Commr. of C. Ex. Vs. Trichy Distilleries and Chem. - Court Judgment

Excerpt:
1. the issue in the appeal relates to the grant of modvat credit under rule 57q in respect of diesel engine which was used with an alternator for generation of electric current for captive consumption. the learned lower appellate authority in this context has held as under :- "it is seen that the issue is on the scope of capital goods under the explanation to rule 57q, as stood prior to 16-3-1995 and eligibility of d.o. engine to the credit. i have been consistently taking a view that after amendments to proviso in rule 57s, the concept of capital goods has been enlarged so as to include vast varieties of capital goods used even in relation to manufacture of final products. in this case i find that the d.o. engine is used in conjunction with the generator, which in turn is used in running the plants, which is not in dispute. without these goods supply of electricity to make the plants functional is not possible. in other words manufacturing process of final product cannot be carried out. therefore, i hold that the d.o. engine is used in relation to manufacture of final product and entitled to credit in terms of rule 57q of central excise rules, 1944." 2. the learned appellant collector in the grounds of appeal has urged as under : "it is evident from the definition of capital goods under rule 57q, in respect of capital goods used in relation to the manufacture of final products that only moulds and dies, generating sets and weigh-bridges used in the factory of the manufacturer were specifically covered prior to 16-3-1995. it is only after the issuance of notification no. 11/95-c.e. (n.t.), dated 16-3-1995, that the scope of capital goods used in relation to the manufacture of final products was widened. the issue of this notification confirms the fact that not all the capital goods used in relation to the manufacture of final products were covered by rule 57q, but only those specifically covered under the definition were covered. 3. as rule 57s is only a procedural rule, dealing with utilisation of credits earned, the amendment made to it should not be allowed to override the provisions of rule 57q, which restrict the credit only to those capital goods which conform to the meaning given in the explanation to rule 57q(1) and deny the credit in respect of those capital goods which were received in the factory before 16-3-1995. in the instant case, the said goods was received by the assessee well before 16-3-1995 and the credit was taken on 26-1-1995, thereby contravening the provisions of sub-rule (2) to rule 57q." 3. the learned sdr for the department has pleaded that the tribunal had the occasion to examine the issue of modvat credit in the context of the use of fuel oil in the generation of electricity in the power plant installed in the factory and in that case has held that the power plant could not be considered to be integral part of the manufacturing process of the finished product. likewise, while considering the benefit of the fork lifts in another case in the order referred to by him in the case of m/s. ferro alloys corporation v. cce vide order no.322/97, dated 5-2-1997, of this tribunal, the tribunal in the case of capital goods viz. fork lifts has held that the benefit could only be allowed if it could be shown that the notified goods could not be manufactured without the use of the said capital goods taking into consideration the process of manufacture of the notified finished product in the appellants factory. the plea is that integrality of the process of manufacture would have to be considered before the modvat credit could be allowed. he has, therefore, pleaded that the learned lower authority has not adverted himself as to what is the accepted process of manufacture of the notified finished product and how the use of the equipment in question could be taken to be as a part of the said process of manufacture. he has, therefore pleaded that the learned lower authority's order has to be reconsidered in the light of the judgment referred to by him.4. the respondents are absent. there is also no request for adjournment. notice for hearing was sent on 17-3-1997.1 have perused the order of the lower authority and considered the pleas made by the learned jdr and also gone through the grounds of appeal. the issue that falls for consideration is whether the manner in which the diesel engine is used, the same could be taken to be used as a capital goods in the context of the definition of the capital goods given under rule 57q. in this connection, we had the occasion to consider the scope of rule 57q vis-a-vis the scope of rule 57s. we have in the case of m/s.mm. forgings vide order no. 830/96, dated 22-5-1996 [1997 (89) e.l.t.617 (tribunal)] held as under in para 4 : "4. we have considered the pleas made by both the sides. we observe that on reading of the definition of capital goods as set out under rule 57q, we ourselves had entertained a doubt prima facie that the equipment like fork lifts may not be covered by this definition. a plain reading of the definition would appear to indicate that the activities in which the capital goods are to be used have such that these are for either producing or processing of the inputs or for bringing about any change in the materials used for the manufacture of the finished products. however we observe that the scope of modvat scheme was enlarged to cover the capital goods with a view to give relief to the industry from cascading effect of duty. the term capital goods therefore has to be read in the context of the use of the equipments in the assessee's factory. what has to be seen is whether the equipment used is a part of the manufacturing stream in the assessee's factory and whether the use is for production or processing or for bringing about any change in the materials used in the manufacture of the final product. the hon'ble supreme court in the case of collector of central excise v. rajasthan state chemical works reported in 1991 (55) e.l.t. 444 had occasion to consider the scope of the term processing in the assessee's factory in that case and which equipment was only doing the function of lifting of brine solution. in that case the hon'ble supreme court has clearly held that handling would also be a process in the context of notified finished products in case it could be shown that without the function of handling the final product could not be manufactured. what is therefore to be seen is whether the equipment which is brought in as such that without the use of which for handling purposes, the final product cannot be manufactured in the appellants' factory. in that event the benefit of modvat credit in respect of that equipment has to be allowed. in the present case the goods involved are fork lifts which are used for lifting. the respondents it has been pleaded are manufacturing iron forgings of various sizes weighing as much as one tonne or so and unless these are lifted and the materials out of which the same has been manufactured are transported, the manufacturing process is not possible. we observe that the respondents' case in the light of the plea made will have to be considered in the light of the judgment of the hon'ble supreme court referred to supra. the plea of the revenue is that the definition of capital goods as set out under rule 57q should not be read with the wordings of rule 57s. we observe that the modvat scheme is an integrated scheme and there are various provisions under different rules from which the scope of the scheme can be read. under rule 57s it is clearly stated that the modvat credit in respect of capital goods can be utilised so long as the same were used in or in relation to the manufacture of the final product. this clear provision about the use as above cannot be ignored and the use of the capital goods therefore for modvat purposes will have to be considered in or in relation to the manufacture of the notified products. we therefore find no force in the plea of the revenue and we hold that the appellants would be entitled to the benefit of modvat credit in case they are able to show that the use of fork lifts is essential in the respondents' factory and without the use of the same the respondents would not be able to manufacture the final product. in this view of the matter we remand the matter to the learned lower authority for this limited purpose." 5. likewise in the context of the use of fuel oil for electricity generation, we have held as under in our order no. 322/97 in the case of m/s. ferro alloys corporation ltd.: "it would thus be seen that the hon'ble supreme court considered the integrality of the operation with reference to the manufacturing process of the particular product. in that case for reason of scientific advancement the hon'ble supreme court held that effluent treatment can be considered as an integral part of the manufacturing process. thus it is seen that the manufacturing process of an item in question has to be the focus for determining the eligibility of an input. thus unless it could be shown that a particular activity was part and parcel of manufacturing process of an end product that activity cannot be taken to be in or in relation to the manufacture of the notified finished product. in the above view of the matter, we hold that the use of fuel oil for the purpose of generation of electricity cannot be taken to be an input for modvat purpose in terms of rule 57a. electricity cannot be taken to be generated as an intermediate product in the manufacturing stream of ferro alloys. the appellants have also taken a plea before us that since in 1995 this fuel oil has been taken to be eligible input, by reason subsequent amendment to rule 57a the benefit of modvat credit should be allowed. we observe that this would merit consideration only if it is shown that fuel oil has been used in or in relation to the manufacture of the notified finished product. here since we have held that plants for generation of electricity cannot be taken to be part of the set up for processes for the manufacture of ferro alloys, the question of extending the benefit in respect of fuel oil for generation of electricity does not arise. we in the circumstances, dismiss the appeal." 6. we observe that the learned lower authority has not taken into consideration the process of manufacture of the notified finished product as accepted vis-a-vis the use of the generator. what has to be considered is the integrality of the process of manufacture in the context of the definition of the input of the capital goods as given in the central excise rules in this regard. therefore, the findings are required to be entered as regards the use of the item vis-a-vis process of manufacture for the purpose of eligibility to the modvat credit. the learned lower authority has not examined the issue in depth and he did not have the benefit of the decision of the tribunal referred supra. in the above view of the matter, the matter has to be re-examined afresh in the light of the above. the order of the lower authority is, therefore, set aside and the matter remanded for de novo consideration and decision in the light of the above.

Judgment:
1. The issue in the appeal relates to the grant of Modvat credit under Rule 57Q in respect of Diesel Engine which was used with an alternator for generation of electric current for captive consumption. The learned lower appellate authority in this context has held as under :- "It is seen that the issue is on the scope of capital goods under the Explanation to Rule 57Q, as stood prior to 16-3-1995 and eligibility of D.O. Engine to the credit. I have been consistently taking a view that after amendments to proviso in Rule 57S, the concept of capital goods has been enlarged so as to include vast varieties of capital goods used even in relation to manufacture of final products. In this case I find that the D.O. Engine is used in conjunction with the generator, which in turn is used in running the plants, which is not in dispute. Without these goods supply of electricity to make the plants functional is not possible. In other words manufacturing process of final product cannot be carried out.

Therefore, I hold that the D.O. Engine is used in relation to manufacture of final product and entitled to credit in terms of Rule 57Q of Central Excise Rules, 1944." 2. The learned appellant Collector in the grounds of appeal has urged as under : "It is evident from the definition of capital goods under Rule 57Q, in respect of capital goods used in relation to the manufacture of final products that only moulds and dies, generating sets and weigh-bridges used in the factory of the manufacturer were specifically covered prior to 16-3-1995. It is only after the issuance of Notification No. 11/95-C.E. (N.T.), dated 16-3-1995, that the scope of capital goods used in relation to the manufacture of final products was widened. The issue of this Notification confirms the fact that not all the capital goods used in relation to the manufacture of final products were covered by Rule 57Q, but only those specifically covered under the definition were covered.

3. As Rule 57S is only a procedural Rule, dealing with utilisation of credits earned, the amendment made to it should not be allowed to override the provisions of Rule 57Q, which restrict the credit only to those capital goods which conform to the meaning given in the explanation to Rule 57Q(1) and deny the credit in respect of those capital goods which were received in the factory before 16-3-1995.

In the instant case, the said goods was received by the assessee well before 16-3-1995 and the credit was taken on 26-1-1995, thereby contravening the provisions of Sub-rule (2) to Rule 57Q." 3. The learned SDR for the Department has pleaded that the Tribunal had the occasion to examine the issue of Modvat credit in the context of the use of Fuel Oil in the generation of electricity in the power plant installed in the factory and in that case has held that the power plant could not be considered to be integral part of the manufacturing process of the finished product. likewise, while considering the benefit of the Fork Lifts in another case in the order referred to by him in the case of M/s. Ferro Alloys Corporation v. CCE vide Order No.322/97, dated 5-2-1997, of this Tribunal, the Tribunal in the case of capital goods viz. Fork Lifts has held that the benefit could only be allowed if it could be shown that the notified goods could not be manufactured without the use of the said capital goods taking into consideration the process of manufacture of the notified finished product in the appellants factory. The plea is that integrality of the process of manufacture would have to be considered before the Modvat credit could be allowed. He has, therefore, pleaded that the learned lower authority has not adverted himself as to what is the accepted process of manufacture of the notified finished product and how the use of the equipment in question could be taken to be as a part of the said process of manufacture. He has, therefore pleaded that the learned lower authority's order has to be reconsidered in the light of the judgment referred to by him.

4. The respondents are absent. There is also no request for adjournment. Notice for hearing was sent on 17-3-1997.1 have perused the order of the lower authority and considered the pleas made by the learned JDR and also gone through the grounds of appeal. The issue that falls for consideration is whether the manner in which the Diesel Engine is used, the same could be taken to be used as a capital goods in the context of the definition of the capital goods given under Rule 57Q. In this connection, we had the occasion to consider the scope of Rule 57Q vis-a-vis the scope of Rule 57S. We have in the case of M/s.

MM. Forgings vide Order No. 830/96, dated 22-5-1996 [1997 (89) E.L.T.617 (Tribunal)] held as under in para 4 : "4. We have considered the pleas made by both the sides. We observe that on reading of the definition of capital goods as set out under Rule 57Q, we ourselves had entertained a doubt prima facie that the equipment like Fork Lifts may not be covered by this definition. A plain reading of the definition would appear to indicate that the activities in which the capital goods are to be used have such that these are for either producing or processing of the inputs or for bringing about any change in the materials used for the manufacture of the finished products. However we observe that the scope of Modvat Scheme was enlarged to cover the capital goods with a view to give relief to the industry from cascading effect of duty. The term capital goods therefore has to be read in the context of the use of the equipments in the assessee's factory. What has to be seen is whether the equipment used is a part of the manufacturing stream in the assessee's factory and whether the use is for production or processing or for bringing about any change in the materials used in the manufacture of the final product. The Hon'ble Supreme Court in the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) E.L.T. 444 had occasion to consider the scope of the term processing in the assessee's factory in that case and which equipment was only doing the function of lifting of brine solution. In that case the Hon'ble Supreme Court has clearly held that handling would also be a process in the context of notified finished products in case it could be shown that without the function of handling the final product could not be manufactured.

What is therefore to be seen is whether the equipment which is brought in as such that without the use of which for handling purposes, the final product cannot be manufactured in the appellants' factory. In that event the benefit of Modvat credit in respect of that equipment has to be allowed. In the present case the goods involved are Fork Lifts which are used for lifting. The respondents it has been pleaded are manufacturing iron forgings of various sizes weighing as much as one tonne or so and unless these are lifted and the materials out of which the same has been manufactured are transported, the manufacturing process is not possible. We observe that the respondents' case in the light of the plea made will have to be considered in the light of the judgment of the Hon'ble Supreme Court referred to supra. The plea of the Revenue is that the definition of capital goods as set out under Rule 57Q should not be read with the wordings of Rule 57S. We observe that the Modvat Scheme is an integrated scheme and there are various provisions under different rules from which the scope of the scheme can be read. Under Rule 57S it is clearly stated that the Modvat credit in respect of capital goods can be utilised so long as the same were used in or in relation to the manufacture of the final product. This clear provision about the use as above cannot be ignored and the use of the capital goods therefore for Modvat purposes will have to be considered in or in relation to the manufacture of the notified products. We therefore find no force in the plea of the Revenue and we hold that the appellants would be entitled to the benefit of Modvat credit in case they are able to show that the use of Fork Lifts is essential in the respondents' factory and without the use of the same the Respondents would not be able to manufacture the final product. In this view of the matter we remand the matter to the learned lower authority for this limited purpose." 5. Likewise in the context of the use of Fuel Oil for electricity generation, we have held as under in our Order No. 322/97 in the case of M/s. Ferro Alloys Corporation Ltd.: "It would thus be seen that the Hon'ble Supreme Court considered the integrality of the operation with reference to the manufacturing process of the particular product. In that case for reason of scientific advancement the Hon'ble Supreme Court held that effluent treatment can be considered as an integral part of the manufacturing process. Thus it is seen that the manufacturing process of an item in question has to be the focus for determining the eligibility of an input. Thus unless it could be shown that a particular activity was part and parcel of manufacturing process of an end product that activity cannot be taken to be in or in relation to the manufacture of the notified finished product. In the above view of the matter, we hold that the use of fuel oil for the purpose of generation of electricity cannot be taken to be an input for Modvat purpose in terms of Rule 57A. Electricity cannot be taken to be generated as an intermediate product in the manufacturing stream of ferro alloys.

The appellants have also taken a plea before us that since in 1995 this fuel oil has been taken to be eligible input, by reason subsequent amendment to Rule 57A the benefit of Modvat credit should be allowed. We observe that this would merit consideration only if it is shown that fuel oil has been used in or in relation to the manufacture of the notified finished product. Here since we have held that plants for generation of electricity cannot be taken to be part of the set up for processes for the manufacture of ferro alloys, the question of extending the benefit in respect of fuel oil for generation of electricity does not arise. We in the circumstances, dismiss the appeal." 6. We observe that the learned lower authority has not taken into consideration the process of manufacture of the notified finished product as accepted vis-a-vis the use of the generator. What has to be considered is the integrality of the process of manufacture in the context of the definition of the input of the capital goods as given in the Central Excise Rules in this regard. Therefore, the findings are required to be entered as regards the use of the item vis-a-vis process of manufacture for the purpose of eligibility to the Modvat credit. The learned lower authority has not examined the issue in depth and he did not have the benefit of the decision of the Tribunal referred supra. In the above view of the matter, the matter has to be re-examined afresh in the light of the above. The order of the lower authority is, therefore, set aside and the matter remanded for de novo consideration and decision in the light of the above.