Shalimar Paints Ltd v. Collector Of Central Excise

K. Sankararaman, Member (T)

1. The Appeal by M/s. Shalimar Paints Limited is against the Order-in-Appeal No. 165/RA/Cal 11/91, dated 23-8-1991 passed by the Collector of Central Excise (Appeals), Calcutta whereby he allowed the Appeal filed before him by the Assistant Collector of Central Excise (T & R), Calcutta II Collectorate, in terms of the authorisation granted by the Collector of Central Excise, Calcutta-n. By that Appeal, the Assistant Collector had challenged the correctness of the order passed by the Assistant Collector of Central Excise, Howrah South Division granting Modvat Credit on Alkyd Resin, Maleic Resin and Fumaric Resin manufactured and used as inputs in the manufacture of paints and varnish. The stand taken by Revenue before the Collector (Appeals) was that in terms of Notification 53/88, dated 1-3-1988, the goods Alkyd Resin, Maleic Resin and Fumaric Resin were exempt form duty and, hence the Assistant Collector was not correct in allowing Modvat credit on such goods captively used for the manufacture of the final products. This plea found favour with the Collector (Appeals). He did not accept the contention raised by the Respondents before him that the captively consumed items are intermediate goods coming into existence in the manufacture of final products as they are fully manufactured goods falling under Tariff Heading sub-Heading 3907.50 which have marketability as such. Collector (Appeals), therefore, held that the provisions of Rule 57D(2) of Central Excise Rules were not applicable, the said Rule clearly speaking of the credit allowed in respect of the inputs. In the instant case he held, no credit was allowable on the inputs, exempt from duty. The Tribunal decision in Jenson & Nicholson (I) Ltd. v Collector of Central Excise, reported in 1988 (38) E.L.T. 174 relied upon by the Respondents was held to be distinguishable as the issue involved therein related to Notification 201/79.

2. In the present Appeal, it has been submitted that the Collector (Appeals) erred in holding that since the Resins were fully manufactured goods, the same could not be treated as intermediate goods. He further erred in holding that the decision of the Tribunal relied upon by them was distinguishable. Though that was in the context of Notification 201/79, the position was quite similar to the present case.

3. The Appellants were represented by Sarvashri S. K. Bagaria and J. P. Tibrewal, learned Advocates. Shri Bagaria submitted that the Tribunal decision in the Jenson & Nicholson case would fully support their case. There also, resins were obtained as intermediate products in the manufacture of paints. The fact that the resins were exempt from duty was not held to be a factor for denying the benefit of Notification 201/79 for the goods used in the manufacture of paints via the stage of resins. Shri Bagaria pointed out that the stand taken by the Collector (Appeals) would make Rule 57D(2) nugatory. He also cited the following decisions covering similar issue -

(1) 1992 (59) E.L.T 168 - Collector of Central Excise v. Indian Aluminium Company;

(2) 1992 (58) E.L.T 300 - Collector of Central Excise v. D.C.W. Ltd.;

(3) 1992 (62) E.L.T 753 (Tribunal-NRB) - Jain Spun Pipe Co. v. Collector of Central Excise;

(4) 1978 (2) E.L.T. 39 (Allahabad) - Nagrath Paints v. Union of India;

(5) 1989 (39) E.L.T. 72 (Tribunal) - Vam Organic Chemical Ltd. v. Collector of Central Excise;

(6) 1991 (47) E.L.T. 376 - Collector of Central Excise v. Hindustan Development Corporation;

(7) 1989 (44) E.L.T. 794 (Supreme Court) - Swadeshi Polytex Ltd. v. Collector of Central Excise

Excepting the Allahabad High Courts Judgment in the case of Nagrath Paints and the Supreme Courts Judgment in Swadeshi Polytex Ltd., the other decisions are in the context of Modvat Scheme. In the Swadeshi Polytex case, the Supreme Court had held that clarification issued for proforma credit under Rule 56A was also applicable for Notification 201 /79, both being pari materia. We hold that the same will apply in Modvat context also. In the case of Modvat Credit, Rule 57D(2) specifically provides that notwithstanding the emergence of exempted intermediate products, the credit of duty paid on the inputs shall not be varied. Such intermediate product need not be a waste or residue. There is nothing in the Scheme requiring that the inputs should straightaway be converted into the declared final product. Due to chemical reaction and technological process the inputs sometimes have to be converted into intermediate products in the first instance which are then reacted further to produce the specified final product. Such intermediate products are exempt from duty. Rule 57D(2) specifically protects the availability of Modvat Credit of duty paid on the inputs which are used in the manufacture of final products though after passing through the stage of the intermediate products. Shri Bagaria pleaded that their Appeal be allowed in view of the clear provision of law which has been accepted in the several decisions cited by him.

4. Shri N.K. Mandal, learned Departmental Representative replied to the arguments advanced by the learned counsel. He referred to the submissions made during the hearing of the Stay Petition on behalf of the respondent Collector that the scope of Rule 57D(2) would extend only to intermediate products which arise in the course of manufacture of the final product. This will mean that such intermediate products should arise as a chance or accidental by-product. It should not be the result of a deliberate manufacturing activity to obtain the particular (intermediate) product. Here, resin is manufactured by a deliberate manufacturing process and the aim of that process is its production. Coming into existence of an intermediate product in the course of manufacture of final product will not bring within its scope a product obtained a deliberate manufacturing process. Shri Mandal pleaded that the case may be decided considering the said argument also, in addition to the grounds relied upon by the Collector (Appeals) in the impugned order.

5. We have considered the submissions. We have gone through the record. We find that the Appellants case is fully covered by Rule 57D(2) as correctly argued by the learned counsel. The Tribunals decisions cited before us are based on the same interpretation of the provisions.

6. The claim made by the present Appellants before the Collector (Appeals) that the resins are intermediate products in the manufacture of paints was rejected by that authority on the ground that they were fully manufactured products attracting classification under sub-heading 3907.50. The fact that alkyd maleic resins are classifiable under the Excise Tariff does not rule out their status or identity as intermediate products in relation to the manufacture of the final products, paints. The term "intermediate product" is a relative concept and is to be understood in the context of the use of such products in the manufacture of the final product. If the alkyd resins etc. are cleared from the factory where they are produced, they are final products and the Tariff classification and Tariff becomes relevant for its assessment and clearance. But where such goods are not cleared outside but are captively consumed in the manufacture of the final products, they are intermediate products. Because they are classifiable under a Tariff Heading and are otherwise final products themselves is not inconsistent with their identity as intermediate products vis-a-vis the final product, paints. Rule 57D(2) specifically provides that credit shall not be denied on the ground that any intermediate product come into existence during the course of manufacture of the final product and that such intermediate product is exempt from duty subject to the condition that the intermediate products are used within the factory of production in the manufacture of final product on which excise duty is leviable. This specific provision has been issued referring to the exemption that may be available to an intermediate product. An exemption becomes necessary only in respect of a final product otherwise dutiable and not a purely intermediate product occurring in the reaction chamber in the course of manufacture. The intermediate products, in the context of Rule 57D(2), are those products which are used in the factory where they are produced in the manufacture of other final products.

The decision of the Tribunal in Jenson & Nicholson is fully applicable to the present case the Modvat Scheme quite similar to the Credit Scheme under Rule 201/79.

A decision under that rule has got sufficient relevance for a Modvat matter. The Collector (Appeals) has not considered the facts and submissions properly and hence, come to an erroneous conclusion by which the earlier decision of the Assistant Collector was set aside. An interesting argument was advanced by the learned Departmental Representative that the intermediate products coming within the purview of Rule 57D(2) are those products which only come into existence during the manufacture of the final product and not those which are actually produced by a deliberate process of manufacture and that coming into existence of a product and production thereof are two different things and the scope of Rule 57D(2) extends only to intermediate products coming into existence not intentionally and not to goods produced deliberately. We find this argument is totally invalid. The rule does not limit its scope to only unintended or accidental arisings of by-products, waste, residue etc. during the manufacturing process. Even by-products are inevitable results of a planned manufacturing process. The words "intermediate products have come into existence during the course of manufacture of the final product" do not permit the interpretation projected by the Departmental Representative. The Appeal is allowed with consequential benefits, as already announced in the Court.