2007 (3) TMI 190 - HC - Central Excise

Capital good credit on iron & steel items used as parts of eligible mfg. machinery Held that to allow credit direct involvement in production is not necessary condition if it falls in any of clauses (b)(c) & (d) of 57Q So credit is allowed on iron & steel items railway track material.

Issues Involved:
1. Disallowing modvat credit on iron and steel items under Rule 57Q of the Central Excise Rules, 1944.
2. Disallowing modvat credit on railway track material.
3. Disallowing modvat credit on capital goods used at captive mine sites.

Detailed Analysis:

1. Disallowing Modvat Credit on Iron and Steel Items:
The primary issue was whether the Tribunal was justified in disallowing modvat credit on iron and steel items used as parts and components of machinery for manufacturing cement. The appellant claimed that only 5% of the steel items were used for machinery, while 95% were used for building construction, and sought modvat credit only for the 5%. The Tribunal disallowed the credit on the grounds that these items were not directly involved in the manufacturing process.

The court referred to the Supreme Court's decision in Commissioner of C. Ex., Coimbatore Vs. Jawahar Mills Ltd., which stated that the definition of 'capital goods' under Rule 57Q is broad and includes machines, machinery, plant equipment, apparatus, tools, or appliances used in producing or processing goods or bringing about any change in any substance for the manufacture of the final product. The court also noted that direct involvement in the manufacturing process is not essential for availing modvat credit if the goods fall under clauses (b), (c), and (d) of Rule 57Q.

The court concluded that the appellant was entitled to avail modvat credit for the 5% of iron and steel items used as parts and components of machinery, as these were essential for the smooth functioning of the machinery.

2. Disallowing Modvat Credit on Railway Track Material:
The second issue was whether the Tribunal was right in disallowing modvat credit on railway track material used for transporting coal and finished products. The Tribunal had disallowed the credit on the grounds that the railway track was not directly involved in the manufacturing process.

The court held that the railway track material, although not directly used in manufacturing cement, was essential for transporting coal, which is a crucial element for running the plant. Therefore, the railway track material should be considered part of the manufacturing process, and the appellant was entitled to avail modvat credit on it.

3. Disallowing Modvat Credit on Capital Goods Used at Captive Mine Sites:
The third issue was whether the appellant could avail modvat credit on capital goods used at captive mine sites for obtaining and transporting raw materials to the plant. The Tribunal had disallowed the credit on the grounds that the mine site was not part of the factory.

The court referred to the Supreme Court's decision in Vikram Cement's case, which held that if the mines are captive and constitute an integrated unit with the cement factory, modvat credit on capital goods used at the mines is available. Since the capital goods in this case were used at captive mines, the appellant was entitled to avail modvat credit.

Conclusion:
The appeals were allowed, and the appellant was held entitled to avail modvat credit on:
- 5% of iron and steel items used as parts and components of machinery.
- Railway track material used for transporting coal and finished products.
- Capital goods used at captive mine sites.

The orders of the Tribunal and authorities disallowing these claims were set aside. No costs were awarded.

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