By TIOL News Service

NEW DELHI, MAY 19, 2015: THE assessee respondent is engaged in the manufacture of Toughened (Tempered) and Laminated Safety Glass for Automobiles. For the manufacture of the glass, the assessee has been supplying float glass which is the main raw material of the assessee's product. On this the assessee has also been availing modvat credit of duty paid on the raw material, under Rule 57A of the Central Excise Rules. Show cause notices dated 1.9.2002, 4.12.2000 nd 29.6.2001 were issued by the Department to the assessee alleging therein that the assessee had availed Modvat credit of inputs that were inherently defective and were neither used nor usable 'in or in relation to the manufacture of the final products'. In these show cause notices, the Department demanded back the duty in a sum of Rs.3,63,79,483, Rs.2257353 and Rs.28,53,875/- respectively. The assessee gave reply to the said show cause notices.

At the same time the assessee also approached the Settlement Commission under Section 32E of the Act for settlement of the case in respect of the show cause notices. In the application for settlement filed by the assessee, the assessee made an admission to the extent that it had received the float glass in packaged form and on the opening of the wooden boxes, certain float lasses were found to be broken and they were not used as inputs while undertaking the manufacturing process. On that basis it was admitted by the assessee that the modvat credit availed on the aforesaid defective float glasses had to be reversed. Accordingly, the assessee agreed to pay back a sum of Rs.56,39,370/-.

The Settlement Commission went into the issue. It found that apart from the aforesaid glasses which were found to be broken/defective on the opening of the wooden boxes, there were some other float glasses which were used in the manufacturing process. During that process, parts of the said glass were also found to be defective and not used for the final production. In the opinion of the Settlement Commission, the modvat credit availed by the assessee had to be reversed/paid back by the assessee to the authorities. In this manner, the Settlement Commission arrived at a figure of Rs.4,03,77,695/- and directed the assessee to pay the balance amount of Rs.3,47,38,325/- towards the settlement of the said show cause notice.

The assessee had objected to the approach adopted by the Settlement Commission during the hearings before the Commission by pleading that once the float glass was used for manufacture and manufacturing process had started thereby, thereafter, if some latent defect was found on a portion of the long sheet of glass and the said portion thereof had to be discarded it was not a case where the entire sheet of glass was not used as input as remaining part of the glass was in fact used. This contention of the respondent, however, was not accepted by the Settlement Commission.

The assessee challenged the order of the Settlement Commission in the Delhi High Court. The High Court accepted the plea of the assessee and remanded the case back to the Settlement Commission.

The Department is in appeal in the Supreme Court against the High Court order. The Department's argument is that once the Settlement Commission had passed the orders under Section 32E of the Act, the High Court had no jurisdiction to tinker with the same, in exercise of its extraordinary jurisdiction under Art. 226 of the Constitution. It is the submission of the Department that the High Court has exceeded its limits of jurisdiction by examining the matter afresh as if it was sitting in appeal over the order of the Settlement Commission, which was clearly impermissible.

The Supreme Court observed,

The High Court has not meddled with the factual aspects which were recorded by the Settlement Commission in its judgment. On the contrary, reading of the impugned judgment amply demonstrates that the High Court has taken the facts as recorded by the Settlement Commission itself on their face value and has not tinkered with the same.

High Court has concluded that the Commission committed an error by applying wrong principle in law, by treating even the float glass used for manufacture, that is, after the manufacturing process had commenced, to be a wasted input and came to an erroneous conclusion that the modvat could not be claimed in respect of that part of a particular float glass sheet. In forming this opinion the High Court relied upon the judgment of this Court in the case of Collector of Central excise vs. Rajasthan State Chemical works - 2002-TIOL-66-SC-CX-LB wherein this Court held as to when the manufacturing process starts. Final portion from the said judgment which is quoted by the High Court, is reproduced for proper understanding of the matter:

"Manufacture thus involves series of processes. Process in manufacture or in relation to manufacture implies not only the production but the various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to, manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process manufacture or processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture."

The Supreme Court concluded that the High Court has simply stated the correct legal position where the Settlement Commission had gone wrong in law. Thus, the High Court has simply applied the correct principle of law on the admitted facts. This was well within the powers of the High Court while exercising its jurisdiction under Art.226 of the Constitution.

The Supreme Court dismissed the Revenue appeal and directed the Settlement Commission to take up the application of the respondent/assessee, in terms of the judgment passed by the High Court and decide the same as early as possible and preferably within six months.

(See 2015-TIOL-129-SC-CX)