The Dhampur Sugar Mills Limited vs Commissioner Central Excise

Sudhir Agarwal, J—Heard learned counsel for parties and perused the record.

This appeal under Section 35G of Central Excise Act, 1944 (hereinafter referred to as ''Act, 1944''), has arisen from judgment and order dated 11th September, 2007, passed by Custom Excise and Service Tax Appellate Tribunal, New Delhi (hereinafter referred to as ''Tribunal''), in Appeal No. E/3365/2005-SM(BR), holding that "Welding Electrodes" are not entitled for MODVAT Credit either as ''Capital Goods'' or ''Inputs''.

Appellant sugar mill is engaged in manufacture and sale of sugar and molasses. It also has a chemical division producing chemicals therein. There is further division wherein appellant is manufacturing paper and paper boards. For the period January, 2001 to March, 2001; May, 2001 to June, 2001 and July, 2001 to December, 2001, it claimed MODVAT credit on use of ''Welding Electrodes''. Assistant commissioner, Moradabad issued show cause notice dated 3rd January, 2002 stating that MODVAT credit availed by appellant during aforesaid period was not correct as it was not entitled for such credit on "Welding Electrodes"

Appellant submitted reply, stating that "Welding Electrodes" are used in re-building of worn out parts of machines such as hammer, cane crusher, cane unloader etc. and also for connecting pipe lines for conveying steam, liquid juice to the machines installed in the factory for manufacture of sugar and molasses. "Welding Electrodes" are thus used in relation to manufacture of finished products and satisfy the definition of ''capital goods'' or ''input'' to ''capital goods'' entitled for MODVAT credit.

Assistant Commissioner, rejected exemplar and disallowed MODVAT credit vide order dated 31st December, 2004, raising a demand of Rs. 183672/-, besides imposing penalty of the same amount. It held that "Welding Electrodes" can neither be treated to be ''input'' nor "capital goods''.

Appellant preferred appeal before Commissioner (Appeals, Central Excise, Meerut-II (hereinafter referred to as ''Commissioner (A)''), who had also rejected the appeal vide order dated 7th March, 2005, holding that "Welding Electrodes" are used in fabrication and repair work of old and used machinery and not in or in relation to manufacture of final products.

Appellant preferred further appeal before the Tribunal, but the same also was rejected so far as benefit of MODVAT credit is concerned. However, in respect to penalty, Tribunal has set aside the same.

In the memo of appeal, appellant has framed seven substantial questions of law, but while admitting appeal on 10th April, 2008, this Court framed only one substantial question of law as under :

"(1) Whether the authorities were justified in disallowing Modvat Credit on welding electrodes used for the maintenance and repair of the machinery in the factory wherein the appellants are engaged in the manufacture of V.P. Sugar and Molasses?"

In order to clarify the things further, with the consent of parties, we have added one more substantial question of law as under :

"(2) Whether "Welding Electrodes" would be entitled for MODVAT credit as ''capital goods'' or ''input'', as per rules applicable during relevant period?"

Learned counsel for parties have addressed us on both the aforesaid substantial questions of law, which though, have been framed differently, but, substantially can be answered together, since the basic aspect in respect to both the questions are same.

The period of dispute brings in two different sets of provisions. For the period January to March, 2001 the matter would be governed by Rules 57A and 57B read with Rule 57Q as were substituted by notification dated 01.03.1997 and amended up to 1999, while subsequent period of May, 2001 to December, 2001, the matter would be governed by CENVAT Credit Rules, 2001 (hereinafter referred to as ''Rules, 2001''). It would be appropriate to first consider the disputed period which is governed by Rules of 1944 as amended up to 1999.

The scheme of MODVAT (Modified Value Added Tax) came to be introduced in India w.e.f. 01.03.1986. Section 37 of Act, 1944 was modified and Clause (xiva) was inserted by Section 51 Act 23 of 1986 w.e.f. 1st March, 1986 and Clause (xvib) was inserted by Section 96 of Act 11 of 1987 w.e.f. 12th May, 1987. These clauses read as under :

"(xvia) provide for the credit of duty paid or deemed to have been paid on the goods used in, or in relation to, the manufacture of excisable goods;

(xvib) provide for the giving of credit of sums of money with respect to raw materials used in the manufacture of excisable goods;"

The scheme was introduced by inserting Chapter AA containing Rules 57A to 57J. Initially MODVAT scheme was introduced with a view to avail credit on duty paid on excisable goods used as ''input'' in manufacture of final products. From 1st March, 1987, similar scheme for allowing credit of money in respect of certain raw materials used in manufacture of certain excisable goods was introduced and Chapter AAA having Rules 57K to 57P was inserted. Scheme was further enlarged by inserting Chapter AAAA with Rules 57Q to 57U w.e.f. 01.03.1994 so as to permit availment of credit on duty paid on ''capital goods'' which are used in manufacturing process.

All these three Chapters i.e. AA, AAA and AAAA were substituted by notification No. 6/97/C.E.(N.T.), dated 01.03.1997.

Rules 57A, 57B and 57Q, as came to be inserted by notification dated 01.03.1997 and amended up to February, 1999, read as under :

"Rule 57A. Applicability. - (1) The provisions of this section shall apply to such finished excisable goods (hereafter, in this section, referred to as the final products) as the Central Government may, by notification in the Official Gazette, specifically 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 (hereafter, in this section, referred to as the specified duty) paid on the goods used in the manufacture of the said final products (hereafter, in this section, referred to as the inputs).

(2) The credit of specified duty allowed under sub-rule (1) shall be utilised 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 notification issued under sub-rule (1) and subject to the provisions of this section and the conditions and restrictions, if any, specified in the said notification.

(3) The Central Government may also specify in the said notification the goods or classes of goods in respect of which the credit of specified duty may be restricted.

(4) The credit of specified duty under this section shall be allowed on inputs used in the manufacture of final products as well as on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not.

(5) Notwithstanding anything contained in sub-rule (1), the Central Government may, by notification in the Official Gazette declare the inputs on which declared duties of excise or additional duty (hereinafter referred to as declared duty) paid shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification and allow the credit of such declared duty deemed to have been paid in such manner and subject to such conditions as may be specified in the said notification even if the declared inputs are not used directly by the manufacturer of final products declared in the said notification, but are contained in the said final products.

Explanation. - For the purposes of the sub-rule, it is clarified that even if the declared inputs are used directly by a manufacturer of final products, the credit of the declared duty shall, notwithstanding the actual amount of duty paid on such declared inputs, be deemed to be equivalent to the amount specified in the said notification and the credit of the declared duty shall be allowed to such manufacturer.

[(6) Notwithstanding anything contained in sub-rule (1), the Central Government may, by notification in the Official Gazette, declare the inputs on which the duty of excise paid under section 3A of the Central Excise Act, 1944 (1 of 1944), shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification, and allow the credit of such duty in respect of the said inputs at such rate or such amount and subject to such conditions as may be specified in the said notification :

Provided that the manufacturer shall take all reasonable steps to ensure that the inputs acquired by him are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid under section 3A of the Central Excise Act, 1944 (1 of 1944).]

RULE 57B. Eligibility of credit of duty on certain [inputs]. - (1) Notwithstanding anything contained in rule 57A, the manufacturer of final products shall be allowed to take credit of the specified duty paid on the following inputs, used in or in relation to the manufacture of the final products, whether directly or indirectly and whether contained in the final products or not, namely:--

(i) inputs which are manufactured and used within the factory of production;

(ii) paints;

(iii) inputs used as fuel;

(iv) inputs used for generation of electricity or steam, used for manufacture of final products or for any other purpose, within the factory of production;

(v) packing materials and materials from which such packing materials are made provided the cost of such packing materials is included in the value of the final product;

(vi) accessories of the final product cleared alongwith such final product, the value of which is included in the assessable value of the final product:

[Explanation. - For the purposes of this sub-rule, it is hereby clarified that the term ''inputs'' refers only to such inputs as may be specified in a notification issued under rule 57A.]

(2) The manufacturer of the final products shall not be allowed to take credit of the duty paid on the following goods, namely:--

(i) machines, machinery, equipment, apparatus, tools, appliances or capital goods as defined in rule 57Q (other than those used as component parts in the manufacture of final products), used for any purpose in the factory;

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

(iii) packing materials or containers, the cost of which is not included in the value of the final products under section 4 of the Act; and

(iv) crates and glass bottles used for aerated water."

"RULE 57Q. Applicability.- (1) The provisions of this section shall apply to goods (hereafter in this section, referred to as the "final products") described in column (3) of the Table given below and to the goods (hereafter, in this section referred to as "capital goods"), described in the corresponding entry in column (2) of the said Table, used in the factory of the manufacturer of final products.

TABLE

(2)(i) The manufacturer of the final products shall be allowed credit of the duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) (hereinafter referred to as "specified duty") paid on the capital goods.

(ii) The manufacture availing of the credit may utilise the same for payment of duty of excise payable on the final products manufactured in his factory.

(3) Notwithstanding anything contained in sub-rule (1), the manufacturer of the final products shall be allowed credit of additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) on goods falling under Chapter heading No. 98.01 of the first schedule to the said Customs Tariff Act, to the extent of 75% of the said additional duty paid on such goods.

(4) A manufacturer of the final products purchasing capital goods from a unit situated in a Free Trade Zone or from a hundred per cent export-oriented undertaking or from a unit in an Electronic Hardware Technology Park or Software Technology Parks and using them in the manufacture of final products, shall be allowed to take the credit of the specified duty paid on such capital goods only to the extent of duty which is equal to the additional duty leviable on like goods under section 3 of the Customs Tariff Act, 1975 (51 of 1975), equivalent to the duty of excise paid on such capital goods.

(5) The credit of the specified duty on capital goods (other than those capital goods in respect of which credit of duty was allowable under any other rule or notification prior to the 1st day of March, 1997) shall not be allowed if such capital goods were received in the factory before the 1st day of March, 1997.

(6) A manufacturer shall be allowed credit of specified duty paid on capital goods manufactured by him for the manufacture of final products in his factory.

(7) The credit of the specified duty on capital goods [other than those capital goods covered under S. Nos. 5, 7, 10, 11 and 12 of column (2) of the Table below sub-rule (1)] and received in the factory on or after the 1st day of January, 1996, shall not be taken on a date prior to the date on which such capital goods are installed or, as the case may be, used for manufacturer or a person designated by him for this purpose.

(8) Notwithstanding anything contained in sub-rule (7), a manufacturer intending to remove the capital goods from his factory for home consumption or for export, prior to their being installed or used, as the case may be, shall be allowed to take credit on the date on which such capital goods are so removed by him from his factory on payment of the appropriate duty of excise leviable thereon as provided in rule 57S."

(emphasis added)

First we would consider the question whether ''Welding Electrodes'' can be considered to be ''input'', attracting MODVAT credit under Rule 57A and 57B of Rules, 1944.

It is admitted case of appellant that "Welding Electrodes" as such have nothing to do with manufacture of ''sugar'' and ''molasses'' and other products, but, same is used for the purpose of repair and maintenance of machines, worn out during the process of running of factory. If no repair or maintenance is required for certain period, "Welding Electrodes" shall never be used. Thus, for the purpose of manufacture of ''sugar'' and ''molasses'' and other by-products in which business the appellant is engaged, the requirement of "Welding Electrodes" is not at all necessarily an integral part. It is only when repair or maintenance of machines is needed that requirement of "Welding Electrodes" may be necessary.

The term used in Rule 57A and 57B i.e. ''input'' means, as used in or in relation to manufacture of final products. This user, in or in relation to, may be direct or indirect. It may not be necessarily used in final production which contains such ''input'', but it could be used in or in relation to manufacture of final products. Despite our repeated query learned counsel appearing for appellant could not explain as to how "Welding Electrodes" can be said to have been used in or in relation to the manufacture of final products. He simply says that repair and maintenance of plant and machinery is an integral part of manufacture process and therefore, it should be included within the aforesaid term, but, we find that argument advanced by him is highly far fetched and goes to the extent of making explanation clause in Rule 57A and 57B, redundant. If what he says is taken to be correct, then land, bricks, cement, concrete, and even nut bolts etc. every thing would come within the ambit of Rule 57A and 57B.

In our view, it can be safely said that under Rules 57A and 57B, there is no term within which ''Welding Electrodes'', as such, may fall. Our attention was drawn to Rule 57B(1)(iv), where MODVAT credit has been allowed to ''inputs'' used for manufacture of final products or for any other purpose within the factory of production. Similarly, our attention was also drawn to Rule 57B(1)(vi) which allowed MODVAT credit on accessories on final products cleared alongwith such final products, value of which is included in the assessable value of final products. Learned counsel for appellant could not explain as to how ''Welding Electrodes'' can be said to be used for manufacture of final products or accessories of final products, so as to bring within aforesaid provisions.

Looking to aforesaid provisions as applicable at the relevant time which is in dispute in the present appeal, we are clearly of the view that ''Welding Electrodes'' would not come within the category ''inputs'' so as to qualify for MODVAT credit under Rule 57A read with Rule 57B of Rules, 1944.

Similarly, whether it can be treated to be ''capital goods'' during the relevant period under Rule 57Q, we find that this aspect as already been considered in Central Excise Appeal No. 135 of 2005 - M/s. Upper Ganges Sugar & Industries Ltd. v. Commissioner Customs & Central Excise (decided on 25.02.2012). This Court has held that "Welding Electrodes" do not satisfy requirement of "capital goods" under Rule 57Q and has answered the said question against assessee and in favour of Revenue. We respectfully have no reason to take a different view and follow the same.

Now, we come to Rules, 2001. The term "capital goods" has been defined in Rule 2(b) and "input" is defined in Rule 2(f). The same read as under :--

2.(b) "capital goods" means,-

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Tariff Act;

(ii) components, spares and accessories of the goods specified at (i) above;

(iii) moulds and dies;

(iv) refractories and refractory materials;

(v) tubes and pipes and fittings thereof;

(vi) pollution control equipment; and

(vii) storage tank,

used in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office,"

2(f) "input" means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production.

Explanation 1. - The high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.

Explanation 2. - Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer."

In substance we find that ''capital goods'' and ''inputs'' as defined in Rule 2 of Rules, 2001, includes the same items, to which Rule 57A, 57B and 57Q were applicable. No substantial distinction, we have found so as to find that during the period when Rules, 2001 are applicable, "Welding Electrodes" stand included within the definition of ''capital goods'' or ''inputs'' as the case may be, so as to entitle for MODVAT credit. Learned counsel for appellant could not point out any such distinction or reason attracting such benefit to appellant.

In view thereof and following the earlier Division Bench Judgment in M/s. Upper Ganges Sugar & Industries Ltd. v. Commissioner Customs & Central Excise (supra), we answer both the substantial questions of law formulated above against appellant and in favour of Revenue.

Appeal therefore lacks merit. Dismissed.

No order as to costs.