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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 7031 of 2009

Commissioner of Central Excise, Jalandhar      … Appellant

Versus

M/s. Kay Kay Industries  … Respondent

WITH

CIVIL APPEAL No. 7032 of 2009

WITH

CIVIL APPEAL No. 7034 of 2009

WITH

CIVIL APPEAL No. 7392 of 2010

WITH

CIVIL APPEAL No. 7393 of 2010

WITH

CIVIL APPEAL No. 7148 of 2013 (Arising out of S.L.P. (C) No. 26499 of 2008)

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J U D G M E N T

Dipak Misra, J.

Leave granted in  Special  Leave Petition  (C)  No.  26499 of  

2008.

2. The controversy that emerges for consideration in this batch of  

appeals,  being  consubstantial,  was  heard  together  and  is  

disposed  of  by  a  common  judgment.   For  the  sake  of  

convenience the facts from Civil Appeal No. 7031 of 2009 are  

set out herein.

3. 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

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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 (for short  

“the  Rules”)  read  with  notification  No.  58/97-CE(NT)  dated  

30.8.1997  and  the  aforesaid  opinion  of  the  Competent  

Authority  persuaded  him  to  issue  a  show-cause  notice  on  

19.1.2001  proposing  recovery  of  deemed  MODVAT  credit  of  

Rs.77,546/-  and  imposition  of  penalty.   The  adjudicating  

authority, after receipt of the reply to the show-cause notice,  

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/-.

4. Being  aggrieved  by  the  aforesaid  order  the  respondent  

preferred  an  appeal  before  the  Commissioner  (Appeals),  

Central Excise, Jalandhar, who ruled that the credit of deemed  

duty paid by the manufacturer under Section 3A of the Central

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Excise Act, 1944, (for brevity “the Act”) was available subject  

to the condition that the inputs were received directly from the  

factory  of  manufacturer  under  cover  of  an invoice  declaring  

therein that the appropriate duty of excise had been paid on  

such  inputs  under  the  provisions  of  the  Act.   The appellate  

authority referred to the provisions of sub-rule (6) of Rule 57A  

and notification No. 58/97-CE(NT) dated 1.9.1997 and opined  

that  the  manufacturer  of  the  inputs  had not  discharged the  

appropriate duty  liability  against  the goods cleared vide the  

invoices  and the respondent  had not  furnished the requisite  

documentary  evidence  which  could  controvert  the  said  

allegation  made  against  the  manufacturer  of  inputs.   The  

appellate authority observed that unless and until payment of  

appropriate duty had been made, the assessee could not have  

availed the benefit.  Expressing such an opinion, it concurred  

with the view taken by the adjudicating authority.  However, it  

reduced the penalty from Rs.40,000/- to Rs.20,000/-.

5. The unsuccess in appeal compelled the respondent to prefer  

Appeal  No.  E/1474/04-SM  before  the  Customs,  Excise  and  

Service Tax Appellate Tribunal (for short “the tribunal”) and the

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tribunal  placing  reliance  on  the  decision  in  Vikas  Pipes  v.  

CCE1 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.

6. 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?”  

7. While dealing with the aforesaid substantial  question of  law,  

the High Court referred to its earlier decision in  Vikas Pipes  

(supra) and distinguished the decision in Collector of Central  

Excise,  Vadodara  v.  Dhiren  Chemical  Industries2 and  

1 2003 (158) ELT 680 (P&H) 2 (2002) 2 SCC 127

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ultimately concurring with the view expressed by the tribunal  

dismissed  the  appeal.   Hence,  the  present  appeal  by  the  

Revenue.

8. Assailing the legal substantiality of the impugned judgment it is  

urged by Mr. Arjit Prasad, learned counsel for the appellant that  

the tribunal as well as the High Court has fallen into error in  

their  interpretation  of  Rule  57A(6)  of  the  Rules  and  the  

notification which imposes conditions, for as per the conditions  

enumerated in the notification it is obligatory on the part of the  

manufacturer of the final products to satisfy the adjudicating  

authority that appropriate duty of excise had been paid.  The  

learned counsel would submit that the “appropriate duty” has  

been squarely dealt with by the Constitution Bench in the case  

of  Dhiren Chemical  Industries (supra)  but  the High Court  

has  failed  to  appreciate  the  ratio  laid  down  therein  and  

distinguished the same in an extremely cryptic manner which  

makes the verdict sensitively susceptible.

9. Resisting the aforesaid submissions, Mr. Ajay Aggarwal, learned  

counsel  for  the respondent,  has  contended that  the tribunal

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and the High Court have appositely relied upon the decision in  

Vikas Pipes (supra) and correctly opined that the respondent  

had satisfied the conditions enshrined in the notification and,  

therefore, there was no warrant to proceed for recovery of the  

benefit  availed  of  by  the  final  manufacturer.   The  learned  

counsel  would  submit  that  the  “appropriate  duty”,  as  

interpreted  by  this  Court  in  Dhiren  Chemical  Industries  

(supra), supports the case of the respondent and the conditions  

prescribed  in  the  notification  having  been  satisfied,  the  

adjudicating authority as well  as the first  appellate authority  

has erred in holding that there was a failure on the part of the  

respondent to satisfy the conditions.

10. To appreciate the rival submissions raised at the Bar and  

the  bold  assertion  by  Mr.  Prasad,  learned  counsel  for  the  

Revenue, that it was the duty of the assessee-respondent, the  

manufacturer  of  the  final  products,  to  see  that  the  

manufacturer of the inputs had actually paid the appropriate  

duty  on the inputs  on the bedrock of  law laid  down by the  

Constitution Bench in Dhiren Chemical Industries (supra), it  

is necessary to understand how and under what circumstances

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the  controversy  travelled  to  the  Constitution  Bench.   Be  it  

noted,  the  Constitution  Bench  was  required  to  resolve  the  

conflict between the two pronouncements, namely,  Collector  

of Central Excise, Patna  v.  Usha Martin Industries3 and  

Motiram  Tolaram  and  another  v.  Union  of  India  and  

another4.

11. In  Usha  Martin  Industries (supra)  the  Court  was  

interpreting  the  exemption  notification  dated  30.11.1963  as  

amended  on  7.4.1981  and  the  question  before  the  three  

learned  Judges  was  whether  the  benefit  of  excise  duty  

exemption (granted by the Central Government as per certain  

notifications) could be claimed in respect of commodities made  

out of raw material on which no excise duty was payable.  The  

Central  Government  had  exempted  iron  or  steel  products  

falling under a particular category made from certain materials  

or  combination thereof.   One of  them was fresh unused re-

rollable  scrap  on  which  the  appropriate  amount  of  duty  of  

excise had already been paid.  The Bench adverted to various  

aspects  and,  eventually,  came  to  hold  that  the  duty  could  3 (1997) 7 SCC 47 4 (1999) 6 SCC 375

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legitimately  be claimed by the  assessee in  respect  of  those  

goods referred to in  the notification under consideration the  

raw material of which were not exigible to any excise duty at  

all.

12. In  Motiram Tolaram  (supra),  another  three-Judge  Bench  

was  dealing  with  notification  No.  185  of  1983.   It  was  a  

notification pertaining to exemption of alcohol falling under item  

15-A of the First Schedule to the Central Excises and Salt  Act,  

1944  and manufactured from vinyl  acetate  monomer,  from so  

much of the duty of excise leviable thereon under the said Act at  

the  rate  specified  in  the  First  Schedule,  as  in  excess  of  the  

amount calculated at the rate of 10% ad valorem.  The proviso to  

the  notification  stipulated  that  such  polyvinyl  alcohol  was  

required  to  be  manufactured  from  vinyl  acetate  monomer  on  

which the appropriate amount of duty of excise under Section 3 of  

the  Central  Excises  and  Salt  Act  or  the  additional  duty  under  

Section 3 of the Customs Tariff Act, 1975, as the case may be,  

had been paid.  A contention was raised before the Court that in  

India there was only one manufacturer of polyvinyl alcohol and  

the  commodity  in  question  could  be  produced  only  from vinyl

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acetate  monomer  and  the  Indian  manufacturer  was,  in  fact,  

paying duty at the rate of 10% ad velorem and that was the only  

duty which could be charged from the appellants therein.  It was  

urged before the Court that the appellants were manufacturing  

that  item  in  India  from  vinyle  acetate  monomer  on  which  

appropriate  duty  of  excise  had  been  paid  and,  therefore,  the  

concessional  duty should be charged from them.  The learned  

Judges  referred  to  the  language  employed  in  the  exemption  

notification and opined that onus was on the assessee to prove  

and  show  that  the  conditions,  as  imposed  in  the  exemption  

notification,  had  been  satisfied.   In  that  context  the  Bench  

proceeded to state that the condition for getting the benefit of the  

lower rate of duty is that on the raw material used appropriate  

amount of duty has been paid.  If perchance or for any reason,  

the manufacturer of polyvinyl alcohol in India is unable to prove  

or show that the same has been manufactured from vinyl acetate  

monomer  on  which  appropriate  amount  of  duty  of  excise  has  

been paid, then the said manufacturer would not be entitled to  

get the benefit of the said notification.

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13. Thereafter, the Court referred to Section 3 of the Customs  

Tariff Act, 1975 and observed that one has to assume that the  

importer of polyvinyl alcohol had actually manufactured the same  

in India. One can further assume, possibly without any difficulty,  

that the said polyvinyl alcohol has been manufactured from vinyl  

acetate monomer, but it is not possible to assume or presume or  

imagine  that  the  raw  material  used  is  the  one  on  which  

appropriate amount of duty of excise has been paid in India and  

hence, the condition which is contained in the said notification  

has to be fulfilled in order to get the benefit of the notification.  

14. The Court further stressing on the purpose of the notification  

expressed thus: -

“11. It appears to us that Excise Notification No. 185 of  1983 was deliberately worded in such a way that the  importer of polyvinyl alcohol, who may not be able to  prove that on the raw material appropriate duty in India  has been paid, will not be able to get the benefit of the  concessional rate of duty. It  has to be borne in mind  that  the  normal  duty  which  is  payable  on  polyvinyl  alcohol is 40%. That is the rate of excise duty which  would  be  payable  by  an  Indian  manufacturer  of  polyvinyl  alcohol  who is  unable  to  show that  he  has  complied with the condition contained in the proviso,  namely,  use  in  the  manufacture  of  vinyl  acetate  monomer  on  which  appropriate  amount  of  duty  has  been  paid.  Similarly  an  importer  of  polyvinyl  alcohol

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would be required to pay under Section 3 duty at the  rate of 40% because on the polyvinyl alcohol imported  duty under Section 3 of the Central Excises and Salt Act  or additional duty under Section 3 of the Customs Tariff  Act has not been paid on the vinyl acetate monomer  used in the manufacture of polyvinyl alcohol. If it was  possible  to  have  shown  that  duty-paid  vinyl  acetate  monomer  had  been  used  in  the  manufacture  of  imported polyvinyl alcohol,  then the benefit  of Excise  Notification  No.  185  of  1983  would  have  been  available.”

15. Eventually, the Court ruled that appropriate duty means the  

duty payable under the Central Excise and Salt Act or under  

the Customs Tariff Act and the condition had not been satisfied  

in the said case.

16. As a conflict was perceived in the aforesaid two judgments,  

it was referred to the Constitution Bench in Dhiren Chemical  

Industries  (supra).  The Constitution Bench adverted to the  

law  laid  down  in  Usha  Margin  Industries  and  Motiram  

Tolaram (supra) and, eventually, opined thus: -

“6. In the case of Motiram Tolaram reliance was placed  upon  the  case  of  Usha  Martin to  contend  that  the  appropriate duty  being nil,  because the raw material  was not manufactured in India, it must be taken that  appropriate  duty  had  been  paid  and  the  appellants  would  be  entitled  to  the  benefit  of  the  exemption  notification  in  question,  which  used  the  said  phrase.  The Court  was unable to  agree.  It  said  that  the  raw

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material  being  an  item  which  was  manufactured  in  India, a rate of excise duty was leviable thereon. On the  raw material which had been imported, the appropriate  amount of duty had not been paid. It was only if this  payment  had  been  made  that  the  exemption  notification would be applicable.

7. In  our  view,  the  correct  interpretation  of  the  said  phrase has not been placed in the judgment in the case  of  Usha Martin.  The stress on the word “appropriate”  has been mislaid. All that the word “appropriate” in the  context means is  the correct  or  the specified rate of  excise duty.

8. An  exemption  notification  that  uses  the  said  phrase applies to goods which have been made from  duty-paid material.  In the said phrase, due emphasis  must be given to the words “has already been paid”.  For  the  purposes  of  getting  the  benefit  of  the  exemption under  the notification,  the goods must be  made from raw material on which excise duty has, as a  matter  of  fact,  been paid,  and has been paid  at  the  “appropriate” or correct rate.  Unless the manufacturer  has paid the correct amount of excise duty, he is not  entitled to the benefit of the exemption notification.”

17. At this juncture, we are obliged to state that the factual and  

legal matrix in the case at hand is quite different.  The decision  

proceeded on the language of the notifications.  Moreover, we  

are  not  dealing  with  a  notification  for  exemption.   The  

controversy pertains to the  interpretation of the notification  

No.  58/97-CE  dated  30.8.1997  which  has  been  issued  in  

exercise of powers conferred by sub-rule (6) of Rule 57A of the

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Rules  dealing  with  availing  of  MODVAT credit  under  certain  

circumstances  subject  to  satisfaction  of  certain  conditions  

precedent.  

18. Before we advert to the notification it is necessary to refer  

to Rule 57A(1) and (6).  The relevant part of Rule 57A(1) reads  

as follows: -

“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  under  Section 3 of the 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  whether  directly  or  indirectly  and  whether  contained  in  the  final  product  or  not  (hereinafter referred to as the ‘inputs’) and for utilizing  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:

(i) 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.”

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19. Sub-rule (6) of Rule 57A in exercise of which the notification  

has been issued is as follows: -

“(6) Notwithstanding  anything  contained  in  sub-rule  (1), the Central Government may, by notification in the  Official Gazette, declare the inputs on which the duty of  excise paid under section 3A of the Central Excise Act,  1944 (1 of 1944), shall be deemed to have been paid at  such  rate  or  equivalent  to  such  amount  as  may  be  specified in the said notification, and allow the credit of  such duty in respect of the said inputs at such rates or  such amount and subject to such conditions as may be  specified in the said notification:

Provided  that  the  manufacturer  shall  take  all  reasonable steps to ensure 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 under section 3A of the Central  Excise Act, 1944 (1 of 1944).”

[Emphasis supplied]

20. On a careful reading of Rule 57A(1), it is clear as crystal  

that a manufacturer of final products can avail  the credit of  

any duty of excise or the additional duty under Section 3 of the  

Customs  Tariff  Act,  1975,  as  may  be  specified  by  the  

notification in the Official Gazette subject to provisions of the  

Section  and  the  conditions  and  restrictions  that  may  be  

specified in the notification.  The proviso further stipulates that  

the Central Government may specify the goods or classes of

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goods in respect of which the credit of specified duty may be  

restricted.  Thus, the conditions and restrictions have been left  

to be prescribed by way of notification in respect of certain  

classes of goods.   

21. Sub-rule (6) of Rule 57A commences with a non-obstente  

clause  and  it  empowers  the  Central  Government  to  issue  

notification declaring the inputs on which the duty of excise  

paid under Section 3A of the Act to be deemed to have been  

paid  at  such rate or  equivalent  to  such amount as may be  

specified in the said notification and allow the credit of such  

duty in respect of the said inputs at such rates or such amount  

and such conditions as may be specified in the notification.  It  

is  pertinent  to  state  here  that  the proviso  to  the  said  Rule  

stipulates that the manufacturer shall take all reasonable steps  

to ensure 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.   Thus,  what  is  

expected  of  an  assessee  is  to  take  reasonable  steps  that  

appropriate  duty,  as  indicated  in  the  documents,  has  been  

paid.

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22. At  this juncture,  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, hence, 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.

                    xxx         xxx         xxx       xxx  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.”

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[Emphasis supplied]

23. We have referred to the aforesaid notification in extenso as  

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 to us 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

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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.   

24. 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.

25. Mr.  Prasad,  learned  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

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concerned  authority  of  the  department  whether  the  excise  

duty had actually been paid or not.  The aforesaid submission  

leaves us unimpressed.  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

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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.

26. Consequently, we concur with the view expressed by the  

High Court and accordingly the appeals, being devoid of merit,  

stand dismissed without any order as to costs.  

……………………….J. [Anil R. Dave]

……………………….J. [Dipak Misra]

New Delhi August 26, 2013