Commissioner of Customs and Central Excise vs Hindalco Ltd.

Heard Sri R.C. Shukla, Advocate, for the applicant and Sri V.K. Upadhyay, Learned Senior Counsel, assisted by Sri Ritvik Upadhyay, Advocate for respondent-assessee. Following question has been referred to be answered by this Court:

"Whether items namely Synthetic Filter Cloth and Asbestos Mill Board said to be not directly used in the manufacture of Aluminium and Products thereof or are used as part of plant and machinery for production of Aluminium and Products thereof, can be considered as "inputs" eligible for Modvat credits under Rule 57A of the Central Excise Rules, 1944 (hereinafter referred to as "Rules, 1944")?"

The period of dispute is July, 1989 to January, 1991. The assessee M/s. Hindalco Industries Limited is engaged in manufacture of aluminium and other connected products. Its final products are liable to Central Excise duty under Chapter 76 of Schedule to Central Excise Tariff Act, 1985 (hereinafter referred to as "CET Act, 1985"). The assessee claimed Modvat credit in respect to Synthetic Filter Cloth and Asbestos Mill Board treating the same to constitute inputs, in or in relation to manufacture of their final products. A declaration under Rule 57G vide letter dated 6-2-1990 for availing credit of Excise duty paid on various inputs was made by assessee and the said inputs included Synthetic Filter Cloth, the nature/function whereof was described by the assessee as fabrication of process liquor. With regard to Asbestos Mill Board its nature/function was described as Furnace/Pot insulation.

The Revenue took the view that these items are part of plant and machinery equipments, not liable to be treated as "inputs" in terms of Rule 57A of Rules, 1944, hence the assessee suppressed function of aforesaid items and availed irregular Modvat credit for the period of July, 1989 to January, 1991, the amount whereof comes to Rs. 1,02,582.97.

The Collector, Central Excise, Allahabad issued a notice dated 9-6-1992 requiring assessee to show cause, why irregular Modvat credit, availed during July, 1989 to January, 1991, on items of "Synthetic Filter Cloth" and "Asbestos Mill Board" be disallowed and recovery be made under Section 11A(1) of Central Excises and Salt Act, 1944 (hereinafter referred to as "Act, 1944"). The assessee was also required to show, why penalty be not imposed under Section 173Q of Rules, 1944 for contravening provisions of Rule 57A, 57F and 57G of Rules, 1944. Assessee submitted reply on 9-7-1992. Oral hearing took place on 15-2-1995, whereafter Collector, Central Excise, Allahabad passed order dated 16-3-1993/23-3-1993 holding that in view of Explanation to Rule 57A, ''inputs'' would not include machines, machinery, plants, equipments, apparatus, tools or appliances, used for producing or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of final products. According to him inputs would mean something in the nature of raw material, component etc. out of which the final product is manufactured and which forms part of final product in some form or which is used in the process of manufacture in such a way that without it final product cannot be manufactured in the form it is removed. The aforesaid two items, namely, "Synthetic Filter Cloth" and "Asbestos Mill Board", according to Collector did not satisfy aforesaid requirement so as to qualify to be inputs entitling Modvat credit to the assessee.

Describing functions of Synthetic Filter Cloth, Collector observed that this is a filtration media on rotary vacuum drum filter for filtering alumina trihydrate slurry to wash out solid organic impurities. The filter cloth on the filter unit is exposed to pressure and vacuum. It gets ruptured in the process necessitating replacement. It is a consumable item. The Synthetic Filter Cloth, therefore, is used to bring about change in the flurry and according to Collector, it is in the nature of an apparatus or appliance.

In respect to "Asbestos Mill Board", Collector observed that this item is used for preparing orifice plate which is required for flow of metal between feed box and the mould. It is made out of such material as can withstand high temperature since molten metal flows over it during the process of continuous casting of billets of aluminium. It is also a consumable item.

Collector, accordingly, disallowed Modvat credit on the aforesaid items for July, 1989 to January, 1991 and ordered recovery of Rs. 1,02,582.97 from assessee under Rule 57-I of Rules, 1944 read with proviso to Section 111A(1) of Act, 1944. He also imposed penalty of Rs. 10,000/- upon assessee under Section 173A of Rules, 1944.

Assessee preferred appeal which was allowed by Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi vide order dated 24-6-1997.

Rule 57A of Rules, 1944 relevant for the purpose of present case, as it stood at the relevant time, read as under:

"Rule 57A. Applicability. - (1) The provisions of this section shall apply to such finished excisable goods (hereinafter referred to as the "final products"), as the Central Government may, by notification in the Official Gazette, specify in this behalf, for the purpose of allowing credit of any duty of excise or the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of 1975), as may be specified in the said notification (hereinafter referred to as the "specified duty") paid on the goods used in or in relation to the manufacture of the said final products (hereinafter referred to as the "inputs'') and for utilising the credit so allowed towards payment of duty of excise leviable on the final products, whether under the Act or under any other Act, as may be specified in the said notification, subject to the provisions of this section and the conditions and restrictions that may be specified in the notification:

Provided that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted.

Explanation. - For the purposes of this rule, "inputs includes-

(a) inputs which are manufactured and used within the factory of production in, or in relation to, the manufacture of final products, and

(b) paints and packaging materials, but does not include-

(i) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products;

(ii) packaging materials in respect of which any exemption to the extent of the duty of excise payable on the value of the packaging materials is being availed of for packaging any final products;

(iii) packaging materials, the cost of which is not included or had not been included during the preceding financial year in the assessable value of the final products under Section 4 of the Act; (iv) cylinders for packing gases;

(v) plywood for tea chests; or

(vi) bags or sacks made out of fabric (whether or not coated, covered or laminated with any other material) woven from stripes or tapes of plastics."

In order to construe the provisions relating to Modvat credit, in Saraswati Sugar Mills Vs. Commissioner of Central Excise, Delhi-III, AIR 2011 SC 3286 : (2011) 187 ECR 10 : (2011) 8 JT 547 : (2011) 8 SCALE 203 : (2011) 32 STT 469 , the Court considered the question, whether iron and steel structures manufactured and used captively in factory for installation of sugar manufacturing plant by assessee can be classified as ''capital goods'' under Rule 57Q of Rules, 1944. The Court held that provisions of Statute must be construed strictly and the Court neither should stretch the words nor add nor subtract words in order to bring in or include something therein.

From the own claim of assessee, it is clear that both the items were part and parcel of machines, plants, equipments etc., used for producing and processing of goods, hence, were excluded specifically under Rule 57A, Explanation which excludes "machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products".

In view of specific exclusion, we are clearly of the view that assessee was not entitled to claim Modvat credit on ''Synthetic Filter Cloth'' and ''Asbestos Mill Board'' treating the same to be "inputs" under Rule 57A of Rules, 1944. The Tribunal taking otherwise view has clearly erred in law. The substantial question of law, formulated above, is answered in favour of Revenue. The reference stands answered accordingly and is disposed of.