Commissioner of Central Excise Vs. Jindal Steel and Power Ltd.

1. In this appeal, filed by Revenue, the issue involved is whether the Modvat credit of the duty paid on capital goods used in power plant is available to M/s. Jindal Steel & Power Ltd. 2. Shri D.N. Chaudhary, learned SDR, submitted that the Modvat credit of the duty paid on capital goods is not available to the Respondents as the power plant has been used exclusively in the manufacture of steam which in turn has been used to generate electricity which is not excisable; that Rules 57R(1) of the Central Excise Rules, 1944 clearly provides that no credit of duty on capital goods is permissible which are used exclusively in the manufacture of final products which are exempt from the whole of the duty of excise or are chargeable to nil rate of duty that steam/electricity cannot also be treated as intermediate products for the manufacture of coal based sponge iron and other iron and steel products. The learned SDR, further, submitted that even before the erection of the power plant in question, the Respondents were having power generation in excess to their requirement; that the entire electricity generated by them from the power plant is sold outside factory which is apparent from the data furnished in the show cause notice dated 25-10-2000 issued to them; that they augmented the installed capacity of the power plant from 28 M.W. to 81.7 M.W. during the years 1996-97 and 1997-98 and further to 94.7 M.W. in the years to follow; that in spite of the fact that the Respondents were self-sufficient in power, they have embarked upon installing an additional power plant of 55 M.W. capacity to further increase their installed capacity of the power plant; that as per power purchase agreement entered by them with M.P. Electricity Board in 1996, they are bound to sell all the surplus power to and through the Electricity Board Grid on chargeable basis; that such an activity of dealing in electric power is also one of their main objects which is evident from the object Clause No. 5 of the Memorandum of Association.

He, therefore, emphasised that it cannot be said that the power plant is a captive power plant as they are already self-sufficient in power.

The learned SDR also mentioned that mere placing the power plant within the boundary of the factory of the Respondents would not make them eligible for capital goods credit as the same is required to be used for manufacture of their final products. He also contended that in any case power plant installed by the Respondents is not excisable and as such the Modvat credit is not available in respect of capital goods used in assembly of power plant.

3. Countering the arguments, Shri D.N. Mehta, learned Advocate for the Respondents, submitted that the power plant and the generation of steam by it is an integral process for manufacture of the final excisable products; that the power plant is situated within their factory premises; that both steam and the final products manufactured by them are excisable goods and thus Rule 57R does not stand in the way of availment of credit. He also emphasised that in setting a new project, the installation capacity of the machinery is reached only in phases and cannot be achieved, all at once, with the installation of machinery; that the Respondents would in fact require more electricity than is produced cap-tively when the plant starts functioning to optimum capacity as planned; that in the mean time sale of surplus electricity, with express approval of M.P. Electricity Board, could not adversely affect their eligibility for availment of credit; that it has been held by the Tribunal in the case of Hanil Era Textiles Ltd. v.CCE, Mum-bai-Vll - 2002 (146) E.L.T. 693 (Tri. - Mumbai) = 2002 (84) ECC 322 (T) that in selling surplus electricity generated, the Appellants did not violate the condition of Notification No.13/81-Cus., dated 9-2-1981. The learned Advocate referred to Paragraphs 12 and 13 of the impugned order wherein the Adjudicating Authority has recorded his finding that the Respondents are engaged presently" in a major expansion work and in the process of such expansion installed capacity of the plant and machinery for the manufacture of sponge iron, steel and ferro alloy will be enhanced." A reference was also made to Tribunal's Final Order No. A/970/2002-NB, dated 23-8-2002 in the case of CCE, Bhopal v. Bhaskar Industries Limited.

4. In reply, the learned SDR, submitted that the admissibility of Mod-vat credit has to be determined on the basis of factors in existence at the material time and not on the basis of future use; that at the relevant time the electricity generated is sold entirely.

5. We have considered the submissions of both the sides. It is the contention of the Respondent that in a project, machine and machineries are installed in phases and the installed capacity cannot be achieved at once and that they would require more electricity once the plant starts functioning to optimum capacity. The Commissioner has appreciated this fact and has allowed the Mod-vat credit of the duty on the capital goods. Similar views were expressed by the Tribunal in the case of Bhaskar industries Limited. In that matter, the assessee had a project to set up a composite mill for spinning, weaving and processing. The first phase related to cotton yarn spinning for which the assessee imported capital goods and availed Modvat credit since the finished product cotton yarn was dutiable. In second phase of manufacturing grey fabrics, non dutiable, they used both imported and indigenous machinery. The Department disallowed the credit on the ground that grey fabrics were completely exempted from payment of duty.

The Commissioner (Appeals), however, allowed the credit since the composite mill has been set up in three phases and since on completion of the third phase processed fabric was manufactured as a final product. At the third phase, the grey fabric is only an intermediate product. The Tribunal has held as under : "In the present case, we are concerned with a composite mill and the final product at the third phase is dutiable. According to us, decision of a learned Single Member in Kailash Auto Builders Ltd. v. CCE (A), Bangalore - 2002 (140) E.L.T. 148 (Tri) - 2001 (47) RLT 950 (CEGAT-Bang.) relied on by the respondent-assessee is more akin to the facts of the present case. It was held therein that there is no time for utilising the credit and merely because there was no dutiable items, which were required to be cleared on payment of duty on the date when the capital goods credit was taken, that credit could not be denied. We, therefore, agree with the learned Commissioner (Appeals) that the assessee is entitled to avail the credit on the capital goods installed during implementation of second phase of the project when the composite mill had reached its third phase and where the processed grey fabrics are dutiable items." Following the ratio of the decision in Bhaskar Industries case, we hold that the Modvat credit cannot be denied to the Respondents herein as the power plant installed is a part of their expansion plant to enhance the production capacity of sponge iron, steel and ferro alloy for which enhanced power will be required by them. We, therefore, reject the appeal filed by Revenue.