SC ruling on Dispute regarding Claim of MODVAT Credit

The Apex Court on 4th September 2013 in the aforesaid matter was called upon to decide a dispute in regard to claim of MODVAT (modified value added tax) credit under the Central Excise Rules, 1944. The appellant who was the asseesee in the case had claimed and availed MODVAT credit on certain goods under Rule 57 Q of the Central Excise Rules by describing them as 'capital goods'. The appeal of the assessee was dismissed by the Apex Court and the court upheld the order of the Customs, Excise and Gold Appellate Tribunal (CEGAT) that had allowed the Central excise department appeal against the assessee claim of MODVAT credit. The question in the present case was whether order of CEGAT was correct in regard to ordering recalculation and recovering of the amount of MODVAT credit that was availed by the appellant-assessee.

The dispute centred around the reference by assessee of his goods as 'capital goods' under Central Excise Rules for the availment of MODVAT credit. The appellant- assessee was a manufacturer of machinery and parts that were used for setting up salt and cement plants. These all were classified under Chapter 84 of the Central Excise Act, 1944. The appellant-assessee had also been setting up salt and cement plants in India and in foreign countries as per the specifications of the clients in India and foreign countries. The present dispute arose with respect to one of the instances of setting up of plant in Vietnam. The appellant –assessee had entered into a contract with a company based in Vietnam for supply and installation of a sugar plant at Vietnam. The appellant – assessee had manufactured certain machinery in his own factory which were to form part of the sugar plant and purchased certain machinery, parts, electric cables that were to be used for setting up plant in Vietnam. This machinery purchased from local manufacturers in India and machines produced by assessee were transported in the same condition to Vietnam. The assessee had paid excise duty on all these inputs. The assessee however did not pay any excise duty for the setting up and installation of the plant in Vietnam. The assessee thereafter claimed MODVAT credit under the Central Excise Rules and this was resisted by the Excise department.

Under the Central Excise Rules, MODVAT credit could be claimed only for capital goods or for those inputs or parts that were to form part of capital goods produced in the factory premises. The Excise department contended that appellant-assessee were not entitled to MODVAT credit under the Central Excise Rules as parts purchased by the appellant-assessee could not be treated as capital goods or even as inputs as the said parts had not been used in the process of manufacturing the machinery. The appellant-assessee on the other hand contended that tribunal order was bad in law and the tribunal had failed to appreciate the proper interpretation of acts and law. The appellant-assessee submitted that goods in respect of which MODVAT was availed were 'capital goods' upon the correct interpretation of Rules. The assessee submitted further that parts of the machinery that were purchased by him, were to form part of the entire plant which was to be set by him at Vietnam and therefore they were to be treated as parts or inputs of the capital goods. The assessee also submitted that he purchased machinery, electric cables for setting up plant in Vietnam and this transport of machinery was also intended to enable him to set up sugar plant in Vietnam.

The Apex Court upon hearing the contentions of both parties rejected the contentions of the appellant-assessee and held that the conclusions arrived by the Tribunal were correct in relation to claim of MODVAT credit and the order of CEGAT did not called for any interference. The Apex Court observed that appellant-assessee had just acted as a trader or an exporter in relation to the machinery purchased by it which had been in turn exported and used for setting up sugar Plant in a foreign country and therefore it cannot be said that the assessee has manufactured that plant in its factory which were essential to avail the benefit of MODVAT credit.

The Apex Court observed that the most important object concerning the grant of the MODVAT credit is to see that the cascading effect of duty imposed on the final product cleared at the time of saleis removed that is if some duty is levied on the inputs, raw materials etc and if final product is also dutiable, then the duty levied on the inputs i.e. raw materials is to be reduced from the duty so ascertained on the final product. The Apex Court further observed that there are two conditions for getting the MODVAT credit benefit: one is, on the raw materials i.e. on the inputs on which the manufacturer must have paid duty and these should have been used in the process of the manufacturing of the final product in the factory or premises of assessee, and secondly, excise duty must have been levied on the final product and in case where no duty is levied on final product then there shall be no question of grant of relief because in such a case there would be no cascading effect on the duty imposed.

The apex court also relied upon its decision in another matter concerning same issue in Madras Cements Ltd. V. CCE  2010 (6) SCC 606 wherein it had held that in order to avail the benefit of the MODVAT credit, an assessee was bound to satisfy the assessing authority that the capital goods in the form of components, spares and accessories had been utilised by him during the process of the manufacture of the finished product and in case where there was absence of identification of the machinery for which the goods had been used, then, in that case, it was not possible for the assessing authorities to come to a decision as to whether the MODVAT credit was to be given in respect of goods in question.

The Apex Court relying upon these legal principles and the facts that appellant assessee had not paid any excise duty on the plant and had not manufactured or used the machinery in his premises for the manufacture of the finished product dismissed the appeal of the assessee and held in favour of Excise department.

The Court held that appellant-assessee could not avail the MODAVT credit facility. The Court said that appellant-assessee had purchased the said machinery for setting up the plant and transported it along with the machinery manufactured by it in as its unpacked condition to Vietnam and thus did not used the purchased machinery in its premises or factory and therefore did not compiled the necessary condition incorporated in the Rules for claiming MODAVT credit. The court reasserted that to avail MODVAT credit, the input on which the excise duty was paid must have been used in the manufacture of the final product in the factory or premises of the assessee and this was not done by assessee in the said case. The court also noted the fact that the purchased property was not even tested and was not even unwrapped in the factory premises of the appellant and therefore stated that it could not be said that the machinery purchased by the appellant-assessee was used by the assessee in the manufacture of sugar plant. The court also stated that appellant did pay any excise duty on the plant set up in Vietnam and hence acted only as trader in the transaction and could not have availed the benefit of MODVAT credit. The Court as stated before dismissed appeal and upheld the order of CEGAT.