Cenvat credit on common inputs eligible only in terms of rule 6 when excisable & exempted products are manufactured

Commissioner of Central Excise Vs. Nicholas Piramal (India) Ltd. (Mumbai High Court)- The Honourable Tribunal was right in allowing the assessee for reversal of credit taken, instead of insisting upon the assessee to pay an amount equal to 8% or 10% of total price of the exempted goods as per the Rules 6(3)(b) of Cenvat Credit Rules 2002 . Cenvat credit on common inputs eligible only in terms of rule 6 when excisable & exempted products are manufactured. Credit can be availed only in terms of rule 6(3) and reversal of pro rata credit not permissible. Judgement of Chandrapur Magnet distinguished by Honourable Bombay High Court.

Facts

The respondents are engaged in the manufacture of Vitamin A falling under Chapter Heading 29.36 and animal food supplement falling under Chapter Heading 23.02 of the Schedule to the Central Excise Tariff Act, 1985. Vitamin A is liable to Central Excise Duty. Animal food supplement is not liable for payment of Central Excise Duty since Heading 23.02 attracts nil rate of duty. The Cenvat credit on common inputs utilised in manufacture of aforesaid final products was availed by the respondent during the period of dispute. At the time of clearance of exempted finished goods (i.e. Animal food supplement), the proportionate credit relating to inputs utilised in manufacture of the said exempted final products was reversed. However, Revenue issued a show cause notice demanding 8% of the value of the exempted final products in terms of Rule 57CC(1) of the Central Excise Rules, 1944/Rule 6(3)(b) of the Cenvat Credit Rules, 2004. The said notice was adjudicated and the same was confirmed by the Commissioner. In an appeal before the Tribunal, the matter was allowed on majority by the larger bench. Revenue is in appeal before the Hon’ble High Court against this order of the Tribunal.

Held

The Bombay High Court agreed with the position adopted by the revenue and held that in absence of any provision allowing proportionate reversal of credit availed in respect of common inputs in Rule 57CC of the Central Excise Rules, 1944 or Rule 6 of Cenvat Credit Rules 2004, It would be imperative on the respondent to pay an amount equal to 8% of the value of exempted final products in terms of Rule 57CC(1) of the Central Excise Rules, 1944/Rule 6(3)(b) of Cenvat Credit Rules, 2004, in the event the respondent did not opt to maintain separate accounts in respect of inputs utilised in manufacture of exempted final products. The Bombay High Court strictly interpreted Rule 57CC of the Central Excise Rules, 1944/Rule 6 of Cenvat Credit Rules, 2004 to hold that a mere reversal of proportionate credit would not comply with the requirements of aforesaid Rule.

Authority

Commissioner of Central Excise, Thane-I V. Nicholas Piramal (India) Ltd. – 2009 (244) ELT 321 (Bom HC)

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

CENTRAL EXCISE APPEAL NO. 9 of 2009

The Commissioner of Central Excise,

Thane- 1 Commissioner ate, 4th floor, Navprabhat Chambers,

Ranade Road, Dadar (West) Mumbai- 400028. .. Appellant

Vs

M/s. Nicholas Piramal (India) Ltd.

Mumbai – Agra Road, Balkum, Thane- 400608. .. Respondents

Date of Judgement: 14th August 2009

J  U  D  G  E  M  E  N  T

(Per FERDINO I. REBELLO, J)

1. This appeal was admitted on the following question :

“Whether the Honourable Tribunal was right in allowing the assessee for reversal of credit taken, instead of insisting upon the assessee to pay an amount equal to 8% or 10% of total price of the exempted goods as per the Rules 6(3)(b) of Cenvat Credit Rules 2002?

2. A few facts relevant for discussion need to be stated before we proceed to answer the issue. The respondents are engaged in the manufacture of Vitamin A falling under Chapter Heading 29.36. and animal food supplement falling under Chapter Heading 23.02 of the Schedule to the CETA 1985. Vitamin A is liable to Central Excise Duty. Animal food supplement is not liable for payment of Central Excise Duty since Heading 23.02 attracts nil rate of duty.

3. According to the Respondents, they first used the inputs in the manufacture of Crude Vitamin A which is an intermediate product. Crude Vitamin A is further used in the manufacture of (i) Vitamin – A, being a dutiable final product cleared on payment of Central Excise Duty and (ii) Animal feed supplement being an exempted final product cleared without payment of Central Excise Duty.

4. Respondents took cenvat credit for duty paid on inputs received in the factory. Prior to the removal of animal feed supplement, the respondents, in their cenvat credit, debit/ reversed the credit to the extent inputs are used in the manufacture of crude Vitamin A which is in turn is used in the manufacture of animal feed supplement. According to respondents thus, at the earliest available opportunity they have surrendered the credit going into the exempted final product. The respondent thus did not take advantage of the credit availed on inputs used in the manufacture of exempted final product.

5. Three show cause notices covering the period March 2002 to December 2003 were issued to the respondents in a sum of Rs. 4,85,79,644/. Subsequent to the show cause notice and after hearing parties, the Commissioner by his order dated 31st January 2005 confirmed the said sum as paid by the assessee and imposed equal penalty. The petitioner preferred an appeal to CESTAT. As there were conflicting views of CESTAT, the matter was referred to a Full Bench. The Full Bench of CESTAT AIT-2008-449-CESTAT-LB by an order dated 12th August 2008 by a majority of 2:1 answered the matter in favour of the assessee. The present appeal by the Revenue is to assail the order of CESTAT.

6. It is submitted on behalf of the appellant that on a perusal of Rule(6) of the Cenvat credit rules 2004 and a literal construction, would make it clear that whenever inputs are used both for manufacture of exempted products as also dutiable products, a person seeking to avail of credit on inputs in respect of dutiable products would have to comply with the requirements of Rule 6(2) of the Rules. On failure to maintain separate accounts for receipt, consumption and inventory of inputs and inputs services meant for use in the manufacture of dutiable final products etc, the assessee who opts not to maintain separate accounts will have to pay duty as set out under Rule 6(3). In the instant case, the majority judgement of CESTAT has not considered this aspect. The judgement therefore clearly discloses an error of law which is apparent and consequently, is liable to be set aside and the order in original to be restored.

On the other hand on behalf of the respondent, their learned counsel submits, that as the inputs are used firstly in the manufacture of an intermediate product, it is not possible for the assessee to maintain books as required. In these circumstances, it is submitted that once the assessee reverses the cenvat credit in so far as exempted products are concerned before the goods leave the factory, what would be attracted is Rule 6(1) of the Rules. At any rate, it is submitted that if Rule 6(2) is construed in the manner sought to be contended on behalf of Revenue, it will cause great hardship to a manufacturer and in such an event, the Court considering the object of the Rule and the apparent provision should give a meaning which can give effect to the purpose of the Act and the rule itself. In that context, it is submitted that the Tribunal was right in taking the alternative view that as the petitioner has complied with the requirements of Rule 6(1) no duty was payable in terms of Rule 6(3).

7. To understand the issue in its correct perspective, we may gainfully refer to the relevant provisions of Rule 6 Rule 6. Obligation of manufacturer of dutiable and exempted goods –

(1) The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub rule (2).

(2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. (emphasis supplied)

(3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:

(a) if the exempted goods are

(i) goods falling within heading No.22.04 of the First Schedule to the Tariff Act;

(ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity

(iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertiliser,

(iv) tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40 of the said First Schedule;

(v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;

(vi) final products falling within Chapters 50 to 63 of the said First Schedule;

The manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relatin to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I. The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise

Explanation II. If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken.

8. The position prevailing prior to 1st September 1996 may be considered to better understand the controversy. Rule 57A of the erstwhile Central Excise Rules, 1944 allowed credit of specified duties paid on inputs used in the manufacture of finished excisable goods (hereinafter referred to as final products). Rule 57C of the erstwhile Central Excise Rules, 1944 read as under: “Credit of duty not to be allowed if final products are exempt. No credit of specified duty paid on the inputs used in the manufacture of final product (other than those cleared either to a unit in a Free Trade Zone or to a hundred percent Export Oriented Unit or to a unit in Electronic Hardware Technology Park or to a unit in Software Technology Parks) shall be allowed if the final product is exempt from the whole of duty of excise leviable thereon or is chargeable to Nil rate of duty”.

Practical accounting difficulties were faced in those cases where a manufacturer produced dutiable final product say car and also exempted final product say tractor. In such case, in law, no credit is available on input used in the manufacture of tractor. It was not reasonably possible to separate the inputs like steel sheet, paints etc, to be utilized in manufacture of both the final products, say car and tractor. In that context, it was clarified by the Central Government vide Circular No.5/87 dated 7.1.1987 as under:

“A reference is invited to Board’s instructions F. No. B. 22/3/86TRU, dated the 10th April, 1986, wherein it has been clarified with regard to Point No. 5 that Modvat credit is not available if the final products are exempt or are chargeable to nil rate of duty. However, where a manufacturer produces along with dutiable final products, final products which would be exempted from duty by a notification (e.g. an endues notification) and in respect of which it is not reasonably possible to segregate the inputs, the manufacturer may be allowed to take credit of duty paid on all inputs used in the manufacture of the final products, provided that credit of duty paid on the inputs used in such exempted products is debited in the credit account before the removal of such exempted final products.”

9. We may next consider the position prevailing post 1.9.1996 on Introduction of Rule 57CC and the Budget Circular explaining the rationale behind it. Rule 57CC was introduced w.e.f. 1.9.1996 in the erstwhile Central Excise Rules, 1944. For gainful reference, we may reproduce the relevant portion of Rule 57CC. They read as under:

RULE 57CC. Adjustment of credit on inputs used in exempted final products or maintenance of separate inventory and accounts of inputs by the manufacturer–

(1) Where a manufacturer is engaged in the manufacture of any final product which is chargeable to duty as well as in any other final product which is exempt from the whole of the duty of excise leviable there on or is chargeable to nil rate of duty and the manufacturer takes credit of the specified duty on any inputs (other than inputs used as fuel) which is used or ordinarily used in or in relation to the manufacture of both the aforesaid categories of final products, whether directly or indirectly and whether contained in the said final products or not, the manufacturer shall, unless the provisions of sub rule(9) are complied with, pay an amount equal to eight per cent of the price (excluding sales tax and other taxes, if any, payable on such goods) of the second category of final products charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

(2) The amount mentioned in subrule(1) shall be paid by the manufacturer by adjustment in the credit account maintained under sub rule(7) of rule 57C or in the accounts maintained under Rule 9 or sub rule(1) of rule 173G and if such adjustment is not possible for any reason, the amount shall be paid in cash by the manufacturer availing of credit under rule 57A.

(9) In respect of inputs (other than inputs used as fuel) which are used in or in relation to the manufacture of any goods, which are exempt from the whole of the duty of excise leviable thereon or chargeable to nil rate of duty, the manufacturer shall maintain separate inventory and accounts of the receipt and use of inputs for the aforesaid purpose and shall not take credit of the specified duty paid on such inputs. (emphasis supplied)

10. The relevant portion of explanatory Notes to Budget changes 1996-97 issued by Central Government explaining the rationale for the introduction of Rule 57CC [1996 (15) RLT M71, is as under:

“At present a manufacturer manufacturing both fully exempted and dutiable final products avails the credit of the duty paid on inputs at the time of the receipt of the goods in the factory. When he clears the fully exempted final product, he is required to reverse the credit taken on inputs contained in the exempted final product. This procedure is quite cumbersome and many a time, in the absence of any input output correlation, it is difficult to determine whether the reversal of credit has been correct or not. In order to circumvent this problem, a provision has bee made by inserting a new rule 57CC so as to prescribe that an amount equal to 20% of the value of the exempted goods is reversed in the modvat credit account at the time of clearance of the exempted final product whether or not the inputs on which modvat credit has been taken is used or contained in the exempted final product. This will eliminate the problem of determination of input duty credit used or contained in the exempted final product.”

Though in the budget it was proposed at the rate 20% it was reduced to 8% when Rule 57CC came into force with effect from 1.9.1996.

11. In the Budget Speech of 1996- 97 the Finance Minister explained important changes in excise duty. Gainful reference may be made to paragraph 73.4

73.4 At present a manufacturer manufacturing both fully exempted and dutiable final products avails the credit of the duty paid on inputs at the time of the receipt of the goods in the factory. When he clears the fully exempted final product, he is required to reverse the credit taken on the inputs contained in the exempted final product. This procedure is quite cumbersome and many a time, in the absence of any input output correlation, it is difficult to determine whether the reversal of credit has been correct or not. In order to circumvent this problem, a provision has been made by inserting a new rule 57CC so as to prescribe that an amount equal to 20% of the value of the exempted goods is reversed in the modvat credit account at the time of clearance of the exempted final product whether or not the inputs on which modvat credit has been taken is used or contained in the exempted final product. This will eliminate the problem of determination of input duty credit used or contained in the exempted final product.”

12. To complete the background Rule 57 AD considering similar provisions like Rule 57CC was introduced with effect from 1.4.2000. Between 1.7.2001 till 28.2.2002 what was relevant was Rule 6 of the Cenvat Credit Rules 2002. This position continued under Rule 6 of Cenvat Credit Rules 2002 as also Rule 6 of Cenvat Credit Rules 2004. From 10th September 2004 the amount payable under Rules 6(3)(b) has been fixed at 10%.

13. On a consideration of Rule 57CC, it is clear that if inputs are used in the manufacture of goods, which are chargeable to duty as well as exempted goods such manufacturer shall pay an amount equal to eight percent of the price (excluding sales tax and other taxes, if any payable on such goods) of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory unless the manufacturer in terms of sub Rule (9) maintain separate inventory and accounts of the receipts and of use of inputs in the manufacture of exempted goods. This rule as both the explanatory note to the Finance Bill and the Budget speech was introduced on the realisation that the procedure was cumbersome and it was difficult to determine whether the reversal of credit was proper or not. The delegate making the rule as also the Finance Minister were aware of the practical difficulties faced by the Industry. Thus if the manufacturer uses inputs in respect of both, manufacture of exempted goods and dutiable goods, then if a separate inventory is maintained for receipt and use, the manufacturer in respect of dutiable goods could take credit of the specified duty paid on such inputs, otherwise pay 8% of the price in terms of Rule 57CC.

14. Respondent relies on the judgement in Chandrapur Magnet Wires Pvt.Ltd. Vs. Collector of Central Excise reported in 1996(81) E.L.T 3(SC), in support of their contention that Rule 6(1) should not be read literally but is capable of an alternative consideration, namely that if an assessee reserves the credit on inputs used in the manufacture of final products before the goods leave the factory, then Rule 6(1) is complied.

15. We may set out a few facts to consider the ratio of the judgement in Chandrapur Magnets. The company manufactured enameled winding wire from duty paid copper wire bars. They manufactured two types of enamelled copper wire. Those exceeding 6 mm diameter and those which were less than 6 mm diameter. Winding wires of copper was dutiable under sl.no.1(ii) of Notification No. 69/86CE. Winding wires were also exempt from duty vide Sl. No. 1(i) of Notification No. 69/86 providing inter alia, if no modvat credit is taken under Rule 57A or Rule 56A. Thus, the exemption was available on fulfilling the condition that credit was not availed or inputs used in manufacture of such exempted final product. Chandrapur Magnets has not considered either the interpretation of Rule 57C or Rule 57CC. The issue for consideration was whether availing of modvat credit on inputs used in the manufacture of exempted final product in terms of the rules as then in force. In that context, the Supreme Court was pleased to hold that if the credit is reversed before the goods leave the factory that would amount to not availing of the credits. The ratio of the judgement in Chandrapur Magnets (supra) therefore cannot be applied to construe Rule 6.

16. The next judgment relied upon on behalf of the respondent in support of their case is the judgment in Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd, AIT-2007-310-SC 2007(215) E.L.T. 489 (S.C.) 489 (S.C.) In paragraph no.2, the issue for consideration by the Court was “Whether in the absence of any “sale”, Rule 57CC of the Central Excise Rules 1944 would have any application or not. In that case, the respondent was manufacturing pulp which was captively consumed for the manufacture of paper in the factory. A small portion of the pulp according to the assessee was sent to the sister unit of the assessee at Asthi. Assessee’s contention was that there was no sale of pulp as alleged by the Department and the quantity of pulp manufactured by the assessee was stock transferred to sister unit as Asthi. The Supreme Court noted that Rule 57CC was placed on statute book by Notification dated 23.07.1996. The Court also noted that object of Rule 57CC(1) was to recover a presumptive sum upon removal of exempted goods from a manufacturer who also manufactured dutiable goods by using common inputs for both dutiable as well as duty exempted goods and who took modvat credit on such common inputs. The Court then in paragraph no.19 observed as under:

“In cases where the manufacturer does not comply with Rule 57CC(9), he shall debit the presumptive sum equal to eight per cent of the value of the exempted goods at the time of clearance from the factory gate. This rule would apply to stock transfers also.”

The object of Rule 57CC was explained as under.

“In the circumstances, Rule 57CC is a provision which seeks to recover presumptive amount at the rate of eight per cent of the price of exempted final product at the time of removal for sale. In the circumstances, the Tribunal erred in holding that Rule 57CC is not applicable to the present case as it involves stock transfer and not a sale. If the view of the Tribunal is to be accepted, then neither Section 4 of the 1944 Act nor the Valuation Rules, 1975 framed there under could apply. If the nature of the presumptive sum is kept in mind then there will be no conflict between our view and the view expressed by the Central Board of Excise and Customs vide Instructions based on Circular No. B42/1/96TRU;dated 2791996. We have enunciated the above principles concerning Rule 57CC on account of the total confusion both in the industry as well as in the Department.

The ratio of this judgment also will not assist in construing Rule 6 on the contra, the basis for the presumptive tax has been accepted. The construction now sought to be given to Rule 6(1) was not under consideration.

17. Learned counsel then sought to place reliance in the case of CCE Vs. Bombay Dyeing & Mfg. Co. Ltd, AIT-2007-289-SC 2007 (8) SCC 177. The assessee there in one of its mills had a spinning section where yarn was spun from raw cotton and a weaving section where grey fabrics were woven from such yarn. The assessee opted for exemption under which woven fabrics specified under Col.2 and not subject to any process are chargeable to Nil rate of duty subject to the condition that the said fabrics are made from textile yarn on which the appropriate duty of excise has been paid and no credit of duty paid on inputs or capital goods have been taken under Rule 3 or Rule 11 of Cenvat Credit Rules. The Supreme Court on the issue whether the assessee was availing of credit was pleased to hold that as the assessee was reversing the credit on input even prior to its utilisation, the condition of notification about nonavailability of credit stood fulfilled. This judgement in our opinion is of no assistance in construing Rule 6.

18. Let us now consider Rule 6. On a plain reading of Rule 6(1), it is obvious that if inputs are used in the manufacture of exempted goods, credit is not allowed except in the circumstances mentioned under sub-rule(2) which has already been reproduced. A manufacturer who avails of CENVAT credit in respect of inputs used in the manufacture of final products which are chargeable to duty as also exempted goods, the manufacturer has to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs used for the manufacture of exempted goods and takes CENVAT credit only on that quantity of inputs which are used in the manufacture of dutiable goods. A plain reading of this rule does not lead to any ambiguity, absurdity or defeat the provisions of the Act. The submission on behalf of the respondents that this would defeat the provisions of the Act and the rules, atleast we are not in a position to understand on a clear and literal interpretation of Rule 6(2). Rule 6(1) and Rule 6(2) read together mean that inputs used in the manufacture of exempted products no cenvat credit is allowed. It may however happen that the inputs are used in the manufacture of both exempted and dutiable goods, in which event if the register as required is maintained the credit can be taken for the quantity of inputs used in the manufacture of dutiable goods. If records are not maintained as required, the duty has to be paid in terms of Rule 6(3). The presumptive tax payable in terms of Rule 6(3) has been recognised and accepted by the Supreme Court in Ballarpur Industries (supra) while construing Rule 57CC. Rule 6(1) does not lead to the construction that if the manufacturer without maintaining the books, does not take credit for the duty paid on inputs for manufacture of exempted goods. Rule 6(1) is satisfied. Rule 6(1) is satisfied only when the requirements of the Rule 6(2) are satisfied, what requires register to be maintained for separate accounts for receipt, consumption and inventory of the inputs. Rule 6(3) then provides that if separate accounts are not maintained then the amount as set out thus has to be paid by a manufacturer who does not maintain accounts.

19. It was submitted on behalf of the assessee that subrule (3) of Rule 6, is attracted only when the assessee does not want to comply with subrule (1) of Rule 6 by reversing the credit. In other words, it is submitted that it is only when the assessee wants an exemption as also credit that the assessee has to comply with Rule 6(3)(b). In our opinion, such a construction militates against Rule 6(1) and Rule 6(3) (b) as also Rule 6(2). The rule has to be read together to understand the object of the Rule. Once a manufacturer, manufactures from common inputs two final products, one dutiable and the other exempted. Rule 6(2) would be attracted and on failure to maintain separate records, Rule 6(3) would apply. Rule 6(1) in such an event would result in denying to the manufacture cenvat credit, Once the inputs are used in the manufacture of exempted goods irrespective whether such inputs are used in the manufacture of dutiable goods. Such manufacturer can avail of credit only in terms of Rule 6(3).

20. The option to pay 8% or 10% under sub rule (3) it is submitted, is not available to goods covered by Rule 3(a). Rule 3 in so far as (a) is concerned in respect of exempted goods set out therein. On failure to maintain accounts the rule imposes on the manufacturer a burden to pay an amount equivalent to the credit attributed to the inputs used in relation to the manufacture of such final products at the time of clearance from the factory. This argument in our opinion has no relevance in construing Rule 6(1) and 6(2).

21. It was then sought to be contended by pointing out to illustrative cases which are also noted in the majority view of the Tribunal, of the hardship that would be occasioned if the interpretation sought to be advanced on behalf of the petitioner is not accepted. We may only mention that hardship cannot result in giving a goby to the language of the rule and making the rule superfluous. In such a case it is for the assessee to represent to the rule making authority pointing out the defects if any. Courts cannot in the guise of interpretation take upon themselves the task of taking over legislative function of the rule making authorities. In our constitutional scheme that is reserved to the legislature or the delegate. It is not open to countenance such an argument as the Finance Minister while providing for a presumptive tax under Rule 57CC had realised this difficulty. This presumptive tax has been continued in Rule 6. Hardship or breaking down of the rule even if it happens in some cases by itself does not make the rule bad unless the rule itself cannot be made operative. At the highest it would be a matter requiring reconsideration by the delegate. In support of their contention, learned counsel has sought to rely on the judgment of K.P. Varghese Vs. ITO – 1981 (4) SCC 173 to contend that the interpretation, which is manifestly absurd and if unjust results follow that interpretation that has to be avoided. The Court there observed that a task of interpretation of a statute or enactment is not a mechanical task. It is more than a mere reading of a mathematical formulae because few words possess the precision of mathematical symbols. We may refer to the relevant provision relied upon by learned counsel.

“……..We must therefore eschew literalness in the interpretation of Section 52 subsection (2) and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even “do some violence” to it, so as to achieve the obvious intention of the legislature and produce a rational construction (vide Luke v. Inland Revenue Commissioner). The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this recognised rule of interpretation, a fair and reasonable construction of Section 52 subsection (2) would be to read into it a condition that it would apply only where the consideration for the transfer is understated or in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee.”

Reliance next was placed on the judgement in CIT Vs. J.H. Gotla reported in (1983) 4 SCC 343. The Court there observed that “Where the plain interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction.”

On a reading of Rule 6(1) and Rule 6(2) it is not possible to say that the construction now given would result in manifestly unjust results or render the rule absurd. It is never possible for the Legislature to conceive every possible difficulty. As noted a provision or a rule can occasion hardship to a few, that cannot result in the rule being considered as absurd or manifestly unjust. The difficulty in maintaining separate accounts had been realized by providing for a presumptive tax.

22. Reference was also made to the judgements in CIT Vs. National Taj Traders 1980 (1) SCC 370; Bhudan Singh vs. Nabi Buz – 1969 (2) SCC 481 and Tirath Singh Vs. Bachittar Singh – 1955 (2) SCR 457 to contend that unreasonable results cannot be intended by the legislature. In our opinion, as earlier set out, a reading of the rule does not result in any absurdity at the highest in a few cases where an intermediate product may be manufactured before the final products are manufactured, it may give rise to some difficulties. That by itself cannot result in departing from the normal rule of construction. In such an eventuality, the question has to be addressed to the Legislature or the delegate. If however an assessee can reverse the credit on the final product, before the goods are taken out of the factory, we fail to understand why on the same basis it is not possible to maintain records of the very same inputs which are used in the manufacture of final products at an intermediate stage.

23. Section 5A it is submitted enables the Government to exempt products in public interest and such public interest cannot be lost off, sight while interpreting Rule 6 to be used as a tool of oppression to extract an amount which is much beyond the remedial measure. Rule 6, it is submitted cannot be interpreted in the manner which frustrates the exemption and in effect taxes the exempted product in an indirect manner. Rule 6 at any rate cannot run counter to section 5A.

Section 5A is an enabling provision, empowering the Government to exempt products from duty in the public interest. Where a product has been exempted in public interest, any interpretation of subordinate legislation should not result in that produce being taxed indirectly since it is well settled that what cannot be done directly cannot be done indirectly as well. Reference can be made to the following maxim:

The maxim ‘quando aliquid prohibetur fieri, prohibitur ex directo et per obliquum’ which means “whenever a thing is prohibited, it is prohibited whether done directly or indirectly”. Vide CCE Vs. Acer India Ltd 2004(8) SCC 173,

In our opinion, the rule must ordinarily be read in its literal sense unless it gives rise to an ambiguity or absurd results. Merely because an assessee contends and it may be factually true that in some instances the rule cannot be followed in the matter of maintaining accounts that cannot be said to be a tool of oppression to extract that amount which is beyond the remedial measure. The very same rule provides for a presumptive tax under Rule 6(3). We at least find no difficulty in reading Rule 6 in conformity with Section 5A. Rule 6, first puts a blanket ban on availing of credit in respect of inputs used in the manufacture of exempted goods. At the same time, realising that the inputs may be used in the manufacture of dutiable goods and exempted goods it has provided a procedure for availing of the credit in respect of dutiable goods. This cannot be said to be unreasonable or a tool of oppression.

24. Rule 6 it is submitted is a part of delegated legislation enacted under section 37(2)(xvia). This section enables the Central Government to make rules providing for credit of duty paid on the goods used in or in relation to the manufacture of excisable goods. Rule 6 cannot be employed as a charging section thus going much beyond the mandate of giving credit.

A power to give benefit, encompasses within itself, the power to put conditions and restrictions under which credit is available. Power to give benefit also carries with it power to take it back or withdraw it. The rules however and which are not in challenge before us, permit availing of credit in terms set out therein. The rule if properly read starts with the words “Cenvat Credit shall not be allowed”. Therefore, Rule 6 makes it clear that in so far as inputs used in the manufacture of exempted goods, no cenvat credit is allowed. The rule making authority however noting that inputs may be used both for manufacturing final products which may be dutiable and other final products which are exempt, has provided that such manufacturer will be given credit in so far as inputs used for manufacturing of dutiable goods, if accounts are maintained in terms of the rules. Therefore merely because the assessee contends that he is willing to forego credit on inputs used in the manufacture of exempted final product does not warrant a departure from the requirements of Rule 6(2) and 6(3). The rules contemplate that on failure to maintain accounts in terms of Rule 6(2) the consequences would be in terms of Rule 6(3)(a) or (b). Nor is is possible to read down the rule as “amount not exceeding” as is sought to be contended on behalf of the assessee.

25. The next submission advanced on behalf of the assessee is that revenue is mistaken in assuming that rule 6(3)(b) is the only method of complying with the bar imposed by section sub-rule(1). It is submitted that Rule 6(3)(b) is only a convenient mode and not the only method of proving that sub-rule(1) has been complied with. Any other method complying with the mandate of sub-rule(1) of Rule 6 is not precluded by Rule 6(3)(b). Rule 6(3)(b) is thus directory and not mandatory. In support of this submission, learned counsel has relied on several authorities which we shall presently examine.

In Thermax Private Ltd. Vs. CC – 1992 (61) ELT 352 (SC), the question was whether the imported goods – for the purposes of Countervailing Duty levied under Customs Tariff Act, 1975 which is equal to excise duty leviable on excisable goods – could avail the benefit of Notification granting exemption from Central Excise duty on a condition that the goods under assessment should follow Chapter X procedure prescribed under Central Excise Act and rules made there under. The Supreme Court held that the imported goods cannot be denied the exemption where the importer is able to establish the use of the imported gods for the prescribed purpose by any other mean or evidence.

In Lakshmiratan Engineering Works Vs. Assistant Commissioner (Judicial) – 1968 (21) STC 154 (SC) = AIR 1968 SC 488, the proviso to Section 9 of the UP Sales Tax Act provided that no appeal against an assessment shall be entertained unless it is accompanied by satisfactory proof of payment of the amount of tax admitted by the appellant to be due. Rule 66(2) of the UP Sales Tax Rules provided that the memorandum of appeal shall be accompanied by the challan showing deposit in the treasury of the admitted tax. Before the Supreme Court it was contended that rule 66(2) provided the only mode of proving that the admitted tax has been deposited. The Supreme Court held that the words of the proviso to Section 9 were general; all that the proviso required was satisfactory proof, and it was not open to a rule to make the section narrower by prescribing a particular mode. The Supreme Court observed as follows:

“The rule lays down one uncontestable mode of proof which the court will always accept but it does not exclude the operation of the proviso when equally satisfactory proof is made available to the officer hearing the appeal and it is proved to his satisfaction that the payment of the tax has been duly made and in time. In this sense, the rule can be regarded as directory since it lays down one of those modes which will be unquestioned for its validity. The other modes of proof are not necessarily shut out. It is to be remembered that all rules of procedure are intended to advance justice and not to defeat it.”

The question before the Full Bench of Allahabad High Court in J.K. Manufacturers Ltd. Vs. STO – 1970 (26) STC 310 (AllFB) was whether the Sales Tax Officer was right in refusing the exemption to sales of yarn on the ground that the petitioner assessee had not submitted in certificates in Form IIIA showing that the these goods were sold to a dealer for resale in the same condition either with the returns or within extended time even though the assessee had filed the same before completion of assessment. Section 3AA of the UP Sales Tax Act stated that “Unless the dealer proves otherwise, every sale by a dealer shall, for the purposes of subsection (1), be presumed to be a consumer.” The Explanation to Section 3AA added : “A sale of any of the goods specified in subsection (1) to a registered dealer who does not purchase them for resale in the same condition in which he has purchased them, or to an unregistered dealer, shall, for the purposes of this section, be deemed to be a sake to the consumer.” Rule 12A read as follows:

“12A. Exemption of sales under section 3AA. A sale of any of the goods specified in section 3AA shall be deemed to be a sale to the consumer, unless it is to a dealer who furnishes a certificate in Form IIIA to the effect that the goods purchased are for resale in the same condition. Details of all such certificates shall be furnished by the selling dealer with his return in Form IV.”

Justice R.S. Pathak held that Rule 12A must be construed to mean to provide merely a convenient mode of proving that the purchase of the goods was for resale in the same condition. It was, however, observed that this rule did not lay down that the only mode of proving this was by furnishing certificates in Form IIIA. Referring to subsection (2) of Section 3AA, Pathak, J. observed that at first blush, the rule gave the impression that unless the selling dealer is armed with a certificate in Form IIIA from the purchasing dealer the sale made by him must be considered to be a sale to the consumer. The learned Judge observed that he was unable to read the rule to mean that. This rule meant a convenient mode to the selling dealer for proving that the goods had not been sold to the consumer. It provided for no more than that. The certificate in Form IIIA was one mode in which the dealer might establish that he had not sold the goods to the consumer. But that was not the only mode. If it was accepted that it was the only mode, then it would limit the selling dealer to that mode alone and would preclude him from adopting any other mode of proof.

The above view of the Allahabad High Court was affirmed by the Supreme Court in Chunni Lal Parshadi Lal Vs. CST – 1986 (2) SCC 501 = 1986 (62) STC 112 (SC). The Supreme Court held that the furnishing of the certificate in the manner indicated raises a presumption, but as indicated before that was not the only method, a registered dealer might prove otherwise also. The Supreme Court further held that, if such certificate was furnished, it raised an irrebutable presumption provided that the certificate was genuine.

26. In none of these judgements was there a rule like Rule 6 under consideration. The legislature in so far as machinery for levying of tax had left it to the delegate to make the rule. The delegate has made the rule. An assessee seeking to take advantage of Rule 6, is fully aware of the requirements of the rules including Rule 6(1). If the rule as framed was arbitrary or in the case of subordinate legislation manifestly arbitrary then it was for the assessee to challenge the said rule. The assessee has chosen not to do so, but seeks to adopt a contention that the rule can be differently read to achieve the said object. Rule 6(1) to which reference may be made again is clear, that Cenvat credit cannot be availed of on inputs used in the manufacturing of exempted goods. It then adds the words “except in the circumstances mentioned in sub-rule(2). A Court cannot read into the said rule something different or render otiose the words which we have earlier set out. The rule mandates specifically that an assessee seeking to avail Cenvat credit in respect of inputs used in the manufacture of exempted goods, the only method to which he can avail of is by following sub rule (2). Rule 2 provides for maintaining accounts.

27. In the light of the above discussion, in our opinion, it is not possible to accept the contention as advanced on behalf of the assessee that the said rule can be read differently. The assessee’s submission has been that he gives up the credit which he had taken before the goods leave the factory premises. That amounts to compliance with Rule 6(1). The language of Rule 6(1) is not to grant credit to an assessee except in circumstances mentioned in subrule (2). We have therefore no hesitation in rejecting the said contention. It will not be possible in that context to read the rule as directory as sought to be contended on behalf of the assessee. The rule would have to be followed. In other words, it is mandatory, if an assessee seeks to avail of Cenvat Credit as set out in the rule.

28. The Assessing Officer under a taxing statute it is submitted are familiar with estimation/quantification of amount of expenditure/ income etc. as part of the assessment functions. Hence, only justification given in the budget circular for enactment of Rule 57C is not correct. Therefore the method prescribed in Rule 6(3)(b) is only directory and not mandatory. If this argument is accepted then the question revenue can posse to the assessee is that, if is it impossible for the assessee to maintain the books of the quantities of inputs used in the manufacture of dutiable final products. How is it not possible at this stage of manufacture of intermediate product. Learned counsel had drawn our attention to the following observations in Dr. Balbir Singh Vs. Municipal Corporation of Delhi 1985 (1) SCC 167 when the court held as under:

“…….The assessing authorities would obviously have to estimate for themselves, on the basis of such material as may be gathered by them, the reasonable cost of construction and the market price of the land and arrive at their own determination of the standard rent. This is an exercise with which the assessing authorities are quite familiar and it is not something unusual for them or beyond their competence and capability. It may be noted that even while fixing standard rent under subsection (4) of Section 9, the assessing authorities have to rely on such material as may be available with them and determine the standard rent on the basis of such material by a process estimation”

In our opinion, the taxing machinery has to follow the method provided more so by the Assessing Officer. He cannot disregard a rule. It is not open to an assessee to contend that because they have chosen not to maintain the records as required, revenue authorities even against the grain of the language of the rule, must estimate the inputs used in the manufacture of final dutiable products and accordingly, pass necessary orders. It is also not possible to accept the contention that because they are familiar with the procedure of ascertaining the amount of credit, that by itself makes rule 6(3)(b) directory. The reference placed on the judgement of the Supreme Court in Krishnamurthy Vs. CIT 1989 (176) ITR 417 (SC), in our opinion is misplaced. In that case, the Supreme Court held considering the provisions of Section 45 of the Income Tax Act that the asset is difficult to value, but is nonetheless of a money value, the best valuation possible must be made. There can be no quarrel with that proposition, considering that under the Income Tax Act normally, there are two methods of valuation which are land and building, and rent capitalisation method.

29. It is also submitted that apportionment on some reasonable basis is not new to tax but a familiar thing. Reference was made to the judgment of the Supreme Court in Commissioner of Income Tax Vs. Best and Co. AIR 1966 SC 1325 to contend that difficulty in apportionment cannot be a ground for taxing the whole receipt or exemption of the whole receipt. The judgement must be read in the context in which it was made. Those were observations made in the context of assessment of income under the Income Tax Act. It was then submitted that a coordinate Bench of this Court in CCE Vs. Concept Pharmaceuticals 2008 (225) ELT) 181(Bom), has accepted a similar contention that the credit of duty paid on common input is taken initially and thereafter reversed, to the extent used in the manufacture of exempted final product, demanding an amount equal to 8%/10% under Rule 57CC is not maintainable. We must firstly note that the learned Division Bench was considering the order of the Tribunal. From the facts it would be clear that the assessee company was reversing credits upon which the Modvat credit was claimed before the inputs were put into process for production of exempted goods. Rule 6(1), 6(2) and 6(3) have not been considered, though in the head note of the citation some reference is made thereto. In our opinion, therefore, that judgement is not an authority on interpretation of Rule 6. On facts also, the assessee there was reversing the credit on inputs used in the manufacture of final product. That is not the case here. In our opinion, therefore, not much assistance can be placed on that judgement.

30. Prorata credit it is submitted has been statutorily provided in Cenvat Credit Rules 2004 with effect from 1.4.2008 and the principles and basis enshrined in those rules can be applied for the past period. The submission is that it is only a rule of evidence and such rules of procedural law, they can be applied for the period prior to 1st April 2000 also. Learned counsel seeks to rely on the judgement of the Supreme Court in Commissioner of Wealth Tax Vs. Sharvan Kumar Swarup 1994 (210) ITR 886 (SC) and in Commissioner of Wealth Tax Vs. Lakshmipat Singhania – 1978 (111) ITR 272 (Alld). In our opinion, it is not possible to accept such a submission. Once there be rules in force, it is those rules which are to be applied. Rules subsequently made may be as a result of experience cannot be made retrospective unless so provided. In the instant case, the rule is prospective from the date the rules come into force and cannot be applied retrospectively. That submission therefore has to be rejected.

31. Lastly, it is submitted that the availing credit is not irrecoverable act and the assessee had the option to surrender the credit availed. An assessee it is submitted can surrender the benefits availed under a particular provision and avail benefit conferred by some other provision. Reliance is placed in the judgement in Share Medical Care Vs. UOI AIT-2007-82-SC 2007(4) SCC 573. In our opinion, the argument is misplaced. Once the law itself has laid down, the circumstances under which credit can be availed, it is that method by which the credit can alone be availed. It is not open to an assessee to contend that some other method is also available and the assessee has the choice of claiming credit or reversing the same. Such an argument in our opinion is devoid of merits considering the clear language of Rule 6(1) and is consequently rejected.

32. For all the aforesaid reasons, in our opinion, it is not possible to find fault with the order of the Tribunal and consequently, appeal is dismissed.

NF