2005 INSC 0321
                                    SUPREME COURT OF INDIA

                                        International Auto Limited

                                                      Vs.

                                Commissioner of Central Excise, Bihar

                                            C.A.No.176 of 2000

                           (C. K. Thakker, Ruma Pal and Arijit Pasayat JJ.)

                                                 17.03.2005

                                                JUDGMENT

C. K. Thakker, J.

1. In C.A. No. 176/2000:

        "The appellant is a job worker manufacturing floor plates assemblies for TELCO.
        These floor plate assemblies are used by TELCO in the manufacture of excavators.
        TELCO made available several inputs to the appellant for the purpose of manufacture
        Of the assemblies on which credit had been taken by TELCO. The appellant used
        TELCO's inputs as well as. Its own inputs in manufacturing the assemblies. It cleared
        the assemblies from its factories upon payment of excise duty on the completed floor
        plate assemblies by including the value of only the inputs put in by the appellant and
        adding thereto its service changes."

2. By show cause notice dated 22-2-1994, the appellant was called upon to show cause as to
why it should not be charged with short levy of excise duty for the period 28-2-1993 to 31-8-
1993 on the ground that the value Of the TELCO's inputs in the assemblies should have been
included in the assessable value of the assemblies.

3. The Departmental Authorities confirmed the demand and also levied penalty on the
appellant's having negatived its contention that the demand was in any case barred by
limitation.

4. The Tribunal upheld the finding of the Departmental Authorities on the basis of the
decision of this Court in Burn Standard Company Ltd. and another v. Union of India - = but
reduced the penalty to Rs. 25, 000/-.

5. Before us learned Counsel appearing on behalf of the appellant has submitted that the
entire transaction between fie TELCO and the appellant was covered by Rule 57F(2)(b) of
the Central Excise Rules, 1944. Under these Rules the assessee is the manufacturer of the

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final product, in this case, excavators. The manufacturer of the final product is permitted to
remove inputs to a place out side the factory for the purpose of manufacture of intermediate
products so that they are returned to the factory for further use in the manufacture of final
products. In such a case the credit is taken by the manufacturer of the final products on the
inputs purchased by it which are made available to the intermediate product produces.
Modvat credit is taken by the manufacturer of the final product on the inputs supplied by it to
the manufacturer of the intermediate products which credit is reversed ultimately when the
final product is removed from such manufacturers' factory. As far as the appellant, (the
intermediate purchaser) is concerned, it is not liable to pay duty on the inputs supplied by
TELCO since it had not taken the credit for the Modvat in respect of inputs. It is submitted
that it' cannot be called upon to pay the duty in respect of those inputs nor can the value of
the inputs be added to the excisable value of the assemblies.

6. We are of the view that the submission of the appellant is correct. The Tribunal appears to
have been confused between the manufacture of the final product, namely, excavators and
the manufacture of the intermediate product, namely, the floor plate assemblies. The scheme
of Modvat permits the person who clears the ultimate final product to take the benefit of the
Modvat scheme at the time of clearance of such final product. The manufacturer of the final
product, in this case TELCO, would therefore/ be entitled not only to adjust the credit on the
inputs supplied by it to the intermediate purchaser such as the appellant but also to the credit
for the duty paid by the intermediate purchaser on its products. The reliance on the decision
in Burn Standard Company Ltd. (supra) by the Tribunal was misplaced. That case has no
doubt held that the value of the free inputs were to be included in the final product. In that
case, the final product was wagons and the question was whether the items which were
supplied free by the Railway Board to the assessee could be included in the value of the
wagons. This Court came to the conclusion that it could. The first distinguishable feature is
that this Court in that case was neither concerned with the Modvat scheme, nor with the
provisions of Rule 57F(2)(b). Furthermore, the Court was not considering a situation where
the question was of the liability of an intermediate product being subjected to excise duty.
What was in consideration was the final product, namely, wagons.

7. In this appeal as we have already noted, the final product was the excavator. According to
the Modvat scheme, it is the Modvat of such final product which would have to include the
cost of the inputs and in respect of which Modvat credit could be taken at the time of
clearance of the final product. The Tribunal having misconstrued the provisions of Rule
57F(2)(b), its decision cannot stand. The decision of the Tribunal is accordingly set aside and
the appeal is allowed. In C.A. Nos. 4086-87/2001:

8. For the reasons elaborated by us in the judgment delivered in C.A. No. 176/2000 (M/s.
International Auto Ltd. v. Commissioner of Central Excise, Bihar) these appeals must be
allowed. The penalty imposed on the appellant is set aside. However, it is recorded that the
appellant is not claiming refund of any duty that had been paid by it pursuant to the demand
which is set aside by us.

9. These appeals are accordingly allowed.

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