

duty had been paid for any reason subsequent to the date of the receipt of the inputs by the manufacturer. The procedure for making adjustment is

also set out.

(vi) There can be no doubt that Rule 57E from it''s inception was procedural in nature. The substantive right of the manufacturer to claim credit,

and the extent to which credit could be claimed for the duty paid on inputs is found in Rule 57A. The manner in which the adjustments are to be

made in the duty credit is dealt with in Rule 57E.

The Supreme Court in the case of K. Kapen Chako Vs. The Provident Investment Company (P) Ltd., considered the extent of operation of the

procedural provision in statutes. It was observed by the Court thus :

If the Legislature forms a new procedure, alternations in the form of procedure are retrospective unless there is some good reason or other why

they should not be. In other words, if a statute deals merely with the procedure in an action, and does not affect the rights of the parties it will be

held to apply prima facie to all sections pending as well as future."" The proposition so stated is too well recognised to need any further elucidation.

That principle has been reiterated by the apex court in several subsequent rulings to which it is unnecessary to refer.

Rule 57A which deals with substantive right of the manufacturer manufacturing specified product, with regard to the extent of his right to claim

credit of the duty paid on inputs, specifically provides that his right is to take credit for the duty ""paid on goods used in or in relation to manufacture

of the said final product"".

As originally framed with amendments upto 15-4-1987, Rule 57A read thus:

57A. Applicability. - (1) The provisions of this Section shall apply to such finished excisable goods (hereinafter referred to as the ''final products'')

as the Central Government may, by notification in the Official Gazette, specify in this behalf for the purpose of allowing credit of any duty of excise

or the additional duty u/s 3 of Customs Tariff Act, 1975 (51 of 1975) as may be specified in the said notification (hereinafter referred to as the

''specified duty'' paid on the goods used in or in relation to the manufacture of the said final products (hereinafter referred to as the ''inputs'') and for

utilising the credit so allowed towards payment of duty of excise leviable on the final products, whether under the Act or under any other Act, as

may be specified in the said notification, subject to the provisions of this section and the conditions and restrictions that may be specified in the

Notification.

Provided that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted.

Explanation : For the purposes of this rule, ""Inputs"" include:-

(a) Inputs which are manufactured and used within the factory of production in or, in relation to, the manufacture of final products, and

(b) paints and packaging materials.

But does not include -

(i) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any

change in any substance or in relation to the manufacture of the final products;

(ii) packaging materials in respect of which any exemption to the extent of the duty of excise payable on the value of the packaging materials is

being availed of for packaging any final products;

(iii) packaging materials, the cost of which is not included or had not been included during the preceding financial year in the assessable value of the

final products u/s 4 of the Act;

(iv) Cylinders for packing gases; or

(v) Plywood for tea chests.

As noticed earlier, this rule is part of the scheme allowing credit of duty paid on excisable inputs. The Legislative intention is abundantly clear

from the caption of the Chapter AA, that the rules are meant to achieve that object of enabling the manufacture to claim credit for the duty paid on

the excisable goods, used by that manufacturer as inputs in the manufacture of the specified final products referred to in the rule. The duty paid

must necessarily refer to the whole of the amount of duty paid, and not only a part. It must again refer to the duty paid not merely at the stage of

the provisional assessment but at the stage of final assessment. It must also necessarily include not only the duty paid when the price with reference

to which duty was paid was provisional, but also the duty paid when the price, after modification, became final price resulting in the payment of

either additional duty or reduction in the extent of liability for payment of duty.

The scope of the provision again must be determined in the background of the objective sought to be achieved by the Modvat scheme, and

also bearing in the mind, the need to harmonise the rules which deal with the scheme. The substantive right conferred by Rule 57A is not to be

whittled down unless the Legislative intention to so whittle down has been set out expressly or is necessarily implicit in any part of the statute or the

Rules. The procedures laid down in the later rules, cannot reduce the width of the earlier rule which deals with the substantive right. The omission in

the procedural rules to deal with one aspect of the adjustment also does not have the effect of denying a benefit which was intended to be

conferred under Rule 57A. The procedural provision subsequently introduced by way of amendment or substitution which makes explicitly the

intention, such intention being in conformity with that has been set out in Rule 57A must necessarily be regarded as clarificatory, and given effect to,

accordingly.

While determining the scope of Rule 57A and 57E as also Rule 57G, the scheme that prevailed prior to the introduction of Modvat scheme as

to the manner in which the Legislature had dealt with the manufacturers with regard to their right to obtain credit for the duty paid on inputs, so that

they are not made to pay duty on duty thereby loading the price of the final product, should also be kept in view.

Bearing these relevant considerations, in view, Rule 57A, 57E and 57G need to be harmonised. While Rule 57A recognises the right of the

manufacturer to take credit for the specified duty on the inputs used in the manufacture of final products, 57E deals with the adjustment in the duty

credit, such adjustment being with regard to reduction of the credit allowed, in the event of the refund to the manufacturer. Rule 57G which sets out

the procedure to be observed by the manufacturer while taking credit of the duty paid on the inputs under Rule 57A, by Sub-rule (2), as it stood at

the relevant time permitted the manufacturer, after obtaining acknowledgment referred in Rule 57G(1) to ""take credit of the duty paid on the inputs

received by him."" The proviso sets out that such credit shall not be taken unless the inputs are received in the factory under a cover of a Gate Pass,

as AR-I, a Bill of Entry or any other document may be prescribed by the Central Board of Excise and Customs.

Proviso to Rule 57G cannot be so construed as to limit the right of manufacturer to take credit for the duty paid on the inputs only to the

amount paid at the time of the receipt of the inputs under the cover of a gate pass, RR-1 or Bill of Entry or any other document as may be

prescribed by the Central Board of Excise and Customs. Proviso only pinpoints the time at which the manufacturer may take credit. Unless and

until the inputs are received in the factory and such receipt is under the cover of any one of the documents prescribed, the manufacturer does not

have the right to take any credit for the duty and on inputs. Proviso does not therefore come in the way of the manufacturer taking credit on the

same inputs in respect of the further amount paid as duty on the inputs which had already been received under the cover of any one of the

documents specified in the proviso of Rule 57G(2). A proviso should always be so construed as to limit its application to the things specifically

dealt with therein, and is not to be so construed as to imply something which is not explicitly covered therein. The fact that the proviso does not

refer to the additional credit being taken on the inputs by reason of further amount having been paid towards the duty on the inputs received, does

not imply that the manufacturer has no right to take such credit.

Rule 57E which deals with adjustment in duty credit, initially dealt with only one aspect of the adjustment, namely, the fact of refund of a part of

the duty paid by a manufacturer or by importer of the inputs. It did not deal with the other aspects namely the effect of the further payment towards

duty after receipt of the inputs into the factory of the manufacturer. This rule, again, as it stood prior to the amendment on 15-4-1987, cannot be

so construed as to limit the right of the manufacturer to claim credit for the duty paid on inputs, only to the amount that had been paid at the time of

receipt of those goods in the factory of the manufacturer. Rule 57E as it stood prior to 15-4-1987 cannot be construed as being exhaustive on the

question of adjustment in duty credit. This rule must necessarily be read in harmony with Rule 57A and the object of Modvat scheme and the right

of the manufacturer to take credit for the duty paid on the inputs cannot be cut down by reason of procedure, having been prescribed for making

adjustment in case of payment of further sum towards duty on inputs, subsequent to the arrival of those inputs in the factory of the manufacturer.

The Rule as it existed prior to 15-4-1987, must therefore be regarded as merely setting out the procedure for adjusting the credit in case of refund,

and is not to be read as prohibiting impliedly or otherwise, the variation in the amount of credit taken on inputs in cases where further amounts are

paid as duty on such inputs subsequent to the date of arrival of the goods in the factory of the manufacturer.

On and after 15-4-1987 what was contained in Rule 57A has been stated explicitly and the adjustment by reason of refund or recovery of

more duty from manufacturer or importers of the inputs has been dealt with. That Rule which has already been set out is clearly one which is

clarificatory in nature. It does not create a new right in the manufacturer for the first time. It merely sets out the mode of adjustment which had been

set out in the rule prior to it''s amendment to all cases of adjustment irrespective of whether the adjustment is occasioned by reason of refund, or by

reason of recovery due to change in the classification of the inputs, or for any other reason. The Rule thus is both clarificatory and procedural.

We may also here refer to the scheme which was introduced from 1-4-2000 by substituting the Rules 57A and B. That scheme covers not

merely the credit for duty paid on excisable goods used as inputs but extend to capital goods as well. In the set of rules, there was an omission to

frame the rule specifically setting out the right of the manufacturer to claim credit for further amount paid as duty on the inputs and the capital goods

received. That omission was made good by amending those rules on 29-8-2000. The letter addressed to the Commissioner of Central Excise,

while effecting this amendment, issued by the (Non Tariff) Department of Revenue, Tax Research Unit, on 29-8-2000, in paragraph 3 states that if

the assessment is provisional then the Cenvat credit of the additional amount of duty that may be recovered from the buyer may be allowed on

production of invoice being issued by the manufacturer of inputs and capital goods.

We have referred to Cenvat scheme only to show that the Legislative intention has throughout been to give full credit for the duty paid on the

inputs used in the manufacture of final product to which proforma credit scheme as it stood earlier and the Modvat scheme as it stood upto 1-4-

2000, applied. The Rule making authority seems to have proceeded by way of trail and error initially omitting to deal with certain aspects, and later

dealing with a part, and finally dealing with the whole, as was done in the case of Rule 57E. Though if Rule 57E as it stood prior to it''s amendment

is read in isolation, it may convey the impression that the adjustment is only limited to the cases of refund and not the case of recovery, the object

and purpose of the rule as also the scheme of the Modvat would clearly show that would not be proper interpretation of the Rule. We, therefore,

hold that the Full Bench of the Tribunal was right in holding that Rule 57E is both clarificatory and procedural. Parties to bear their respective

costs.