Pearl Engineering Co. vs Commissioner of Central Excise

Having heard counsel for the parties, we frame the following substantial question of law :-

Whether Customs, Excise and Service Tax Appellate Tribunal was right in holding that the appellant is not entitled to Modvat credit under Rule 57Q of the Central Excise Rules, 1944 on the CNC wire cut machine on the ground that it is used for manufacture of intermediary products and not the final products?

The appellant had purchased one electric ''CNC wire cut electric discharge machine'' on 14-3-1995 and had filed a declaration under Rule 57(T)(1) of the Central Excise Rules, 1944 (Rules for short). By order dated 18-5-1999, the Assistant Commissioner held that the excise duty paid on the aforesaid machine cannot be credited in the Modvat account as the said machine was used for manufacture of dyes and tools which were not the final products. The final product of the appellant was stamping and lamination in which these dyes/tools were used. The Modvat credit of Rs. 1,30,000/- was directed to be withdrawn and penalty of Rs. 25,000/- was imposed on the assessee. Interest was directed to be charged as per law.

The appellant was not successful in the first appeal and approached the Tribunal, who by their order dated 9-10-2002 passed an order of remand.

In the second round, the Deputy Commissioner by the order dated 15-1-2003 held that the machine in question was not covered by the definition of "capital goods" as defined in the original Explanation to Rule 57Q of the Rules. He observed that there was a subsequent amendment vide notification dated 16-3-1995 and after the said date, the term "capital goods" had been defined broadly. By another amendment, the term "capital goods" was even expanded further.

The appellant was unsuccessful in the first appeal and before the Tribunal. In the impugned order dated 27-7-2005, the Tribunal has held that the machine in question was not used for manufacture of the final products but was used to manufacture an intermediary product, viz., dyes/tools. Thus, the appellant assessee was not entitled to modvat credit of Rs. 1,30,000/- and it was liable to pay interest, penalty, etc.

Rule 57Q as it existed during the relevant time was as under : -

57Q. Applicability. - (1) The provisions of this section shall apply to finished excisable goods of the description specified in the Annexure below (hereinafter referred to as the "final products") for the purpose of allowing credit of specified duty paid on the capital goods used by the manufacturer in his factory and for utilising the credit so allowed towards payment of duty of excise leviable on the final products, or as the case may be, on such capital goods, if such capital goods have been permitted to be cleared under rule 57S, subject to the provisions of this section and the conditions and restrictions as the Central Government may specify in this behalf:

Provided that credit of specified duty in respect of any capital goods produced or....

(a) in a free trade zone and used for the manufacture of final products in any other place in India; or

(b) by a hundred per cent export-oriented undertaking or by a unit in an Electronic Hardware Technology Park and used for the manufacture of final products in any place in India, Shall be restricted to the extent of duty which is equal to the additional duty leviable on like goods u/s 3 of the Customs Tariff Act, 1975 (51 of 1975) equivalent to the duty of excise paid on such capital goods.

Explanation. - For the purposes of this section, -

(1) ''capital goods''

(a) 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 for the manufacture of final products;

(b) components, spare parts and accessories of the aforesaid machines, machinery, plant, equipment, apparatus, tools or appliances used for aforesaid purpose; and

(c) moulds and dies, generating sets and weigh-bridges used in the factory of the manufacturer.

(Emphasis supplied)

The reading of Clause (a) to the Explanation makes it clear that machine, machinery, plant, equipment, apparatus, tools and appliances are treated as ''capital goods''. They should be used for either (a) producing, or (b) processing of goods, or (c) to bring about change in any substance for the manufacture of final products. The machine in question, as noticed above, and as per the finding recorded by the Tribunal, is used for manufacture of dyes/tools which are used for manufacture of laminates and stamping. The said lamination and electrical stamping is also done by the appellant, i.e., for manufacture of the final products. The tools and dyes were required as every customer who approaches the appellant requires laminates or stamping with his name, logo, etc., and for this purpose tools and dyes have to be first produced and manufactured as per the needs and requirements of the customer. Then, and thereafter lamination and stamping is possible. The whole process is an integrate one. Production of the dyes or stamps by the machine is covered under Clause (a) of the Explanation. The CNC wire cut electric discharge machine is a tool/machine used for producing or processing of any goods. The last words ''bringing about any change in any substance for the manufacture of final product'' is also broad and wide. The machine/tool in question brings about change in substance and this enables production/manufacture of the final product. Without the change, i.e., production of dyes or stamp, the final product cannot be manufactured. Unless the dyes and tools are first manufactured, it will not be possible for the appellant to manufacture laminations and stamping as per the requirements of the customers. The manufacture of dyes and tools forms part of a single, continuous and inseparable process in the entire chain and is a step towards and for manufacture of the laminations or stampings.

Clause (b) further stipulates that the accessories of the aforesaid machines, apparatus or tools or appliances used for the aforesaid purpose also qualify and have to be treated as capital goods. The intention of the Legislature is, therefore, clear i.e. to give liberal and expansive meaning to the term ''capital goods'' and not to give a restrictive and strict meaning to the said term. This legislative intention is relevant and supports the interpretation placed by the appellant.

In this connection, we may reproduce a portion of the judgment of the Supreme Court in Commissioner of Central Excise Coimbatore and Others Vs. Jawahar Mills Ltd. and Others, / in which the term capital goods was examined and it was observed as under :-

The aforesaid definition of ''Capital goods'' 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. 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. Clause (c) makes moulds and dies, generating sets and weigh-bridges used in the factory of the manufacturers as capital goods and thus qualify for availing Modvat credit. The goods enumerated in clause (c) need not be used for producing the final product or used in the process of any goods for the manufacture of final product or used for bringing about any change in any substance for the manufacture of final product and the only requirement is that the same should be used in the factory of the manufacturer. Thus, it can be seen that the language used in the explanation is very liberal

Looking from any angle the appellant is entitled to Modvat credit under Rule 57Q of the Rules. The question of law is answered in the negative and in favour of the appellant and against the Revenue. The appeal is disposed of accordingly. No costs.