2008 (10) TMI 431 - Commissioner - Central Excise

Summary

Issues Involved:
1. Business profile of the appellant.
2. Manufacturing process of the appellant.
3. Whether machining and grinding amount to manufacture.
4. Whether Cenvat credit is allowed on inputs required for quality control.
5. Whether Cenvat credit is allowed on inputs that become waste during manufacture.

Detailed Analysis:
1. Business Profile of the Appellant:
The appellant is a registered vendor with RDSO and engaged in manufacturing locomotive parts for Railways. They adhere strictly to RDSO's quality control norms, which include in-house laboratory testing and inspection by RDSO before dispatch. This ensures no compromise on safety and quality of the components manufactured.

2. Manufacturing Process of the Appellant:
The production process involves receiving un-machined forgings, followed by machining and grinding to meet RDSO-approved specifications. Post-machining, the forgings undergo visual and dimensional inspections for cracks and blow holes. The final product, Constant Contact Polyurethane Side Bearer Pads, is assembled after ensuring all components meet stringent quality checks, including height, load deflection, and fatigue tests.

3. Whether Machining and Grinding Amount to Manufacture:
The higher courts have established that machining and grinding processes, which remove excess surface skin or steel, constitute manufacturing under Section 2(f) of the Central Excise Act, 1944. This was supported by precedents such as TISCO v. Union of India and Bhartia Electricals, where similar processes were deemed manufacturing.

4. Whether Cenvat Credit is Allowed on Inputs Required for Quality Control:
It is well-settled that inputs used for quality control tests essential for marketing the final product are part of the manufacturing process. Cenvat credit is allowable on such inputs, as established in cases like Kirloskar Electric Co. Ltd. v. CCE and Asahi India Safety Glass Ltd. v. UOI.

5. Whether Cenvat Credit is Allowed on Inputs that Become Waste During Manufacture:
Cenvat credit is permissible if inputs become waste during the manufacturing process due to defects noticed. This principle was upheld in cases like Ashok Leyland Ltd. v. CCE and Panchmahal Steels Ltd. v. CCE, where defective products not usable as such were considered waste and scrap, and credit was allowed.

Conclusion:
The appellant, engaged in producing railway locomotive parts under strict RDSO norms, uses a manufacturing process that includes machining and grinding, which legally constitutes manufacturing. Inputs that fail quality control or become waste during production are eligible for Cenvat credit. Therefore, the demand for differential duty and the associated penalty are unwarranted. The impugned order is set aside, and the appeal is allowed.