THE COMMISSIONER OF CENTRAL EXCISE, PUNE III Vs. M/S. PRAKASH FOODS LTD., COMET HOUSE, 691/A10, PUNE SATARA ROAD, PUNE 411 037 AND OTHERS

JUDGEMENT

(1.) By this appeal, the appellant Revenue has taken an exception to the judgment and order dated 10th November 2005 passed by the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench at Mumbai (for short "CESTAT") in the appeal preferred by the respondents-assessees. The respondents are engaged in the manufacture of vegetable oil, soap stock, acid oil, industrial mono-carboxylic fatty acid, distilled fatty acid etc. falling under Chapters 15 and 38 of the Central Excise Tariff Act, 1985. The respondents were clearing the said goods on payment of duty after availing Modvat credit of duty paid on the inputs used in the manufacture of the products. According to the case of the appellant, during the period from March 1997 to August 2001, the respondents availed Modvat credit to the tune of Rs. 1,54,71,283/- and utilized the same for payment of duty which was to the extent of Rs. 1,62,80,444/-. Balance amount of Rs. 11,25,600/-was paid by them through PLA.

(2.) A show-cause-notice dated 9th April 2002 was issued to the respondents calling upon them to show cause as to why the credit taken on the inputs and capital goods should not be denied on the ground that the same have been used in the manufacture of final products which were wholly exempted from duty in terms of Notification No.115/75. It was the case of the appellant Revenue that the fixed vegetable oils account for approximately 99% of the total production and all other byproducts account for remaining 1%. It was alleged that even though the byproducts which account for 1% are exempted, the respondents have not availed the exemption and opted to pay duty on those products. The respondents availed Modvat credit on inputs and capital goods used for the manufacture of final products and utilized the same for payment of duty on the byproducts. The show-cause-notice was replied by the respondents. Apart from merits, an issue of limitation was also raised by the respondents. The Commissioner of Central Excise, Pune-III by order dated 7th August 2003 disallowed the Modvat credit amounting to Rs. 1,54,71,283/- and directed the respondents to pay the said amount. He imposed penalty of the same amount. He imposed penalties of Rs. 30,00,000/- on the second respondent and Rs. 15,00,000/- on the third respondent. Being aggrieved by the said order, three separate appeals were preferred by the respondents herein which have been decided by the common impugned judgment and order. In the impugned order, the CESTAT relied upon the decision of the Apex Court in the case of Commissioner of Central Excise(A) v. Narayan Polyplast, 2005 (179) ELT 20 (SC) ; Commissioner of Central Excise v. Narmada Chematur Pharmaceuticals Ltd., 2005 (179) ELT 276 (SC) ; and Punjab Tractors Ltd. v. Commissioner of Central Excise, 2005 (181) ELT 380 (SC) . The Tribunal observed that the Apex Court has held that if the assessee has chosen to pay duty in respect of exempted goods, he cannot be denied the benefit of the Modvat credit inasmuch as the entire exercise was revenue neutral.

(3.) This appeal was admitted on 13th September 2007 framing two substantial questions of law which read thus: