The facts of the case in Collector of Central Excise Pune vs DaiIchi Karkaria Ltd 1999 AIR SCW 3205, are as follows: The manufacturer purchases raw material. He uses the raw material in the manufacture of an intermediate product in the manufacture of a final product. The raw material and the intermediate product are liable to excise duty and they are specified goods for the purposes of the Modvat scheme. In determining the assessable value of the intermediate product, the cost of the raw material has to be taken into account. The contention of the revenue authorities was that the price of raw material including excise duty paid though, the manufacturer is entitled to credit for duty paid under the Modvat scheme, to be utilised against thepayment of excise duty on products manufactured by him, should be considered as cost "for levy of excise duty.

The Supreme Court examined in detail Section 4 of the Central Excise and Salt Act 1944 and relevant provisions of Central Excise (valuation) Rules 1975. The Supreme Court noted that "value" by reason of Rule 2(c) of the Valuation Rules means "the value under Section 4 of the Act'. The value of excisable goods has to be determined on the cost of their manufacture including profits. The rules also state that the value of excisable goods does not include the amount of the duty of excise payable on goods.

The Supreme Court noted the finding of tribunal in Collector of Central Excise vs Incab Industries (1990) 45 ELT 342 that "Modvat credit results in the reduction of cost of the excisable product to the extent of the credit. In contention of the revenue was that the raw material suffered excise duty legally and factually. If there had been no Modvat scheme excise duty on the raw material would beincluded in the cost of production of the excisable product. The Modvat scheme resulted in reducing the excise duty on the excisable product. It was a separate and special facility that had the effect of reducing excise duty incidence on the excisable product and had no bearing in determining the cost of its production. Actually, credit was taken, that is availed of or utilised at the time of the removal of the excisable product. Consequently the cost of production of the excisable product was not reduced by the amount of Modvat credit on the raw material.

The Modvat credit was in the nature of a setoff or an adjustment.The Supreme Court examined in detail the Central Excise Rules, in Chapter VAA which deal with the credit of duty paid on excisable goods used as inputs" and in particular Rule 57A, 57C to 57G the Supreme Court stated that from above rules it is clear that manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable productimmediately it makes the requisite declaration and obtains on acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product.

The benefit of the credit validity taken by manufacturer is available without any limitation in time or otherwise. The credit is indefensible. There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The Supreme Court quoted with approval the observation in Eicher Motors Ltd vs Union of India (1999) 106 ELT 3 that "Credit under the Modvat scheme was "as good as tax paid."

The Supreme Court noted that the word "cost is not defined in the Central Excise and Salt Act, 1944. The Supreme Court relied on observation of the court in Challapalli Sugars Ltd vs Commissioner of Income Tax AP (1975) 98 ITR 167. "As the expression "actual cost"had not been defined, this court was of the view that it should be construed "in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with normal rules of accountancy prevailing in commerce and industry." The rule of accountancy had to be adopted for determining the "actual cost" of the asset in the absence of any statutory definition or other indication to the contrary. The Supreme Court opined that the meaning to the word "cost" be given such as accords with the meaning that a man of business put upon it and for so doing established accountancy practice would be relevant.

The Supreme Court relied on `guidance note on accounting treatment for Modvat of March 16, 1995 issued by the Institute of Chartered Accountants of India. The note states "Modvat is a procedure whereby the manufacturer can utilise credit fora specified duty on inputs against duty payable on final product. Duty credit taken oninputs is of the nature of setoff available against the payment of excise duty on final product."

The apex court noted that guidance note has given two alternative methods of treatment of Modvat credit in accounts. Both the methods require that inputs consumed and inventory of inputs should take in to account the Modvat credit which company is entitled to and appropriate adjustment be made to the extent of the Modvat credit actually utilised in respect of cost of inputs and balance credit available in determining valuation of cost of inputs not consumed and lying in stock.

The Supreme Court stated that "it is appropriate that the cost of excisable product for the purposes of assessment of excise duty under Section 4(1)(b) of the Act read with Rule 6 of the valuation Rules should be reckoned as it would be reckoned by a man of commerce. Such realism must inform the meaning that the courts give to words of a commercial nature like cost, which are not defined in the statutes which use them.

The SupremeCourt stated that the view about the cost of the raw material taken by it, is borne out by the guidance note of the Institute of Chartered Accountants and there can be no doubt that the institute is an authoritative body in the matter of laying down accountancy standard.

The Supreme Court held "in determining the cost of an excisable product covered by Modvat scheme under Section 4(1)(b) of the Act read with Rule 6 of the valuation rules, the excise duty paid on raw material also covered by Modvat scheme is not to be included.

Accordingly the appeal of the Collector of Central Excise, Pune, against the order of the Central Excise and Gold Control Appellate tribunal was dismissed.

The author is a Mumbai-based chartered accountant