By TIOL News Service

NEW DELHI, APR 15, 2014: THE following question of law was referred to the High Court -

"Whether the option is available to the Assessee either to avail the exemption or to pay duty on the final product by taking modvat credit on inputs in terms of Rule 57A of the Central Excise Rules, 1944."

For the uninitiated, this issue was the hottest thing going in the Central Excise department in the year 1993 and continued for a few more years. Vide notification 1/93-CE, SSI units were granted full exemption from payment of duty upto an aggregate value of Rs.30 Lakhs clearances. Many SSI units chose to forego this ‘exemption' and pay duty on the clearances by opting to avail MODVAT credit. The jurisdictional authorities called this as "payment of duty on own volition" and sought to deny the MODVAT credit availed by citing C.B.E.C's Circular No. 2/91-CX 3, dated 4-1-1991 from F.No.93/13/90-CX 3. The corollary to this allegation was that the ‘duty so paid on own volition' was to be treated as "deposit" in view of the Supreme Court decision in Jain Spinners Ltd. 2002-TIOL-58-SC-CX and demand notices were issued to the consignee for denial of credit taken by him as he could have availed credit only of ‘duty' & not of ‘deposit'.

The Central Government soon realized the exigencies pursuant to which a manufacturer chose to forego the SSI exemption and pay duty by availing MODVAT and so in the year 1994 came out with an amending notification 59/94-CE and which allowed a manufacturer to pay the normal rate of duty without enjoying the SSI exemption. As for the law, section 5A(1A) of the CEA, 1944 came into being by the Finance Act, 2005.

Thankfully, the issue for the prior period was tackled by the Tribunal in the case of Everest Convertors 2002-TIOL-129-CESTAT-KOL by allowing the appeal and holding that there is no infirmity in the duty payment made by the appellant.

Be that as it may, in the present case the matter travelled up to the Tribunal and following their decision in the afore cited case, the appeal of the assessee was allowed.

But the Revenue was relentless in its pursuit. An appeal/reference was filed in the year 2000.

The Delhi High Court examined the issue in a very clinical fashion and after highlighting the dynamics of the SSI industry observed thus -

++ The Notification (1/93-CE) has been issued for the benefit of the registered SSI Units enabling them to clear goods upto a certain value without payment of excise duty. The notification granting limited exemption is available to SSI Units. The rationale behind the notification is apparently to promote Small Scale Industries and encourage and make the products manufactured attractive, competitive and eventually saleable due to price advantage. It is in nature of beneficial and benevolent provision.

++ Exemption notifications have to be strictly and liberally construed. Liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction, while keeping the object and purpose as the guiding factor.

++ The stand of the Revenue that since the respondent was a SSI Unit and covered under the Notification No.1/93 and clearance of goods upto a value of Rs.30 lakhs was exempted from payment of duty, the benefit of MODVAT scheme could not be availed in terms of Rule 57C is counter-productive and not beneficial for the respondent Assessee. It works against them and makes them in-competitive and places them at a disadvantage.

++ Thus, the stand of the Revenue is not sustainable. The object of the MODVAT Scheme is to reduce cost of final product by taking credit for the duty paid on the inputs. The object of the Exemption notification is to grant benefit to the SSI Units for clearing goods without payment of duty upto a particular limit.

++ Both the MODVAT scheme and the exemption notifications are beneficial legislation. The beneficial notification have to be strictly initially but liberally interpreted.

++ If the interpretation of the Revenue is to be accepted that there was no choice to SSI Units to either avail the MODVAT Scheme or the benefit of the exemption notification, then the SSI units are prejudiced and may even become unviable. The purpose of the MODVAT Scheme is to prevent and neutralise cascading effect of the duty paid on inputs. If the interpretation of the revenue is accepted then a manufacturer not registered as a SSI unit would be entitled to benefit of the MODVAT scheme for unlimited value and pass on benefit to the purchaser. But a SSI unit covered by the exemption notification would not be entitled to the benefit of the MODVAT scheme but would be entitled to clear goods at nil duty or lesser duty only upto a limit. Because he cannot pass on the MODVAT credit, to the purchaser, he is denied a level playing field and suffers disadvantage. This clearly is not the purpose behind the MODVAT scheme and the exemption notification.

++ A manufacturer cannot simultaneously avail of double benefits one of the MODVAT Scheme and the other of the exemption notification unless expressly permitted to do so. In case a manufacturer is covered both under the MODVAT scheme and an exemption notification, then the manufacturer should have the right to choose to avail the benefit of either of the two whichever is more attractive and beneficial. The choice once exercised is binding and final and interchange may not be permissible, unless allowed but this is different to arguing that choice is not available. The two provisions are in alternative but the right of choice is not curtailed.

++ Where two exemption notifications were applicable, the Assessee had to take/avail of benefits of that notification which was more beneficial to it.

++ In the present case the manufacturers are admittedly covered both under the MODVAT Scheme and the exemption notification.If the right to choose is not granted then it would be disadvantageous for a manufacturer to get itself registered as a SSI unit. This would thus be to the detriment of the manufacturer to register as a SSI unit. This consequence is clearly not intended by the legislature/Rule.

++ The Respondents admittedly have not claimed or availed of any benefit under the exemption notification but have sought to claim benefit of only the MODVAT Scheme as was available to other manufacturers. The Respondents have only sought to forego the benefits of the exemption notification available to SSI units.

++ The Assessee in our view would have the option either to avail the exemption under the exemption notification or to pay duty on the final product by taking MODVAT credit on inputs in terms of Rule 57A of the Rules.

In fine, the reference was answered in favour of the Assessee and against the revenue.

(See 2014-TIOL-496-HC-DEL-CX)