Judgment:
1. The above appeal has been filed against the order of the Collector of Central Excise, Chandigarh, disallowing Modvat credit of a sum of Rs. 85,53,993/- taken by the appellants on certain testing equipments during the month of April, 1994 in accordance with the provisions of Rule 57U of the Central Excise Rules, 1944.
2. The brief facts of the case are that the appellants herein are engaged in the manufacture of digital microwave radios to be supplied to the Department of Telecommunications, for the purpose of establishing telephone communcation links. The appellants imported certain machines/equipment and claimed the benefit of Modvat in terms of Rule 57Q. The details of the equipment on which Modvat was claimed are as under :--------------------------------------------------------------------------------B.E.No. Date Commodity Chapter Amount of Pt.II Entry No.& Heading RG 23 C Date--------------------------------------------------------------------------------18194-3-1994 Test system for 9801.00 30,65,796.50 01 dated 12-4-1994 testing base band34868-3-1994 Test system for 9801.00 14,88,566.13 03 dated 12-4-1994 testing Modem34858-3-1994 Set of accessories 9801.00 96,555.63 04 dated 12-4-1994 for testing system18214-3-1994 Test system for 9801.00 15,28,797.63 05 dated 12-4-1994 testing Modem Since it appeared that the above equipment did not conform to the definition of capital goods as given in the explanation to Rule 57Q(1), a show cause notice was issued on 10-10-1994 proposing recovery of the amount mentioned above, being the amount of Modvat credit wrongly taken. The adjudicating authority held that the process chart and the statement of functions of the testing equipment squarely shows that broadly the functions of the testing equipment are for adjusting, measuring various parameters, alignments of systems and their controls, apart from doing programming of the integrated system. Before carrying out the above functions with the testing equipment for final rack assembly the input has to be processed at many stages like printed circuit board assembly involving processes of electronic components/kiting solder paste printing.... After these processes have been completed, the systems are subjected to adjustment/alignment/measuring various parameters and programming of the integrated circuits with the help of the testing equipments and since such type of processes being carried out by the testing equipments do not qualify to be considered as a process as defined in Rule 57Q and also since testing equipment cannot be considered as goods having been used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final products as contemplated under Rule 57Q, it was held by the Collector that the testing equipments are not capital goods, as defined under Rule 57Q and hence, Modvat is not admissible. Hence this appeal.
3. Shri L.P. Asthana, learned Counsel for the appellants submits that in the case of such sophisticated and sensitive equipment such as digital microwave radios which are manufactured by the appellants, testing is absolutely necessary and this is a requirement of the Department of Telecommunication to whom the entire supplies are made as well as the requirement of foreign collaborators. He submits that the imported equipment is used to programme microprocessors, tunable coils, resistors and capacitors in the Printed Circuit Boards and the programming as well as the alignment of these devices is carried out with respect to certain electrical parameters such as output level, frequency, etc. The equipment, therefore, principally performs the function of programming and alignment without which the PCBs cannot operate and, therefore, the functions of alignment and programming form part of the manufacturing process and hence the goods in question are capital goods used for manufacture of the final products covered by Clause (a) of the explanation to Rule 57Q. It is pertinent to note that the RG 1 stage for digital microwave radios has been fixed as stage subsequent to the testing. He cites the Tribunal's order reported in 1996 (88) ELT 753 in the case of Geep Industrial Syndicate Ltd. v.Commissioner of Central Excise, Allahabad wherein it has been held that electrically heated muffle furnace used for testing quality of the raw materials at different temperatures ampere meter, volt meter used for measuring and testing finished goods and vaccum pump used for testing carbon rods are appliances used in the process of manufacture of dry cell battery (finished goods of the appellants therein), and therefore, they would be eligible for the benefit of Modvat credit under Rule 57Q.3.1. He next contends that the demand is barred by limitation as the show cause notice under Rule 57U(1) has been issued on 7-10-1994 which is beyond the period of six months from the date of taking credit which is 1-4-1994. He, therefore, prays that the impugned order may be set aside and the appeal may be allowed both on merits as well as on limitation.
4. Shri P.K. Jain, learned SDR strongly opposing the learned Counsel's submissions, argues that the role of the equipment is only testing which is only incidental or ancillary to the completion of manufacture.
He refers to the technical literature which confirms that the equipments perform the work of testing only e.g. power meter and network analyser. Since the equipment only performs the function of testing, it cannot be said that the equipment is used for producing or processing any goods or for bringing about any change in any substance for the manufacture of final products and is hence not covered by the definition of capital goods as given in Clause (a) of the explanation to Rule 57Q(1). Clause (b) of the explanation is also not applicable because this clause applies only to components, spare parts and accessories of the machines, machinery, plant, equipment, apparatus, tools or appliances of the machines covered by Clause (a) used for the purpose of goods covered by Clause (a) and hence even the accessories covered by Bill of Entry 3485, dated 8-3-1994 (Sl. No. 4 of the chart set out in para 1 of this order, would not fall within Clause (b) of explanation to Rule 57Q(1). The RG 1 stage is independent of the stage of completion of manufacture and is not determinative of such stage.
Regarding time bar, he submits that it is not the taking of credit which is the starting point for computing the period of limitation provided in Rule 57U(1) but the date of filing of RT 12 returns which is the earliest point of time when the Department comes to know that credit has been taken by the assessees and since the entries in RG 23C Part II registers were made only on 12-4-1994 (as seen from the last column of the chart in para 1 of this order), .the demand is within the statutory period of six months and is not barred by limitation.
5. We have carefully considered the -submissions of both sides. Rule 57U(1) as it stood during the relevant period provided that "where credit of specified duty on capital goods under Rule 57Q has been taken on account of an error, omission, or misconstruction on the part of an officer or a manufacturer or an assessee, the proper officer may within six months from the date of such credit, serve notice on the manufacturer or assessee who has taken such credit requiring him to show cause why he should, not be disallowed such credit and where the credit had already been utilised, why the amount equivalent to that credit should not be recovered from him. Therefore, the learned Counsel is correct in contending that the period of six months begins to run from the date of taking credit. The argument that it is the date of filing RT 12 returns which is to be taken as the relevant date for computing six months period of limitation, has been considered and negatived in the case of Arunachal Plywood reported in 1992 (62) ELT 830 which has been subsequently followed. Even though this decision was rendered in the context of Rule 57-1, the ratio thereof would apply squarely to the present case in the context of Rule 57U. We, therefore, agree with the appellants that the entire demand is time barred as the notice has been issued beyond a period of six months from the date on which the appellants took credit on the five Bills of Entry under which the equipment was imported.
6. Since the appeal is being allowed on the ground of limitation, we are not recording any findings on the merits of the matter. In the result, the impugned order is set aside and the appeal allowed on the ground of time bar.