Delhi High Court

Commissioner Of Central Excise vs M. B. Dyers on 1 February, 2010

Author: Badar Durrez Ahmed

IN THE HIGH COURT OF DELHI AT NEW DELHI

% Judgment delivered on: 1st February, 2010

+ CEAC 2/2007

COMMISSIONER OF CENTRAL EXCISE ..... Appellant

-versus-

M. B. DYERS ..... Respondent

Advocates who appeared in this case:
For the Petitioner : Mr Baldev Malik
For the Respondent : Mr Sanjay Grover

CORAM:
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SIDDHARTH MRIDUL

1. Whether reporters of local papers may be allowed to
see the judgment? Yes.

2. To be referred to the Reporter or not? Yes.

3. Whether the judgment should be reported in the Digest? Yes.

BADAR DURREZ AHMED, J (ORAL)

1. Admit.

2. The following substantial question of law arises for our

consideration:-

Whether the Customs, Excise and Service Tax Appellate
Tribunal (CESTAT) was right in allowing deemed credit
in respect of the fibre/yarn used in the grey fabric which
was an indirect input in the assessee's final product-
processed fabric, in view of the Notification No.

CEAC 2/2007 page 1 of 9
06/2002-CE(NT) dated 1st March, 2002?

3. Counsel for the parties are agreed that this appeal can be taken up

straightaway and, therefore, they addressed arguments at this stage itself.

Since the question was one of interpretation of the notification, counsel for

the parties also submitted that there is also no necessity of filing any paper

book inasmuch as the relevant documents are already on record.

4. We have heard the counsel for the parties.

5. The learned counsel appearing on behalf of the Revenue/appellant

contended that the said notification referred to a table of inputs and final

products. According to him the input of the respondent-manufacturer was

grey fabric and not yarn/fibre. Grey fabric is not referred to in the table of

inputs mentioned in the said notification and, therefore, the respondent

would not be entitled to claim the benefit of the said notification in respect

of its manufactured products-processed fabrics.

6. On the other hand the learned counsel for the respondent submitted

that the notification read with Rule 11 of the Cenvat Credit Rules, 2002

make it absolutely clear that as long as the input referred to in the table given

in the notification are used in the manufacture of the final product mentioned

in the said notification, the manufacturer would be entitled to take deemed

credit in respect of those inputs irrespective of the fact as to whether those

inputs have been used directly or not. The learned counsel for the respondent

submitted that there are two types of mills producing processed fabrics.

CEAC 2/2007 page 2 of 9
They are- composite mills and "other than composite mills", which are

commonly referred to as non-composite mills. He submitted that the said

notification specifically referred to both composite mills as well as non-

composite mills. He also contended that that the difference between the two

kinds of mills is that, in the case of composite mills the input is yarn/fibre

which is converted by the said mills into the intermediate product-grey

fabric which is further converted, after a series of processing activities, into

processed fabric. On the other hand, in non-composite mills, the direct input

is grey fabric which is processed to manufacture the final product-processed

fabric. However, the grey fabric which is directly used as an input, in turn,

contains fibre/yarn which is a direct input insofar as grey fabric is

concerned. A reference was also made by the learned counsel to the Circular

No. 702/18/2003-CX dated 13th March, 2003, which was in connection with

an issue which arose with regard to refund of unutilized deemed credit of

Cenvat on grey fabrics used in the processed fabrics exported under bond. In

that context the circular discussed Notification No. 29/96-CE (NT) dated 3rd

September, 1996 which was the predecessor notification to the present

Notification No.6 pertaining to availment of deemed credit. While

examining the issue, the Central Board of Excise and Customs, by virtue of

the said circular, observed that although grey fabrics are not included as the

declared inputs in the said notification, they are made out of duty paid

yarn/fibres, which are declared inputs and have suffered appropriate excise

duty. The Board also reiterated its earlier view and observed that the refund

of the said unutilized deemed credit of grey fabric was admissible.

CEAC 2/2007 page 3 of 9
According to the learned counsel for the respondent, in view of the

clarification given by the Board, it is clear that inputs which formed part of

the intermediate products namely grey fabrics were to be considered for the

purposes of deemed credit in terms of the Notification No.6 referred to

above.

7. Rule 11 of the said Cenvat Credit Rules, 2002 reads as under:

"11. Power of Central Government to notify goods for
deemed CENVAT credit. - Notwithstanding anything
contained in Rule 3, the Central Government may, by
notification in the Official Gazette declare the inputs on
which the duties of excise, or additional duty of customs paid,
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 CENVAT credit of such duty deemed to have been
paid in such manner and subject so such conditions as may be
specified in the said notification even if the declared inputs
are not used directly by the manufacturer of final products
declared in the said notification, but are contained in the said
final products."
(underlining added)

8. It is pertinent to note that the said rule makes it clear that Cenvat

credit is to be allowed in respect of the inputs even if the declared inputs are

not used directly by the manufacturer of the final products declared in a

notification under Rule 11 but are contained in the final products.

9. Notification No. 6/2002-CE(NT) dated 1st March, 2002 to the extent

relevant is set out herein below:

"Notification: 6/2002-CE(NT) dated 01-Mar-2002

Deemed credit for independent textile processors and
composite mills -
Notification No. 53/2001-C.E. (N.T.), superseded

CEAC 2/2007 page 4 of 9
In exercise of the powers conferred by rule 11 of the
CENVAT Credit Rules, 2002, and in supersession of the
notification of the Government of India in the ministry of
Finance (Department of Revenue) No. 53/2001-Central
Excise (N.T.), dated the 29th June, 2001, published in the
Gazette of India vide number G.S.R. 497(E), dated the 29th
June, 2001, except as respects things done or omitted to have
been done before such supersession, the Central Government,
hereby declares the following inputs (hereinafter referred to
as the "declared inputs") and final products falling within the
first Schedule to the Central Excise Tariff Act, 1985 (5 of
1986) (hereafter referred to as the said First Schedule), as
specified in the Table below, namely:-
TABLE

S.No. Inputs Final products

(1) (2) (3)

(1) Goods falling within The following
heading No. 51.05, goods
51.06, 51.07, 52.05, manufactured by a
52.06, 53.06, 53.07, composite mill,
53.08, 54.02, 54.03, namely:-
54.04, 54.05, 55.01,
55.02, 55.03, 55.04, (i) Processed
55.05, 55.06, 55.07, fabrics falling
55.09, 55.10, 56.04, under Chapters 52
56.05 or 56.06 of the (except sub-heading
said First Schedule., Nos. 5207.20,
5208.20 and
5209.10), 54
(except sub-heading
Nos. 5406.10 and
5407.10), 55
(except sub-heading
Nos. 5511.10,
5512.10, 5513.10
and 5514.10), 60.01
or 60.02 (except
sub-heading No.
6002.10); or
(ii) Fabrics of
cotton or man-
made fibres,
whether or not
processed, falling
under heading Nos.
58.01, 58.02 or
58.06 (except sub-
heading No.
5806.20) of the
said First Schedule.

CEAC 2/2007 page 5 of 9
(2) (i) Goods falling within The following
heading No. 51.05, 51.06, 51.07, goods
52.05, 52.06, 53.06, 53.07, manufactured by a
53.08, 54.02, 54.03, 54.04, manufacturer other
54.05, 55.01, 55.02, 55.03, than a composite
55.04, 55.05, 55.06, 55.07, mill, namely:-
55.09, 55.10, 56.04, 56.05 or
56.06 of the said First Schedule; (i) Processed
fabrics falling
under Chapters 52
(except sub-heading
Nos. 5207.20,
5208.20 and
5209.10), 54
(except sub-heading
Nos.
5406.10............
...................

...................

6. The provisions of this notification shall not apply to final products on which duty of excise leviable under the Central Excise Act, 1944, or as the case may be, the additional duty leviable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, has not been levied or paid or has been short-levied or short paid or erroneously refunded by reason of fraud, collusion or any wilful mis- statement or suppression of facts, or contravention of any provisions of the Central Excise Act or of the rules made thereunder with intent to evade payment of duty.

Explanation 1.- It is clarified that even if the declared inputs are used directly by a manufacturer of final products the credit of the declared duty shall, notwithstanding the actual amount of duty paid on such declared inputs, be deemed to be equivalent to the amount specified in this notification and the credit of the declared duty shall be allowed to such manufacturer.

Explanation 2.- For the purposes of this notification, "composite mill" means a manufacturer who is engaged in the processing of fabrics with the aid of power along with the spinning of yarn from fibres and weaving or knitting or crocheting of fabrics within the same factory and includes a multi-locational composite mill, i.e., a public limited company which is engaged in the processing of fabrics with the aid of power along with the spinning of yarn from fibres and weaving or knitting or crocheting of fabrics in one or more factories owned by the same public limited company. Explanation 3.- For the removal of doubt it is clarified that the provisions of this notification shall not apply where

CEAC 2/2007 page 6 of 9 processed fabric itself is used as an input for further processing.

...............

............."

10. A plain reading of the said notification shows that a distinction has

been drawn out between the composite mills and other than composite mills.

Explanation 2 to Clause (6) of the notification makes it clear as to what is

meant by a composite mill. It means, a manufacturer who is engaged in the

processing of fabrics with the aid of power along with the spinning of yarn

from fibres and weaving or knitting or crocheting of fabrics within the same

factory etc. The respondent, as already mentioned above, is not a composite

mill. It manufactures its final product-processed fabrics not by spinning of

the yarn from fabrics but from grey fabric purchased from the market.

Explanation 3 is also relevant inasmuch as it clarifies that the provisions of

the notification would not apply where the processed fabric itself is used as

an input for further processing. The consequence of this explanation and

clarification is that if there is any processed fabric and the same is further

processed into the final product namely processed fabric, the same would

not be eligible for the benefit under the said notification. However, insofar

as yarn/fibre is concerned the same, admittedly, finds mention in the table of

inputs in Column-2 of the said notification.

11. We have examined the decision of the Tribunal and we are in

agreement with the conclusion as well as the reasoning adopted by it. The

Tribunal was of the view that Rule 11 of the Cenvat Credit Rules, 2002

CEAC 2/2007 page 7 of 9 empowers the Central Government to declare the inputs on which the duty

of excise or additional duty of customs shall be deemed to have been paid at

such rate as may be specified in the notification and to allow Cenvat credit

of such duty deemed to have been paid even if the declared inputs are not

used directly by the manufacturer of final products declared in the

notification but are contained in the final products. The Tribunal went on to

examine the said Notification No. 6/2002 (NT) in the light of Rule 11 as

also in the light of the clarification given in the circular of 13 th March, 2003.

Thereafter the Tribunal came to the conclusion that the contention of the

Revenue was not correct inasmuch as the said Notification No.6/2002 had

been issued under Rule 11 of the Cenvat Credit Rules, 2002, which clearly

provided that the deemed credit would be available even if the declared

inputs are not used directly by the manufacturer of the final products

declared in the notification but are contained in the said final products.

12. In fact the provisions of Rule 11 are very clear. Grey fabrics in the

present case, though not mentioned in the table of inputs referred to in the

notification, comprised of yarn/fibre which are the inputs in respect of grey

fabrics. Grey fabrics are also not processed fabrics and, therefore, are not

covered by Explanation 3 to Clause (6) of the said notification. The

processed fabrics are the final products containing the yarn/fibre which is

the requirement under Rule 11. Thus, although the yarn/fibre is contained in

the final product, they are not directly used by the respondent-manufacturer

CEAC 2/2007 page 8 of 9 in its manufacturing process. It comes in indirectly being a constituent of

grey fabric. The requirement of Rule 11 stands satisfied.

13. We are also of the view that if the interpretation sought to be given by

the Revenue is to be accepted then Serial No. 2 of the table in the

notification would become redundant because there would be no non-

composite mill which could take the benefit of the notification inasmuch as

all the inputs refer only to yarn/fibre and do not include the intermediate

product-grey fabric. The very fact that yarn/fibre is mentioned as an input in

respect of non-composite mills also makes it clear that the notification was

to allow deemed credit in respect of such inputs although they were not to

be used directly by the non-composite mills. We, therefore, decide the

question against the Revenue and in favour of the respondent-assessee.

14. The appeal is dismissed.




                                             BADAR DURREZ AHMED, J



                                                 SIDDHARTH MRIDUL, J
       FEBRUARY 01, 2010
       mk




CEAC 2/2007                                                            page 9 of 9