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Judgment
Dhirendra Mishra, J.—This excise appeal has been admitted on the following substantial questions of law:
(1) Whether the learned Appellate Tribunal has erred in misinterpreting and inappropriately applying the earlier decision of the Tribunal in the present case, where the facts of the case are different?
(2) Whether the learned Appellate Tribunal has correctly held that the Respondent is not required to pay the irregularly availed MODVAT/Cenvat credit, availed on the inputs used in the manufacture of electricity (non-dutiable product) sold to outside parties (r) 8% of the value of such goods?
Briefly stated, facts necessary for adjudication of this appeal are that the Respondent had two factories, one at Durg (Chhattisgarh) and another at Raisen (Madhya Pradesh), the former manufacturing sponge iron and the latter manufacturing graphite electrode. They had a Captive Thermal Power Plant (in short "CPP") of 12.8 MW capacity having three boilers, one steam turbine and a generator. The steam generated in these boilers was used to generate electricity which was used captively for manufacture of sponge iron. The substantial part of the surplus electricity generated from CPP was transmitted to Raisen factory through the Grid of M.P. Electricity Board (MPEB). The Respondent availed credit of the duty paid on various components, spares and accessories of CPP between October, 1995 and September, 2000 under Rule 57-Q upto 31st March, 2000 and under Rule 57-AB from 1st April, 2000 of the Central Excise Rules, 1944 and utilized the credit for payment of duty on their final product (sponge iron).
The Commissioner of Central Excise, issued show cause notices (16 in number) from time to time and sought to recover the entire duty under Rule 57-Under Rule 57-AH read with Section 11A of the Central Excise Act (in short "the Act") on the ground that the credit was not admissible for non-fulfillment of condition set out in the proviso to Sub-rule (2) of Rule 57-R because the electricity generated from CPP had not been fully utilized within the factory for manufacture of sponge iron as substantial part of the electricity had been wheeled out of the factory for use elsewhere, and also on the ground that in terms of proviso to Sub-rule (1) of Rule 57-R the credit was not available to the parts, components and accessories of CPP, which was used for generating electricity, which was not an excisable product. Another ground raised for denying the credit was that CPP was not eligible for capital goods under Rule 57-Q as it was not concerned with the manufacture of sponge iron and, therefore, its parts, components and accessories would not fall within the purview of capital goods. Accordingly, the learned Commissioner held that the party was entitled to avail MODVAT credit (Annexure P/4), and the appeal preferred by the revenue has been further rejected by the Tribunal and the order of the Commissioner has been upheld. Hence, this appeal.
The Tribunal, after dealing with the following common issues formulated by the Commissioner arising from the show-cause notices issued to the Respondent, has passed the impugned order:
Whether parts, accessories/spares of CPP qualify the test of "capital goods" under the erstwhile Rule 57-Q/57-AB of the Central Excise Rules, 1944 for availment of capital goods duty credit?
Whether the proviso to Rule 57-R of the Central Excise Rules/57-AD(3) of the said Rules, disentitle the availment of capital goods duty credit on parts/spares/accessories of CPP/Boiler as no excise duty is payable on the steam/electricity generated in CPP or Boiler as also since surplus electricity so generated is supplied to their sister concern through MPEB Grid and is not used exclusively in their factory in the manufacture of sponge iron and as the electricity so generated/steam produced are also used for various other purposes other than that for the manufacture of sponge iron for which no separate recording and accounting is being done.
Whether the said CPP has any concern in any way in the manufacture of their final product ''sponge iron'', as the same is exclusively used for the generation of electricity
The Tribunal dealing with issue No. 1 - whether parts, accessories/spares of CPP qualify the test of "capital goods" under the erstwhile Rule 57-Q/57-AB of the Central Excise Rules, 1944 for availment of capital goods duty credit? - has referred to the arguments advanced by the Assessee at length on this issue, wherein it was argued that boilers, turbine and generator and all components/parts thereof were integral parts of CPP, which generated electricity, which was an indispensable requirement for the manufacture of the specified final product - sponge iron. Such component, parts and accessories were covered by the definition of capital goods under Rule 57-Q as amended from time to time by Notification dated 16-3-95, 23-7-96, 1-3-97 and so on during the relevant period. Under the new Rules, which came into force w.e.f. 1-4-2000, all goods falling under Chapters 82, 84, 85 and 90 and components, spares and accessories thereof were still within the ambit of the definition of capital goods and therefore, boilers, turbine, generator and all components, spares and accessories were eligible capital goods for MODVAT credit. Finally, it was observed that the revenue has virtually conceded that credit of duty could be taken in respect of capital goods used in the manufacture of other capital goods for use in the manufacture of final product.
Dealing with other ground of the revenue that various parts, components etc. used for fabrication of CPP and electricity generated from there, are not excisable and therefore, MODVAT credit cannot be availed by the Assessee, it has been observed that there was no such requirement in Rule 57-Q that for credit to be taken on any part of any capital goods, the capital goods itself must be dutiable. The electricity generated by CPP was, by no stretch of imagination, a final product of the Respondent as held by the Commissioner and therefore, reliance placed by the Appellant/revenue on Sub-rule (1) of Rule 57-R is also misconceived.
Rejecting the argument of the Appellant/revenue that Sub-rule (2) of Rule 57-R as amended w.e.f. 16-3-95, which allowed credit in respect of capital goods used for generation of electricity for manufacture of excisable goods or for any other purpose, was in force only upto 22-7-95 and therefore, no credit could have been allowed for the subsequent period, it has been held that Sub-rule (with the relevant proviso) was in force beyond the said date also. After examining the legislative history of the capital goods credit scheme, it has been observed that the Commissioner has rightly found that under the provisions of Rule 57-Q (upto 31-3-2000) and the new Rule (from 1-4-2000), the Respondent was entitled to avail MODVAT credit on such capital goods, not affected by the provisions of Rule 57-R(2).
Mr. Bhisham Kinger, learned Standing Counsel appearing for the Appellant/revenue, has mainly challenged the order of the Tribunal on the ground that the substantial electricity generated by CPP installed in the premises at Durg has been wheeled outside to its sister concern at Raisen (MP), which is engaged in the manufacture of graphite electrode and the same is not used in their factory in the manufacture of final product - sponge iron.
Placing reliance on the decision of the Hon''ble Supreme Court in the matter of Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III, , it was argued that the Assessee was not entitled for MODVAT credit on capital goods used in its CPP as substantial part of the generated electricity has been transmitted outside the factory to its sister concern through MPEB Grid.
Mr. Kinger further submits that while dismissing the appeal of the revenue in the case of Respondent/Assessee itself vide order dated 7th November, 2009 passed in the matter of Union of India v. HEG Ltd. in Tax Case No. 50/2008, the law laid down by the Supreme Court in Maruti Suzuki has not been considered as it was not brought to the notice of this Court.
On the other hand, Mr. M.P. Devnath with Mr. Raja Sharma, learned Counsel appearing for the Respondent/Assessee, would argue that from perusal of the impugned order, it would be evident that the Tribunal, after formulating common issues arising from the show cause notices issued by the Commission, has held that the components, spares and accessories used in CPP installed in the factory premises of the Assessee were covered by the definition "of capital goods under Rule 57-Q as amended from time to time. The above finding is based on the decision of the Hon''ble Supreme Court in the matter of Commissioner of Central Excise Coimbatore and Others Vs. Jawahar Mills Ltd. and Others, With regard to the arguments advanced by the revenue for denying MODVAT credit to the Assessee on the ground that various parts, components, etc. used for fabrication of CPP and the electricity generated from there are not excisable, it has been held that there was no such requirement under Rule 57-Q that for credit to be taken on the parts of capital goods, the capital goods itself must be dutiable. Confirming the decision of the Commissioner, it has been observed that the above argument is not well founded on the provisions of Rule 57-Q inasmuch as electricity generated by CPP was not the final product of the Respondent and therefore, reliance of the revenue on Sub-rule (1) of Rule 57-R is misconceived. It has been further held that the Commissioner has rightly found that under the provisions of Rule 57-Q, the Respondent was entitled to avail MODVAT credit on such capital goods and its right is not affected by the provisions of Rule 57-R(2). The above finding has not been seriously contested by learned Counsel for the Appellant/revenue and the same are based on settled principles of law in the field.
It was further argued that the ratio of law laid down by the Supreme Court in Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III, has no application in the facts of the present case as the same is in relation to denial of Cenvat credit on inputs to the extent of excess electricity cleared at the contractual rates in favour of the joint ventures, vendors etc., which was sold at price. However, in the instant case, the issue is with regard to entitlement of MODVAT credit on capital goods used in CPP for production of electricity for manufacture of final product -sponge iron. There is nothing on record to show that the Assessee wheeled out its surplus electricity to its sister concern on payment of price.
We have heard learned Counsel for the respective parties and perused the order of the Commissioner as also the impugned order.
We have already reproduced the findings of the Tribunal with respect to substantial questions of law mentioned in paragraph-4 in detail. The Tribunal, referring to the definition of capital goods under Rule 57-Q as amended from time to time by notifications, has held that boilers, turbine and generator and all components/parts thereof were integral part of CPP, which generated electricity, which was an indispensable requirement for the manufacture of specified final product - sponge iron - and thus, they are covered by definition of capital goods under Rule 57-Q. Even under the new Rules, which came into force w.e.f. 1-4-2000, the goods falling under Chapters 82, 84, 85 & 90 and components, spares and accessories thereof fall within the ambit of definition of capital goods, and thus, they were eligible capital goods for MODVAT credit.
In 2000 (91) ECR 263 the Larger Bench of the CEGAT, Northern Bench, New Delhi, while considering the identical issue, held that the fuel oils such as Low Sulphur Heavy Stock (LSHS), light diesel oil, residual fuel oil, mobil oil and furnace oil for captive generation of electricity, which, in turn, is used for manufacture of final products of Assessees, are entitled for MODVAT credit even prior to 16-3-1995, whereas learned Single Member (T) in his dissenting order held that inputs, such as fuel, used for generation of electricity were eligible for the benefit of MODVAT credit under Clause (c) of explanation to Rule 57-A introduced in 1944 w.e.f. 16-3-1995. However, prior to that date, input used for generation of electricity will not be entitled to MODVAT credit.
In the matters of Collector of Central Excise Vs. Solaris Chemtech Limited and Others, , dismissing the appeal of the revenue, it has been held that Low Sulphur Heavy Stock and furnace oil used to generate electricity which is captively consumed for manufacture of final product such as caustic soda, cement etc., Assessee is entitled to MODVAT credit on LSHS in view of expression "used in relation to the manufacture" in Rule 57-A of the Central Excise Rules, 1944 even before 16-3-1995. Hence, MODVAT credit on LSHS used in production of electricity cannot be denied. It has been further observed that the words "in relation to", which find place in Section 2(f) of the said Act, have been interpreted by this Court to cover processes generating intermediate products and it is in this context that it has been repeatedly held by this Court that if manufacture of final product cannot take place without the process in question, then that process is an integral part of the activity of manufacture of the final product. Therefore, the words "in relation to the manufacture" have been used to widen and expand the scope, meaning and content of the expression "inputs" so as to attract goods which do not enter into finished goods.
In the case of Commissioner of Central Excise Coimbatore and Others Vs. Jawahar Mills Ltd. and Others, , while dealing with the definition of capital goods under Rule 57-Q of the Central Excise Rules, 1944, it has been held that capital goods can be machines, machinery, plant equipment, apparatus, tools or appliances. Any of these goods if used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final product would be "capital goods", and therefore, qualify for availing MODVAT credit. Per Clause (b), the components, spare parts and accessories of the goods mentioned in Clause (a) used for the purposes enumerated therein would also be ''capital goods'' and qualify for MODVAT credit entitlement.
In Commissioner of Central Excise, Jaipur v. Rajasthan Spinning & Weaving Mills Ltd. 2010 (255) E.L.T. 481 (S.C.) , the question before the Supreme Court was whether the Tribunal was justified in allowing MODVAT credit in respect of steel plates and M.S. channels used in the fabrication of chimney for the diesel generating set, by treating these items as capital goods in terms of Rule 57-Q of the Central Excise Rules, 1944. Referring to the decision of the Supreme Court in Commissioner of Central Excise Coimbatore and Others Vs. Jawahar Mills Ltd. and Others, and dismissing the appeal of the revenue, it was held thus:
Inter alia observing that capital goods can be machines, machinery, plant equipment, apparatus, tools or appliances, if any of these goods is used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final product, although this view was expressed in the light of the afore-noted definition of "capital goods" in the said Rule, which is not there in Rule 57-Q, as applicable in the instant case, yet the "user test" evolved in the judgment, which is required to be satisfied to find out whether or not particular goods could be said to be capital goods, would apply on all force to the facts of the present case, in fact, in para 6 of the said judgment, the court noted the stand of the learned Additional Solicitor General, appearing for the Revenue, to the effect that the question whether an item falls within the purview of "capital goods" would depend upon the user it is put to.
Applying the "user test" on the facts in hand, we have no hesitation in holding that the steel plates and M.S. channels, used in the fabrication of chimney would fall within the ambit of "capital goods" as contemplated in Rule 57Q. It is not the case of the Revenue that both these items are not required to be used in the fabrication of chimney, which is an integral part of the diesel generating set, particularly when the Pollution Control laws make it mandatory that all plants which emit effluents should be so equipped with apparatus which can reduce or get rid of the effluent gases. Therefore, any equipment used for the said purpose has to be treated as an accessory in terms of Serial No. 5 of the goods described in column (2) of the Table below Rule 57Q.
In the matters of Vikram Cement v. Commissioner of Central Excise, Indore - 2006 (197) E.L.T. 145 (S.C.) it has been held that as under:
As regards the MODVAT/Cenvat credit on capital goods, if the mines are captive mines so that they constitute one integrated until together with the concerned cement factory, MODVAT/Cenvat credit on capital goods will be available to the Assessee. On the other hand, if the mines are not captive mines but they supply to various other cement companies of different Assessees, MODVAT/Cenvat credit on capital goods used in such mines will not be available to the concerned Assessee under the appropriate MODVAT/Cenvat Rules. The matters are remanded to the respective original authorities for decision only on the above issue.
In Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III, , the question before the Hon''ble Supreme Court was - whether the department is right in reversing the proportionate Cenvat credit to the extent of power wheeled out by the Appellant to the sister units, vendors, joint ventures? In the above cited case, the Assessee claimed Cenvat credit on inputs in accordance with the Cenvat Credit Rules, 2002. The Assessee had installed three gas turbines in their factory for generation of electricity. From January, 2003 onwards, the Assessee started using naphtha as fuel to run gas turbines and availed Cenvat credit on naphtha used for generation of electricity in gas turbines. During the disputed period, the Assessee cleared a part of electricity generated in the factory to its joint ventures, vendors etc. for price. On these facts, it has been held thus:
To sum up, we hold that the definition of "input" brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted is that, in the present case, excess electricity has been cleared by the Assessee at the agreed rate from time to time in favour of its joint ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, Assessee was not entitled to Cenvat credit. In short, Assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to Cenvat credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors, etc. which is sold at a price.
In the matter of Commissioner of Central Excise v. Gujarat Ambuja Cement Ltd. 2010 (100) RLT 98 (HP) : 2010 (256) E.L.T. 356 (H.P.), the Assessee company was engaged in the manufacture of cement. It got installed a Diesel Generating Power Plant (DGPP) through another company. DGPP was used for running the factory of the Respondent when there is power cut in the factory in question. Negating the arguments of the Respondent that since DGPP is not excisable, the question of giving MODVAT credit for the same does not arise as the same is used for manufacture of final product, it has been held that since DGPP is a part and parcel of the factory of the Respondent, which is definitely a capital goods, Rule 57-Q is applicable.
The definition of capital goods u/s 57-Q (sic) (Rule 57Q) is very wide. Capital goods can be machines, machinery, plant, equipment, apparatus, tools or appliances. Any of these goods if used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final product would be "capital goods" and, therefore, qualify for availing MODVAT credit and the component, spare parts and accessories for the above purposes would also be "capital goods" and qualify for MODVAT credit entitlement. The above proposition would be applicable if the "user test" is satisfied and the question whether an item falls within the purview of "capital goods" would depend upon the user it is put to. The definition of "inputs" brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. However, where excess electricity has been cleared and wheeled out by the Assessee at an agreed rate for a price, the Assessee is not entitled to Cenvat credit to that extent.
Applying the above user test on the facts of the present case, we have no hesitation in holding that parts, accessories/spares of CPP installed in the factory premises would fall within the ambit of "capital goods" as contemplated under Rule 57-Q as user of electricity in the production of sponge iron is an integral part of manufacturing process. Therefore, Cenvat credit on parts, accessories/spares cannot be denied to the Assessee on the ground that substantial portion of the electricity generated from CPP has been wheeled out to its sister concern at Raisen through MPEB Grid, and principles of law laid down in the judgment of the Supreme Court in Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III, are not applicable in the facts of the present case as Assessee is not claiming any Cenvat credit on inputs used for generation of electricity in CPP.
In the result, we decide the substantial questions of law in favour of the Assessee and against the revenue, and confirm the order of the Tribunal. The appeal is, accordingly, dismissed.