MEWAR POLYTEX LTD.versusUNION OF INDIA AND ORS.

                   [2010] 14 (ADDL.) S.C.R. 812


A                     MEWAR POLYTEX LTD.
                                  v.
                   UNION OF INDIA AND ORS.
                 (Civil Appeal No. 10413 of 201.0)
                        DECEMBER 9, 2010
B
               [DR. MUKUNDAKAM SHARMA AND
                      ANIL R. DAVE, JJ.]

         Central Excise Rules, 1944: r.57A - Modvat credit on
C   inputs -Advance Licencing Scheme - Declaration made by
    assessee on AR~4 Form that it was not availing the benefit of
    Modvat credit on inputs - Assessee, however, used
    indigenous inputs in the manufacture of export consignment
    and availed Modvat credit on the same - Exported finished
D   goods under the Advance Licencing Scheme without payment
    of duty - Reversal of credit and imposition of penalty by
    Revenue - Correctness of - Held: Correct - Entitlement to
    Modvat credit did not arise since no excise duty was incident
    upon the finished goods - Declarations under AR4 entitled
E   the assessee to import inputs on payment of the
    countervailing duty, which subsequently was permitted to be
    drawn back - The assessee not only availed of Modvat credit
    on the indigenous input, but also drew back countervailing duty
    paid on imported inputs that were mere stock replenishments
F   - This amounted to a double benefit - Tax/Taxation - Unjust
    enrichment.

      The assessee exported fabrics with a declaration on
  the AR4 that they were not availing the benefit of credit.
  The export was made by them under the Advance
G Licencing Scheme against which they were entitled to
  receive replacement. However due to urgency of export
  order, they used indigenous inputs in the manufacture of
  the export consignment. Later on, when the replacement
  was received, they took modvat credit on the indigenous
H                           812
  MEWAR POLYTEX LTD. v. UNION OF INDIAAND              813
                  ORS.
inputs. They also availed the benefit of drawback as the     A
export was made by them under the drawback scheme.

     The question which arose for consideration in the
instant appeal was whether the appellant-assessee was
entitled to avail modvat credit on indigenous input.         8
    Dismissing the appeal, the Court

     HELD: 1.1. A literal reading of the Rule 57 A of Central
Excise Rules, 1944 makes it amply clear that an
entitlement to Modvat credit will arise only if excise duty C
is incident upon the final product. The final product in the
instant case referred to the finished goods (PP fabrics)
that were exported under the Advance Licensing Scheme
without payment of duty. The declarations filed under
AR4 entitled the assessee to import inputs on payment o
of the CVD, which subsequently was permitted to be
drawn back. Therefore, the assessee had utilized the
specified mechanism to avail of a benefit on the imported
inputs, while availing of Modvat credit on the indigenous
raw material used in the manufacture of the exported
goods. In effect, the assessee has not only availed of E
Modvat credit on the indigenous input, but also drew
back countervailing duty paid on imported inputs that
were mere stock replenishments. This would amount to
a double benefit. That the Modvat credit was technically
                                                              F
claimed only subsequent to the filing of AR4 declarations,
although the indigenous goods were used in the
manufacturing process a priori does not also reflect well
on the intention of the assessee. The assessee has
merely resorted to the technicality of claiming Modvat •
credit subsequent to the AR4 declarations, thereby G
entitling it to drawback. Subsequently, the Modvat credit
has been availed on the very same indigenous goods,
which shows that the claim of the assessee to be
legitimately entitled to two separate duties was but a
facade. [Para 15, 16] [820-D-H; 821-A-B]                      H
    814    SUPREME COURT REPORTS (2010) 14 (ADDL.) S.C.R.

A      1.2. There can be no question of separate duties
  arising in the instant case since the issue concerns the
  manufacture and export of one and the same goods. The
  imported inputs were primarily stock replenishments that
  were used in the execution of other orders, and allowing
B the assessee to claim Modvat credit on the indigenous
  input would tantamount to giving a benefit twice for the
  same process that began with the manufacture and
  culminated in the export of the specified goods. The
  assessee cannot claim Modvat credit on finished goods
c where duty is not incident. Any attempt to avail it
  subsequently, casts serious aspersions on the bonafide
  intention of the assessee. The argument of the assessee
  that action had to be taken under the Duties Drawback
  Rules, 1971 and not through reversal of credit is not
D tenable. The reversal of credit is meant to deny the
  assessee of a benefit that they would have otherwise
  enjoyed without justification. The drawback equivalent to
  CVD is legitimately permissible by the process of AR4
  declarations and, thus, it is the benefit that is enjoyed
E without justifiable basis that has to be reversed. [Para 17]
  [821-C-F]

        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    10413 of 2010.

F        From the Judgment & Order dated 26.08.2008 of the High
    Court of Judicature for Rajasthan, Jodhpur, Bench at Jodhpur
    in D.B. Central Excise Appeal No. 9 of 2006.

         R.P. Bhatt, Arijit Prasad, H.R. Rao, P. Parmeswaran for
    the Appellant.
G
         Dr. Surat Singh, Pratibha Chopra, Ashok K. Mahajan for
    the Respondents.

          The Judgment of the Court was delivered by

H         Dr. MUKUNDAKAM SHARMA, J. 1. Leave granted.
 MEWAR POLYTEX LTD. v. UNION OF INDIAAND                   815
    ORS. [DR. MUKUNDAKAM SHARMA, J.]
                                       '
     2. The assessee (appellant herein) seeks to challenge the A
judgment of the High Court of Rajasthan at Jodhpur in Central ·
Excise Appeal No.9 of 2006. By its judgment and order dated
26.8.2008, the High Court dismissed the appeal, affirming the
order of the Tribunal dated 4.7.2005, which had allowed the
appeal of the Revenue and set aside the order of the B
Commissioner (Appeals), who in turn had set aside the order
in original. By the order in original, the Assistant Commissioner
had disallowed the Modvat credit of Rs. 5,37,799, and
confirmed the recovery thereof, and also imposed a penalty of
Rs. 50, 000 under Rule 173 Q (1) (bb) of the Central Excise       c
 Rules, 1944 (for short "the Rules").

      3. The necessary facts, in brief are, that the show cause
notice dated 15.2.1999 was issued to the assessee alleging
that it had wrongly taken credit to the extent of Rs. 5,37,799
under Rule 57A of the Rules, during August 1998. The notice       D
also caned upon the assessee to show cause and explain as
to why the aforesaid credit, wrongly taken by the assessee
should not be disallowed/recovered under provisions of Rule
57-1, and also why penal action under Rule 1730 (1)(bb) should
not be taken, and interest should not be charged under Section    E
 11 AB.

     4. The assessee is engaged in the manufacture of HOPE/
PP fabrics and bags, and was clearing the goods for home
consumption on payment of central excise duty, as well as . F
exporting the goods under bond without payment of duty, and
was availing Modvat credit on the inputs under Rule 57 A. The
Revenue alleged that the assessee vide declarations in Form
AR4 dated 4.8.1998, 17.8.1998 and 22.8.1998 had ~xported
certain quantity of fabrics in its own acco11nt. ai 1d in the said G
AR4s had declared that the assessee nad manufactured the
fabric as mentionea in AR4, and that the benefit of Modvat
under Rule 57A has not been availed, and also that it had not
availed the facilities under Rule 12(1 )(b) and 13(1)(b) of the
Rules, and that export was made in discharge of export
obligation under "advance licence" file.                           H
    816     SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.


A      5. It was alleged by the Revenue that the same was a false
  declaration, as the assessee has been availing Modvat credit
  on the inputs under Rule 57A. Likewise, in column 4 of the
  Form, the assessee had further declared that the export is under
  duty draw back, while on examination of Central excise records
B and R.T.12 returns of the assessee, it was found that the
  assessee had taken Modvat credit on the inputs used in the
  manufacture of exported goods, and they had not received any
  duty free consignment of PP Granules (Inputs) from anyone for
  exporting the goods on its behalf till the date of above-said
c exports, and that they had also not reversed any credit taken
  on the inputs used in the goods exported vide above referred
  AR4s. Thus, the assessee, it was alleged, had wrongly taken
  credit of Modvat, to the tune of Rs. 5,37,799, which was not
  admissible.

D        6. The Assessing Officer confirmed the demand, which
    was set aside in appeal, and was reconfirmed in further stages
    of appeal, as delineated above.

       7. The High Court dismissed the appeal, holding that the
E assessee had resorted to subterfuge and impermissible
  technicalities in attaining its desired end to claim the Modvat
  credit. While the High Court admitted that the assessee had
  not indeed claimed the Modvat credit on the inputs at the date
  when Form AR4s were submitted and the goods were exported,
F it was held by the Hon'ble Court that the said line of argument
  could not make a case in favour of the assessee. The High
  Court arrived at this conclusion on a reading of the provisions
  enshrined in Rule 57A, Sub-rules (1) and (2), and on
  interpreting the declarations made under Form AR4 in context
G of the case. The High Court held:

          "A reading of the [Rule 57A] does make it clear, that the
          Modvat credit is to be utilised towards payment of duty of
          excise, leviable on final products. Obviously therefore, the
          sine qua non for entitlement of Modvat credit is, that the
H         final product should have suffered the incident of excise
  MEWAR POLYTEX LTD. v. UNION OF !NOIA AND                   817
     ORS. [DR. MUKUNDAKAM SHARMA, J.]
    duty, and it is from out of that excise duty, that the credit A
    of Modvat is availed by the assessee. In the present case,
    admittedly, the finished products have not suffered any
    excise duty, may be on accoun~ of resorting to any
    contrivance, or subterfuge, but the hard fact remains, that·
    the finished goods have not suffered any excise duty, and B
    therefore, per force the language of Rule 57-A, the
    assessee was not entitled to claim the credit of Modvat.

     [ ... ]the declaration was required to be considered in the
     right perspective, in as much as, the benefit of Modvat
     credit should not have been availed, not only at the precise   C
     point of time when the declaration is given, but the benefit
     should not have been availed with respect to the inputs
     used in manufacture of the finished products, which was
     sought to be exported under AR4. Obviously, not only at
     the cut off time of giving declaration AR4, but also at any    D
     time in future."

Based on this line of reasoning, the High Court deemed it fit
to dismiss the appeal preferred by the assessee. Aggrieved
by the decision of the High Court the appellant-assessee has        E
approached this Court by way of this Special Leave to Appeal,
on which we have granted leave.

     8. The appeal was listed for hearing and we heard the
learned counsel appearing for the parties who have ably taken
us through all the relevant documents on record and also
                                                                    F
placed before us the various decisions which may have a
bearing on the issues raised in the present appeal.

      9. Before we outline the arguments led by the parties to
this appeal, it would be appropriate to outline some of the facts   G
which are· beyond dispute. It is well-settled that the assessee
had not claimed Modvat credit at the time when the
declarations under Form AR4 were made. However, the
assessee had in fact, claimed Modvat credit subsequently on
the inputs used for the very same manufactured goods that were      H
    818   SUPREME COURT REPORTS [2010] 14 (ADDL.) S.C.R.

A exported under AR4. In effect, the assessee had used
  indigenous duty-paid inputs, and the finished products were
  exported without payment of excise duty and subsequently,
  Modvat credit was claimed on such inputs. To explain further,
  we may elaborate briefly on the technicalities that made this
B possible for the assessee.

       10. In the normal course, an assessee is entitled to Modvat
  credit on the duty paid in the manufacture of finished products
  and it is from out of that excise duty, the Modvat credit is availed
  of by the assessee. 111 the case of imported raw materials, a .
C countervailing duty (CVD) has to be paid, equal to excise duty
  on such goods. On the other hand, an assessee who
  manufactures finished goods to be exported out of imported
  input material is given an "Advance License" to import the
  inputs required for the manufacture free from duty.
D
       11. The case that is then made out by the assessee in the
  present appeal is that the goods exported by the assessee
  were manufactured out of indigenous goods, and hence
  Modvat credit could be claimed. At the same time, however,
E credit for the CVD was availed of by the assessee in respect
  of the goods imported to be used in manufacture. Therefore,
  the crux of the entire case at hand is whether the assessee has
  been at the receiving end of a double benefit, having claimed
  credit twice for the raw materials used.
F        12. To fortify its stance, the assessee contended before
  this Court that it had taken credit of the duty on indigenous
  inputs only after the replenishment arrived. That is to say, the
  assessee had not claimed Modvat credit at the time the
  declarations under the advance license scheme were filed, but
G only later. It was further contended by the assessee that it has
  not gained any extra benefit except as provided under law. While
  fulfilling the export obligation under the Advance Licensing
  Scheme, the assessee contends that it was entitled to avail
  credit on duty paid on indigenous inputs as well as on CVD in
H lieu of excise duty paid on imported, replenished material. On
  MEWAR POLYTEX LTD. v. UNION OF INDIAAND                     819
     ORS. [DR. MUKUNDAKAM SHARMA, J.]
this count, it is the submission of the assessee that it has only     A
avaiied Modvat credit on indigenous inputs and availed
drawback on the export consignment as no credit was availed
on CVD paid for the imported material. Therefore, any actior
that could have been taken against the assessee should have
been made under the Customs and Central Excise Duties                 B
Drawback Rule, 1971 which was not done in the present case.

     13. For its part, the Revenue has contended that the .
assessee has resorted to technicalities in order to avail the
aforementioned double benefit. The essence of the argument
led by the Revenue is that the Modvat credit availed relates to C
the same inputs which were used in the manufacture of exported
goods under AR4. Since the assessee had exported the goods
under AR4, claiming that no excise duty was payable on the
exported goods, it was contended by the Revenue that no
Modvat credit could be claimed in line with the provisions of D
Rule 57A.

     14. In sum and substance, we are faced with a claim of
the assessee that, in order to meet the exigency of the export
order, the assessee used indigenous inputs for the manufacture        E
of the export goods. Subsequently, when the 'replenishment'
arrived in the form of imported goods, the assessee availed
the drawback duty for the same. However, the question to note
is whether there were two separate duties that arose, for the
assessee to claim credit on both, or if the entire process is to      F
be considered as a single cycle, which culminated in the export
of goods under the Advance Licensing Scheme?

     15. The statutory position regarding the specified benefits
is postulated in Rule 57A of the Rules.
                                                                      G
    "Rule 57A. Applicability.-(1) The provisions of this section
    shall apply to such finished excisable goods (hereafter, in
    this section, referred to as the final products) as the Central
    Government may, by notification in the Official Gazette,
    specify in this behalf for the purpose of allowing credit of      H
    820     SUPREME COURT REPORTS (2010) 14 (ADDL.) S.C.R.


A         any duty of excise or the additional duty under Section 3
          of the Customs Tariff Act, 1975 (51 of 1975), as may be
          specified in the said notification hereafter, in this section,
          referred to as the specified duty) paid on the goods used
          the manufacture of the said final products (hereafter, in this
B         section, referred to as the inputs)

          (2) The credit of specified duty allowed under sub-rule (1)
          shall be utilised towards payment of duty of excise leviable
          the final products, whether under the Act or under any other
          Act, as may be specified in the notification issued under
c         sub-rule ( 1) and subject to the provisions this section and
          the conditions and restrictions, if any, specified in the said
          notification."

  A literal reading of the aforestated provision makes it amply
D clear that an entitlement to Modvat credit will arise only if excise
  duty is incident upon the final product. The final product in this
  instance refers to the finished goods (PP fabrics) that were
  exported under the Advance Licensing Scheme without any
  payment of duty. Therefore, the attempt of the assessee to
E justify its availing of Modvat credit is seriously undermined by
  the provisions in Rule 57 A.

        16. Subsequently, it is to be seen whether the claiming of
  Modvat credit after filing the declarations in Form AR4 would
  entitle the assessee to Modvat credit on the indigenous inputs.
F The declarations filed under AR4s entitled the assessee to
  import inputs on payment of the CVD, which subsequently was
  permitted to be drawn back. Therefore, the assessee had
  utilized the specified mechanism to avail of a benefit on the
  imported inputs, while availing of Modvat credit on the
G indigenous raw material used in the manufacture of the same,
  exported goods. In effect, the assessee has not only availed
  of Modvat credit on the indigenous input, but also drew back
  countervailing duty paid on imported inputs that were mere stock
  replenishments, which amounts to a double benefit. That the
H Modvat credit was technically claimed only subsequent to the
  MEWAR POLYTEX LTD. v. UNION OF INDIAAND                  821
     ORS. [DR. MUKUNDAKAM SHARMA, J.]
filing of AR4 declarations, although the indigenous goods were     A
used in the manufacturing process apriori does not also reflect
well on the intention of the assessee. The assessee has merely
resorted to the technicality of claiming Modvat credit
subsequent to the AR4 declarations, thereby entitling it to
drawback. Subsequently, the Modvat credit has been availed         B
on the very same indigenous goods, which shows that the claim
of the assessee to be legitimately entitled to two separate
duties is but a fa9ade.

      17. There can be no question of separate duties arising
 in this case since the issue concerns the manufacture and         C
export of one and the same goods. The imported inputs were
primarily stock replenishments that were used in the execution
of other orders, and allowing the assessee to claim Modvat
credit on the indigenous input would tantamount to giving a
benefit twice for the. same process that began with the            D
manufacture and culminated in the export of the specified
goods. The assessee cannot be held to be not entitled to
claiming Modvat credit on finished goods where duty is not
incident. Any attempt to avail it subsequently, casts serious
aspersions on the bonafide intention of the assessee. The          E
argument of the assessee that action had to be taken under
the Duties Drawback Rules, 1971 and not through reversal of
credit does not bear merit. The reversal of credit is meant to
deny the assessee of a benefit that they would have otherwise
enjoyed without justification. The drawback equivalent to CVD      F
is legitimately permissible vide the process of AR4
declarations and thus, it is the benefit that is enjoyed without
justifiable basis that has to be reversed.

      18. In light of the aforesaid facts and circumstances, we    G
find that the contentions of the assessee are without merit. We
dismiss the appeal filed by the assessee, but leave the parties
to bear their own costs.

D.G.                                       Appeal dismissed.
                                                                   H