Whether deemed credit facility available for grey fabrics when notification did not specify it as input eligible for benefit?

PJ/Case Study/2013-14/88

Prepared by: CA Neetu Sukhwani &
Hushen Ganodwala

Case study

Introduction:-This case study is an attempt to draw attention towards notification no. 06/2001-C.E. dt. 01.03.2002 that specified the inputs and the final products for the purpose of availing the deemed credit facility. The deemed credit was specifically allowed for yarn only and not on the grey fabrics. It was very clearly stated that the deemed credit facility was allowed not only for those inputs that were directly used but also for those inputs that were indirectly used and were contained in the final product. It was submitted that yarn is the basic inputs for textile industry and the grey fabrics utilised by the respondent also contained yarn in substantial quantity. Accordingly, it was contended that the deemed credit was correctly admissible on the grey fabrics also irrespective of the fact that there was no duty on grey fabrics because the facility of deemed credit is available notwithstanding the actual amount of duty paid on such declared inputs. The admissibility of the deemed credit facility introduced by the notification no. 06/2001-C.E., dt 01.03.2002 is the subject matter of the present case study.

CCE, Jaipur Vs M/s Nahata Fabrics Ltd.
[OIA No. 698-828(HKS)CE/JPR-II/2005 dated 1.12.2005]

Issue involved:-Whether deemed credit facility available for grey fabrics when notification did not specify it as input eligible for benefit?

Brief Facts:-The issue under consideration in the present appeal is that whether the deemed credit facility available for certain basic inputs of the textile industry like yarn, fibres, dyes, chemicals, packing materials etc., is also admissible with respect to grey fabrics used in the processing of cotton fabrics that are ultimately cleared on payment of duty. The deemed credit facility was extended to the textile industry from 04.09.1996. The respondent undertook job work of Bleaching, Dyeing, Printing, Padding, Calendering etc. on the woven fabrics of cotton yarn. The processed fabrics were exported from the place of manufacture through Merchant Exporter for which debit entry was recorded in deemed credit register for Cenvat duty @ 8% adv. The respondent filed rebate claim with respect to such deemed credit that was duly sanctioned to them vide Order-in-Original. Aggrieved by the said OIO granting rebate claim of deemed credit on grey fabrics, the revenue department filed appeal before the Commissioner Appeals. However, the Commissioner Appeals rejected the appeal of the department and upheld the order of the adjudicating authority sanctioning the rebate claim to the assessee. Aggrieved by the order of the Commissioner Appeals, the revenue department further filed appeal before the Revisionary Authority but the Revisionary Authority refused to admit the appeal for the reason that it is not competent to decide cases relating to admissibility of deemed credit facility and that the issue under the present appeal pertained to the admissibility of the deemed credit taken by the respondent. Thereafter, the appeal was filed before the Tribunal along with the Condonation of Delay application. The Condonation of delay application was allowed.

The subject matter of the case study is whether the deemed credit facility was admissible to the respondents and consequently, whether the rebate claim of the deemed credit granted to the respondents was just and proper.

Appellant’s Contention:-The revenue department filed the appeal to the Tribunal for recovering the rebate allowed for deemed credit on grey fabrics to the respondents on the following grounds:-

It appeared that the respondent was availing deemed cenvat credit under Rule 11 of the Cenvat Credit Rules, 2001 in respect of processed fabrics being manufactured and cleared for export by them. The main input being used by the assessee was woven grey fabrics falling under sub headings nos. 5207.20, 5208.20, 5209.10, 5407.10, 5511.10, 5512.10, 5513.10, 5514.10, for the manufacture processed fabrics falling under chapter 52, 54 & 55 respectively. The central government by issue of Notification no. 53/2001-CE(NT) dated 29.06.2001 and Notification no. 06/2002-CE(NT) dated 01.03.2002 under Rule 11 of Cenvat Credit Rules, 2001 declared the inputs for the purpose of allowing deemed credit. But no duty was payable on grey fabrics either of cotton or MFE till February 2002 and in budget 2002 an opportunity was given to grey fabrics manufacturer to avail Cenvat credit of yarn used in the weaving of grey fabrics and if they did not want to avail Cenvat credit, no duty was leviable on grey fabrics in terms of notification no. 14/2002-CE dated 01.03.2002-CE dated 1.03.2002. The assessee(processor) could not avail the Cenvat credit of duty paid on grey fabrics as the grey fabrics received by them did not suffer any duty because manufacturers of grey fabrics were availing exemptions from whole of duty leviable thereon under Notification no. 14/2002-CE dated 01.03.2002. Thus the assessee had availed deemed credit wrongly at time of clearance of their final products that had been produced from the grey fabrics, which was not declared as an eligible input for availing deemed credit in any of the notification. The inputs being used by the assessee were exempted from payment of duty leviable under Central Excise Act, 1944 and were also chargeable to nil rate of duty leviable under the additional duties of excise (Goods of Special Importance Act,1957). Therefore deemed credit was refunded erroneously as the same was not admissible to them under Rule 11 of Cenvat credit Rules, 2001.

The grey fabric which is exempted from duty and the main input for producing the processed fabrics has not been declared as eligible input for taking credit in any of the notification. This implies that deemed credit is not available on the grey fabrics when used as input for manufacture of processed fabrics.

While interpreting a similar provision of Rule 57G(2) of the erstwhile Central Excise Rules 1944, as in force prior to 23 July 1996, the Honorable Tribunal, in the Case of M/s machine Builders[1996(83) ELT 576] ruled that the intention is not to deem those inputs which actually did not suffer duty. The purpose is to ensure the benefit to those who use inputs in the manufacture of which duty has actually been paid, but it might not be possible to produce duty paying documents.

Respondent’s Contention:-The respondent made following submissions in their defence as follows:-

1. Compilation of the Budget Speech:-The issue under consideration in the present appeal is that whether the deemed credit facility available for certain basic inputs of the textile industry like yarn, fibres, dyes, chemicals, packing materials etc., is also admissible with respect to grey fabrics used in the processing of cotton fabrics that are ultimately cleared on payment of duty. The deemed credit facility was extended to the textile industry from 04.09.1996. The basic theme of the said “deemed credit facility” is explained briefly as it was announced by the then Hon’ble Finance Minister, Mr. P. Chidambaram in his Budget Speech in Point 123 and 124. The point 123-I stated that with a proposal to integrate the tax on the textile sector with the mainstream of the Central Excise Duties Scheme having Modvat principle, Modvat scheme is also introduced in the textile sector. It was stated that as excise duties were levied at the fibre and yarn stage and there was only an additional excise duty, in lieu of fabrics, it resulted in very high duties on inputs that encouraged evasion. This indicated deficient system of taxation wherein instead of capturing addition, the industry is being denied of opportunity to claim Modvat input credit on the capital goods, chemicals and yarn. Therefore, with a view to boost the textile industry because of this lopsided tax structure, the facility of deemed credit was proposed.

The para 124 of the Budget Speech further proposed to reduce the excise duty on yarn in the case of polyster filament yarn from the then current level of 50% to 40% and unify the rates on other yarn at 20%, except nylon filament yarn and cotton yarn for which the present rates of 30% and 5% respectively were proposed to be retained. Thereafter, with a view to provide Modvat for the textile sector, basic excise duty of 5% on cotton fabrics and that of 10% on other fabrics was proposed to be collected at the processed fabrics stage. It was stated that the processors would be in a position to Modvat the duty paid on yarn imputed on the basis that yarn accounts for 50% of the value of the finished fabrics. A simple procedure of imputed value was adopted to avoid the imposition of a basic duty on grey fabrics which are manufactured by thousands of powerlooms. Such powerlooms were continued to be outside the purview of excise net. Moreover, Composite mills and textile processors would be able to avail themselves of Modvat facilities hitherto not extended to them. This restructuring of excise duty, together with the substantial reduction in customs duties on selected machinery and on inputs for the textile sector, should provide a major boost to the textile industry.

For this purpose, Rule 57A(2) was inserted which gave the power to the Government to issue deemed credit facility. The wordings of the Rule 57 A (2) read as follows:-

“Notwithstanding anything contained in sub-rule (1), the Central Government may, by notification in the official Gazette, declare the inputs on which declared duties of excise or additional duty (hereinafter referred to as “declared duty”) 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 the credit of such declared duty deemed to have been paid in such manner and subject to such condition as may be specified in the said notification even if the declared inputs are not used directly by the final products declared in the said notification, but are contained in the said final products.”

Explanation- For the purpose of this sub-rule, 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 the said notification and the credit of the declared duty shall be allowed to the manufacturer.

Notification no. 110/96-C.E. (N.T.) dt. 23.07.96 was issued under power of Rule 57A(2). The above scheme was proposed to be implemented from 01.08.96. But later on, the same was further extended. The Cenvat of colour, chemicals, dyes and packing material was also given on deemed basis in addition to grey fabrics. The scheme started from 04.09.96. A new notification no. 29/96-CE (N.T.) dt 03.07.96 was issued for this budget under the same Rule 57A(2).

Explaining these changes in Budget, Departmental instructions were issued by Board. In point no. 5 of these notes, it was clarified that:-

“For other inputs like chemicals, dyes, capital goods, usual records as prescribed under Modvat rules would be required to be maintained by composite mills and independent processors. However, for the purpose of “deemed credit”, a separate register for availment of credit on deemed basis, in the proforma given below may be prescribed through Trade Notice.

1.    S. No.
2.    Lot No./ Sort No. of fabrics cleared
3.    Invoice no. and date on which fabrics have been cleared.
4.    Value of the fabrics cleared (in Rs.)
5.    Duty payable (in Rs.)
6.    Amount of credit availed on deemed basis (in Rs.)
7.    Amount of credit utilised {Same as (6)}

For payment of duty purposes, in so far as “deemed credit” utilisation is concerned, reference of entry in this register will be given in the invoices. In case of a composite mill, the above register will be required to be maintained only for fabrics processed on job work. For their own fabrics, as stated earlier, deemed credit scheme will not apply.
Thereafter, the deemed credit was made available to textile independent processors upto year 2003. It was availed by textile manufacturer although the notification changed many times. In last, the notification no. 06/2002-CE (NT) dt. 01.03.2002 as amended by notification no. 16/2002-CE (NT) dt. 27.04.2002 (as mentioned in show cause notice) has given us deemed credit. The notification no. 06/2002-CE (N.T.) dt. 27.04.2002 was issued under Rule 11 of erstwhile Cenvat Credit Rules, 2001 which reads as follows:-

Power of Central Government to notify goods for deemed 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 to 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.

The table given in the notification no. 06/2001-C.E. (NT) dt 01.03.2002 specified the inputs and the final products for the purpose of availing the deemed credit facility, of which inputs under chapter heading 52.05 and 52.06 specified in serial no. 2 pertains to the respondent. The inputs covered by the chapter headings 52.05 and 52.06 basically cover cotton yarn. Thus, the deemed credit was specifically allowed for yarn only and not on the fabrics. However, on analysing the notification, it is very clear that the deemed credit facility was allowed for those inputs also that were not directly used but were contained in the final product. It is submitted that yarn is the basic inputs for textile industry and the grey fabrics utilised by the respondent also contained yarn in substantial quantity and so the deemed credit was correctly admissible on the grey fabrics also irrespective of the fact that there was no duty on grey fabrics as the facility of deemed credit is available notwithstanding the actual amount of duty paid on such declared inputs. Therefore, the appeal filed by the revenue department is baseless and is devoid of merits and the same is liable to be rejected.

2. Reliance on judicial pronouncements:-The respondent submits that the issue is no longer res-integra and the same has been decided by the Hon’ble Delhi High Court in the case of Commissioner of C.Ex., Vs M. B. Dyers [2010 (253) E. L.T. 402 (Del)], wherein it was held that:-

Cenvat/Modvat - Deemed credit - Notification No. 6/2002-C.E. (N.T.) - Deemed credit denied under Notification ibid as grey fabrics from which processed fabric i.e. final product manufactured, not in the list of inputs eligible for credit - Tribunal in impugned order while allowing deemed credit held that Notification ibid was issued under Rule 11 of Cenvat Credit Rules, 2002 which provided for deemed credit even if declared inputs not used directly by manufacturer of declared final products but are contained in said final product - Grey fabrics, presently though not mentioned, comprised of yarn/fibre which are inputs in respect of grey fabrics and find mention in Notification ibid - Grey fabrics not covered by Explanation (3) to clause (6) of Notification ibid as not processed fabrics - Fact that yarn/fibre mentioned as input in respect of non-composite mills makes clear that notification was to allow deemed credit on inputs not used directly by non-composite mills - Question decided against Revenue - Rule 13 of Cenvat Credit Rules, 2004. - 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 in its manufacturing process. It comes in indirectly being a constituent of grey fabric. The requirement of Rule 11 stands satisfied. [paras 11, 12, 13]

Appeal dismissed

Therefore, in light of the clear cut pronouncement of the Hon’ble Delhi High Court, the deemed credit is rightly admissible to the respondents on the grey fabrics used in their final products even though grey fabrics are not specifically mentioned in the notification granting deemed credit facility. As such, the appeal filed by the department is devoid of merits and deserves to be rejected. In addition to the above decision, the respondent wishes to place reliance on the following judgements delivered on the even issue as follows:-

DAMINI PRINTERS (P) LTD. VS COMMISSIONER OF CENTRAL EXCISE, NOIDA [2005 (191) E.L.T. 653 (Tri. – Del)]:-

Cenvat/Modvat - Deemed credit - Grey fabrics brought into factory for processing, not declared as input for the purpose of deemed credit under Notification No. 6/2002-C.E. (N.T.) issued under Rule 11 of Cenvat Credit Rules, 2002- Deemed credit available if declared inputs are contained in final products - Declaration of inputs which are used directly by manufacturer of final products, not necessary - Rule 13 of Cenvat Credit Rules, 2004. [paras 5, 6]

COMMISSIONER OF CENTRAL EXCISE, JAIPUR-II VS BOHRA SYNTHETICS P. LTD. [2008 (230) E.L.T. 533 (Tri. - Del.)]:-

Refund - Deemed credit, unutilized credit - Yarn used in manufacture of grey fabric which in turn used in manufacture of man-made fabric which is exported - Though yarn was not declared as inputs eligible for taking deemed credit, but as it was contained in grey fabric, exporter of man-made fabric held entitled to take credit thereon - Refund of same allowed - Rule 5 of Cenvat Credit Rules, 2004. [paras 3, 4]

DELITE PROCESSORS VS COMMISSIONER OF CENTRAL EXCISE, NOIDA [2009 (243) E.L.T. 731 (Tri. - Del.)]:-

Cenvat/Modvat - Deemed credit - Grey cotton and unprocessed man-made fabrics - Used as input in final product viz. processed cotton and man-made fabrics - Notification No. 60/2002-C.E., permitting deemed credit, did not require one to one co-relation between the inputs and final products specified therein - Assessee/Processor held entitled to deemed credit on non-duty paid grey fabrics as duty paid yarn was present in final product even though it was not directly used therein - Rule 57A of erstwhile Central Excise Rules, 1944 - Rule 3 Cenvat Credit Rules, 2004. [paras 7.3, 7.4, 7.5]

COMMISSIONER OF C. EX., AHMEDABAD VS SUZUKI SYNTHETICS [2008 (222) E.L.T. 279 (Tri. – Ahmd)]:-

Cenvat/Modvat - Deemed credit on inputs - Grey fabrics - Notification No. 7/2001-C.E. (N.T.), credit thereunder denied as grey fabrics not mentioned therein as inputs - Yarn used as input for grey fabrics also declared as inputs for processed fabrics - Yarn is an input to grey fabric which is an input to processed fabrics - Normally Cenvat credit available on inputs used in manufacture of final products - Deemed credit available to grey fabrics - Explanation-I to notification ibid. [paras 8.1, 8.4]

Deemed credit - Grey fabrics - Notification No. 7/2001-C.E. (N.T.) - It is not as if each and every goods mentioned as inputs in said notification required for every finished products mentioned as final product therein - Deemed credit takes into account broadly the inputs required and probable duty incidence on approximate basis - Grey fabrics though not mentioned as inputs covered under Notification ibid. [para 8.2]

ASHOK SILK MILLS VS COMMISSIONER OF CENTRAL EXCISE, MUMBAI [2003 (158) E.L.T. 339 (Tri. – Mumbai)]:-

Cenvat/Modvat - Deemed credit - Processed pile fabrics manufactured from unprocessed pile fabrics made out of duty paid viscose yarn purchased by assessee - Deemed credit available in terms of Notification No. 7/2001-C.E. - Expression “hereinafter referred to as the declared inputs” in the preamble does not in any way restrict the scope of Notification No. 7/2001-C.E. [para 2]

Cenvat/Modvat - Processed pile fabrics manufactured from unprocessed pile fabrics made out of duty paid viscose yarn - Since unprocessed pile fabrics is an intermediate product and the input i.e. viscose yarn is duty paid and the final product processed pile fabric is cleared on payment of duty, deemed credit cannot be denied on the ground that no duty is paid on the intermediate product - Rule 57A of erstwhile Central Excise Rules, 1944. [para 2]

MANGAL TEXTILE MILLS (I) PVT. LTD. VS COMMR. OF C. Ex., AHMEDABAD [2003 (159) E.L.T. 464 (Tri. - Del.)]:-

Cenvat/Modvat - Deemed credit - Inputs used in the manufacture of final goods coming under sub-heading 5801.21 of Central Excise Tariff Act, 1985 - Heading 58.01 ibid is included in the list of final product in Notification No. 29/96-C.E., deemed credit not deniable - Benefit of Notification No. 20/96-C.E. admissible. [para 2]

Cenvat/Modvat - Deemed credit - Inputs used in the manufacture of grey fabrics - In light of Board’s Circular No. 243/77/96-CX., dated 3-9-1996, deemed credit admissible [paras 3, 4]

Therefore, in light of the above cited decisions, it is very much clear that deemed credit has been rightly availed on the grey fabrics and consequently the rebate claim has been correctly sanctioned to the respondent by the adjudicating authority. Hence, the appeal filed by the revenue department is devoid of any merits and deserves to be quashed.

3. No duty payable on grey fabrics cannot be ground to deny deemed credit:-It has been contended in the grounds of appeal filed by the revenue department that no duty was payable on grey fabrics either of Cotton or MMF till February, 2002 and in Budget 2002 an opportunity was given to the grey fabric manufacturer to avail Cenvat Credit of yarn used in the weaving of grey fabrics and if they did not want to avail cenvat credit, no duty was leviable on grey fabrics in terms of Notification no. 14/2002-CE dt. 01.03.2002. In the present case, the assessee was not availing credit of duty paid on grey fabrics as the grey fabrics received by them did not suffer any duty because the manufacturers of grey fabrics were availing exemption from whole of duty leviable thereon under notification no. 14/2002-CE dt. 01.03.2002. Thus, the assessee had availed deemed credit wrongly at the time of clearance of their final products that had been produced from the grey fabrics, which was not declared as an eligible input for availing deemed credit in any of the notification. It was contended by the revenue department that as the inputs used by the assessee were exempted from payment of duty leviable under the Central Excise Act, 1944 and were also chargeable to Nil rate of duty leviable under the Additional duties of excise (Goods of Special Importance Act, 1957) so the deemed credit was not admissible to the assessee. In this regard, the respondent submits that non levy of duty on grey fabrics cannot be ground to deny admissibility of deemed credit as the scheme of deemed credit allows specified amount of credit on inputs prescribed in the notification irrespective of the actual amount of duty paid on inputs. As such, whether any duty is paid on such inputs or not is irrelevant for the purpose of claiming the benefit of “deemed credit facility” as far as such inputs satisfy other conditions of the notification like in the present case, such inputs are directly or indirectly contained in the final product. It is very clear that substantial portion of yarn is contained in the grey fabrics that are used by the respondent in their final product and it is also not disputed that deemed credit facility is available for yarn. Hence, when yarn is contained in the grey fabrics and is consequently contained in the final product, deemed credit facility available for yarn is also admissible with respect to grey fabrics. The above view is also supported by a number of judicial pronouncements relied in preceding paras. As such, the ground taken by the revenue department is baseless and does not has force. The appeal filed by the revenue department should therefore be rejected and the rebate sanctioned by the adjudicating authority of the deemed credit should be upheld.

4. Grey Fabric not specified in the notification for availing deemed credit cannot be ground to deny the benefit:-It has been contended by the revenue department that as the grey fabric which is exempted from duty and is the main input for producing the processed fabrics, but has not been declared as eligible input for taking credit in any of the notification, it implies that deemed credit is not available on the grey fabrics when used as input for manufacture of processed fabrics. In this respect, the respondent submits that in the deemed credit scheme, it is stated that the deemed credit facility shall be allowed subject to such conditions as may be specified even if the declared inputs are not used directly in the final products declared in the said notification, but are contained in the said final products.The respondent reiterates that grey fabrics substantially comprise of yarn which is specified input that is eligible for deemed credit facility and so the deemed credit facility has been correctly allowed to them with respect to grey fabrics used in the manufacture of final products. As the specified input, yarn is contained in the grey fabrics used by the respondent, the deemed credit facility admissible for yarn is allowable to the respondent. Therefore, the contention of the revenue that grey fabric is not specified input eligible for deemed credit facility does not hold good and consequently the appeal filed by the revenue deserves to be set aside.

5. Erroneous reliance placed on the decision given in the case of M/s Machine Builders [1996 (83) E.L.T. 576] :-It is submitted that the revenue has placed reliance on the above case wherein it was held that the intention is not to deem that the inputs which actually did not suffer duty are inputs which suffered duty. The purpose is to ensure the benefit to those who use inputs in the manufacture of which duty has actually been paid, but it might not be possible to produce duty-paying documents. In this respect, the respondent submits that totally erroneous reliance has been placed on the decision given in the above cited case by the revenue as the case pertains to a different deemed credit facility that pertained to Rule 57 G (2) of the Central Excise Rules, 1944, wherein the second proviso clearly debarred deemed credit facility on the inputs that were clearly recognised as non-duty paid. The said proviso is produced as follows for the sake of reference:-

“Provided further that having regard to the period that has elapsed since the duty of excise was imposed on any inputs, the position of demand and supply of the said inputs in the country and any other relevant considerations, the Central Government may direct that with effect from a specified date, all stocks of the said inputs in the country, except such stocks lying in a factory, customs area (as defined in the Customs Act, 1962 (52 of 1962) or a warehouse as are clearly recognizable as being non-duty paid, may be deemed to be duty-paid and credit of duty in respect of the said inputs may be allowed at such rate and subject to such conditions as the Central Government may direct, without production of documents evidencing the payment of duty”.

However, in the present case, the deemed credit facility is governed by the provisions of Rule 57 A (2) of the Central Excise Rules wherein no such condition has been specified. Moreover, reliance is also placed on the Board’s Circular no. 243/77/96-CE dt. 3.9.1996 wherein it has been clarified that the deemed credit is in lieu of duty paid on fibres, yarns, dyes, chemicals, consumables and packaging materials. Hence, the denial of deemed credit facility on the premise that grey fabrics are not dutiable is not tenable and the order in original sanctioning refund claim is correct and proper. Therefore, as the facts and circumstances of the above cited case are clearly distinguishable from the present case, the above cited case is not relevant and wrong reliance has been placed on the same. The appeal filed by the revenue department should therefore be set aside and the order in original should be upheld.

6. Issue already settled in favour of the assessee:-It is also submitted that it is a common practice followed by the revenue department to simultaneously issue show cause notice and also file appeal against the order in original sanctioning the rebate claim to the assessee as it is ambiguous as to what is the course of action to be followed against the order in original sanctioning the rebate claim filed by the assessee. Consequently, in the present case also, the revenue department issued show cause notices and also filed appeal to the Commissioner Appeals against the order in original granting the rebate claim of the deemed credit to various assessees. Further even the show cause notices that were issued have been dropped by the adjudicating authority vide Order in Original no. 20-124/2011/C.Ex./JPR-II-COMMISSIONER dated 04.04.2011. It is also worth mentioning that while dropping the show cause notices issued for denying the deemed credit with respect to grey fabrics, it has been specifically mentioned in the order in original itself that the Departmental Audit Paras (DAP) raised for the same matter in case of some other assessees have already been vetted and so the same shall not be persuaded further. Therefore, the issue under consideration has been settled even as far as C&AG is concerned. Hence, when the issue under consideration has been decided in favour of the assessees vide the said Order in Original and the revenue department has also not preferred further appeal against the said Order in Original to the Commissioner Appeals, there is no doubt in interpreting that the issue under consideration has attained finality and has not been challenged further. As such, when the issue has been settled in favour of the assessee, the present appeal filed by the revenue department is not legally sustainable and should be rejected as devoid of any merits. A copy of the Order in Original no. 20-124/2011/C.Ex./JPR-II-COMMISSIONER dated 04.04.2011 was also enclosed.

In light of the above cited submissions, it is crystal clear that the appeal filed by the revenue department is not at all sustainable and should be rejected by confirming the order in original sanctioning the rebate claim of the deemed credit on grey fabrics to the assessee.

Reasoning of Judgment:-After hearing both sides, it was found that the assessees were allowed due Modvat credit in respect of various inputs mentioned in Notification No. 53/2001-C.E. (N.T.) dated 29.6.2001 and 6/2002-C.E. (N.T.) dated 1.3.2002. All the respondents are processors of cotton fabrics.

The revenue initiated proceedings against the respondents proposing to deny the deemed credit on the ground that grey fabrics was not one of the specified inputs, even though various other items like yarn, dye and chemicals used in manufacture of grey fabrics were specified items. The Revenue’s contention was that inasmuch as grey fabrics which come into existence, in between, were exempted from payment of duty, the processors of grey fabrics will not be entitled on benefit of deemed Modvat credit.

It is seen that such proceedings initiated against the respondents were dropped by the original adjudicating authority. The Revenue challenged the said order before Commissioner (Appeals), who rejected the appeals filed by the department by observing that the issue stand covered by the Board’s circular No. 243/77/96 dated 3.9.96 and Tribunal decision in the case of Mangal Textile Mills(I) Pvt. Ltd. vs. CCE [2003(54) RLT 282 (Tri)].

Revenue, not being satisfied with the orders of the Commissioner (Appeals) further filed the present appeal before Tribunal.

At this stage, it was found that the issues are no more res integra and stand settled by various decisions of the Tribunal as upheld by the Hon’ble High Court of Delhi as detailed below:

1.    CCE, Ahmedabad vs. Suzuki Synthetics [2008(222) ELT 279 (Tri.-Ahmd.)];
2.    Delite Processors vs. CCE, NOIDA [2009 (243) ELT 731 (Tri.-Del.)]; and
3.    Damini Printers (P) Ltd. vs. CCE, NOID [2005(191) ELT 653 (Tri.-Del.)]

Inasmuch as the issue is settled, the tribunal found no reason to take a different view than the one taken by the original adjudicating authority as also by Commissioner (Appeals). Consequently, the appeal filed by the Revenue was rejected.

Decision:-Revenue appeal rejected.

Conclusion:- The crux of this case is that respondent had availed deemed credit on grey fabric used in their final products even though grey fabrics were not specifically mentioned in the notification granting deemed credit facility. The reason for taking deemed credit in respect of grey fabrics was that in the notification introducing the deemed credit facility, it was specifically mentioned that this benefit would be extendable to inputs that were not directly used in the manufacture of final products but were contained in the final products. There was no doubt as regards substantial quantity of yarn contained in the grey fabrics which was ultimately used in the manufacture of cotton fabrics. Moreover, the yarn was specified as input eligible for deemed credit facility. Consequently, the grey fabrics was also eligible for the deemed credit facility. Not only this, the deemed credit facility on grey fabrics was confirmed by the various decisions of the Tribunal and was also upheld by the Hon’ble High Court of Delhi in case of Damini Printers (P) Ltd. vs. CCE. As such, the appeal filed by the revenue was held to be devoid of any merits. Another important point that is concluded from this case study is that in case of rebate claims, there is practice of issuing show cause notice as well as filing of appeal against the said rebate claims by the revenue department. In the present case, as the proceedings initiated vide the show cause notice were already dropped, the question of sustaining the present appeal did not arise at the outset.

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PJ/Case Study/2013-14/88
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