TMI Blog1999 (4) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... uch goods. The Revenue is also of the view that the amendment in Rule 57Q which was made on 16-3-1995 is prospective and not retrospective in operation. 3. In the case of Jawahar Mills Ltd., Modvat credit has been denied on power cables and capacitors; the period of dispute is March 1994 to October 1994. This case has been referred to the Larger Bench by Misc. Order No. 52/98, dated 27-1-1998 [1998 (100) E.L.T. 41 (Tribunal)], in view of the conflicting views expressed in the Tribunal s order - Modvat credit had been extended on wires and cables in the cases of Century Cement Ltd. v. Collector of Central Excise - 1997 (95) E.L.T. 655, Grasim Cement v. Collector of Central Excise - 1997 (96) E.L.T. 354 and other cases while in the case of SIV Industries by Final Order No. 646/96 dated 16-4-1996, the Tribunal had held that wires and cables used for transmission of electricity would not be eligible to the benefit of Modvat credit as they are not eligible to capital goods in terms of Rule 57Q. 4. In the case of Indian Refrigeration Company Ltd. the items are control panels, cables, distribution boards, switches and starters and air compressors and the issue of eligibility to Modvat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lent to the duty of excise paid on such capital goods. Explanation. - For the purposes of this section, - (1) `Capital goods means - (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. (2) Notwithstanding anything contained in sub-rule (1), no credit of specified duty paid on capital goods shall be allowed if such duty has been paid on such capital goods before the 1st day of March 1994. Sub-clauses (d) and (e) were added to Explanation 1 of Rule 57Q vide Notification No. 11/95-C.E. (N.T.), dated 16-3-1995. The same also introduced sub-rule 57Q(2). The same is reproduced below : (d) following goods falling within the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) and used in the factory of the manufacturer - (i) all goods falling under headi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84.37, 84.40, 84.50, 84.52, 84.69 to 84.74, 84.76, 84.78 expansion valves and solenoid valves falling under sub-heading 8481.10 of a kind used for refrigerating and air-conditioning appliances and machinery); (b) all goods falling under chapter 85 (other than those falling under heading 85.09 to 85.13, 85.16 to 85.31, 85.39 and 85.40); (c) all goods falling under heading 90.11 to 90.13, 90.16, 90.17, 90.22 (other than for medical use) 90.24 to 90.31 and 90.32), (other than of a kind used for refrigerating and air conditioning appliances and machinery); (d) components, spares and accessories of the goods specified against items (a) to (c) above; (e) moulds and dies: (f) refractories and refractory materials; (g) tubes and pipes of iron and steel or copper or aluminium used for conveying inputs, on which credit of duty is taken, intermediate goods or final products in the factory; and (h) pollution control equipment (2) `specified duty means duty of excise or the additional duty under section (3) of the Custom Tariff Act, 1975 (51 of 1975). (3)(2) Notwithstanding anything contained in sub-rule (1) (i) No credit of the specified duty paid on capital goods (other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , credit will be allowed, without the need to establish as to whether such capital goods are used in the manufacture of finished goods. It may be clarified that any equipment etc. purchased by a manufacturer but not used within the factory will not be admissible for Modvat. For instance, R D equipment used by a manufacturer in their laboratory outside the factory will not be eligible for Modvat. If however, such laboratory is part of the manufacturer s factory, Modvat will be admissible. 11. Para 5.1 is the relevant portion of the Budget circular issued by CBEC in connection with Finance Bill, 1996 and the same reads as under : Modvat Scheme - the Modvat scheme has been amended in several respects. - In Rule 57Q(1), specific headings and sub-headings have been mentioned. Thus any goods falling under these would be admissible for Modvat credit and anything not falling under these headings or sub-headings will not be admissible for Modvat credit. This has been done to resolve the interpretational problems about the scope of Rule 57Q. 12. In Indian Copper Corporation Ltd. [1965 (16) STC 259], the Supreme Court was dealing with Section 8(3)(b) of Central Sales Tax Act, 1956, rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r carrying ore and other materials used in the process of manufacture and also for use of the sanitary department for collecting refuse to protect cleanliness and health in the colony of the workers. 16. Of the above items, the High Court excluded the locomotives and motor vehicles used by the Corporation after the mining operations were concluded and before the manufacturing process commenced, as also vehicles used in carrying the finished products from the factory on the conclusion of the process of manufacture, on the ground that these are not intended for use in the manufacture or processing of goods for sale or in the mining operations. Laboratory fittings used for sample and analysis of the ore and the raw materials in the initial stages of mining and in the process of manufacture, were held to be eligible by the High Court, but not hospital equipments, stationery and cane baskets used for carrying refuse. Cane baskets used for carrying ore and other materials was held to be outside the purview of Section 8(3)(b) of the Act. The Supreme Court held as under : ... Nor is there any ground for excluding locomotives and motor vehicles used in carrying finished products from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raphic material on the ground that these materials are required merely in the preparation of design which though necessary for turning out textile goods, cannot be said to be goods intended for use in the manufacture of goods. The Supreme Court conceded to the observation of the High Court that without the use of drawing and photographic materials, designing of patterns would, if not impossible, be very difficult. 19. The relevant extract of the above judgment is as under : 7. ... But the High Court was apparently of the view, and that view is supported by counsel for the Sales Tax officer, that goods intended for use in the manufacture of goods or processing of goods for sale must of necessity to be goods which are used as ingredients or commodity in the creation of goods, or which are directly and actually needed for turning out or making of the goods. 8. .... it would be difficult to regard goods used only in the process of weaving cloth and not goods used in the anterior processes as goods used in the manufacture of cloth. To read the expression, in the manufacture of cloth in that restricted sense, would rise many anomalies. Raw cotton and machinery for weaving cotton a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the actual production of goods and without which commercial production would be inexpedient must be regarded as goods intended for use in the manufacture of goods. 12. ... The expression `electricals is somewhat vague. But in a factory manufacturing cotton and other textiles, certain electrical equipment in the present stage of development would be commercially necessary. For instance, without electric lighting, it would be very difficult to carry out the business. Again electrical humidifiers, exhaust fans and similar electrical equipment would be in the modern conditions of technological development normally be regarded as equipment necessary to effectively carry on the manufacturing process. We are not prepared to agree with the High Court that in order that electrical equipment should fall within the terms of Rule 13, it must be an ingredient to the finished goods to be prepared or it must be a commodity which is used in the creation of goods. If having regard to normal conditions prevalent in the industry, production of the finished goods would be difficult without the use of electrical equipment, the equipment would be regarded as intended for use in the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Also the rest of the items mentioned in Rule 13 viz. machinery, plant, equipment and tools are indeed items indicated in Explanation 1(a) to Rule 57Q. Spare parts and accessories figure in Explanation 1(b) to Rule 57Q. Thus the language employed in the first portion of Explanation 1(a), viz. machinery, machine, plant etc. is also the language employed in Rule 13. Thus the provisions construed by Supreme Court are in pari materia with Explanation 1(a) of Rule 57Q. Therefore, the aforesaid two judgments of the Supreme Court are directly relevant for the present purposes. 23. While construing the expression, in the manufacture of goods, occurring in Notification 201/79, the Five Member (Larger) Bench of the Tribunal in Shri Ram Rayons v. CCE [1987 (30) E.L.T. 850] held as under : The expression in the manufacture of goods should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods. Where any particular process is so integrally connected with the ultimate production of goods that but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would, in our judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the manufacture of such goods. Such machinery would be an essential and integral part of the plant which manufactures finished goods and would certainly satisfy the description that it is machinery used in the manufacture of finished goods. If this test be applied, it is clear that humidifiers are machinery used in the manufacture of cloth. It is evident from the finding given by the Deputy Commissioner of Sales-tax and accepted by the Tribunal that humidifiers are used by cotton textile mills in order to maintain certain humidity for the purpose of increasing the strength of yarn, avoiding breakages of yarn and improving the quality of yarn and they are essential to the modern textile industry. They play an important role in the manufacturing process in that they provide a particular humidity without which yarn would not acquire proper strength and there may be breakages in yarn affecting not only the quality of the yarn but also the smooth functioning of the ring frames. They are as essential to the manufacturing process as ring frames or looms and they are certainly machinery used in the manufacture of cloth. We are therefore, of the view that humidifiers are machinery used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [1997 (94) E.L.T. 449 S.C.] in which the Apex Court was construing the Customs Notification No. 116/88-Cus., dated 30-3-1998. That notification inter alia exempted `materials required to be imported for the purpose of manufacture of products (hereinafter referred to as the resultant products or replenishment of materials used in the manufacture of resultant products, or both . The Supreme Court in that context held as under : In the notification, two different expressions have been used namely, materials required to be imported for the purpose of manufacture of products and replenishment of materials used in the manufacture of resultant products, which indicates that the two expressions have not been used in the same sense. The expression materials required to be imported for the purpose of manufacture of products cannot be construed as referring only to materials which are used in the manufacture of the products. The said exemption must be given its natural meaning to include materials that are required in order to manufacture the resultant products. In that view, the exemption cannot be confined to materials which are actually used in the manufacture of the resultant produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of necessity, goods used as ingredients or commodities in the creation of goods or which are directly and actually needed for turning out or making the goods. This was in express terms rejected in para 8 of the judgment. In para 10, the Supreme Court held that the expression `in the manufacture of goods, cannot be limited to process or production of goods only. The Court held that drawing and photographic materials are covered. Under the category of electricals, the Supreme Court covered electrical humidifiers, exhaust fans and electrical equipments and even electrical electrical lightings. However, electrical equipments not directly connected with the process of manufacture and office equipments like fans, coolers and air-conditioners were held to be not covered by Section 8(3)(b). Further in view of judgment of Supreme Court in Oblum Electrical Industries P. Ltd. v. CC, the expression employed in Rule 57Q is even wider than the expression contained in Section 8(3)(b) read with Rule 13. The aforesaid two judgments of the Supreme Court would apply with greater force to the present matter. 30. Further, in TISCO s case supra, the Patna High Court has held that material handling eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulfil the function of a plant in the assessee s trading activity? Is it a tool of his trade with which he carries on his business? If the answer is in the affirmative it will be a plant. As already seen, though the above decision was rendered in the context of Section 43(3) of the Income Tax Act, 1961, which contained a very wide definition of the expression plant , the above interpretation of the expression, plant , was not because of any special or particular defintion of that expression in the Income Tax Act. Therefore, the test laid down by the Supreme Court in the above case would be relevant for construing the expression plant employed in Explanation 1(a) to Rule 57Q. Interestingly, even without reference to the aforesaid judgment of the Supreme Court, the Single Member Bench of this Tribunal in Valley Abrasives Ltd. v. CCE - 1997 (91) E.L.T. 700 has held as under : 6. Therefore, it has to be taken in the sense in which the trade generally understands it. plant" is understood in the context of manufacture of goods, as a place where aggregate of machines, machinery equipment, etc. which produces or processes the goods are installed. I do not find any specific reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree different and distinct expressions are used, it will not be possible and correct to construe the expression `used for producing of any goods for the manufacture of the final product as synonymous with `used for bringing about any change in any substance for the manufacture of the final product. Similarly, it would not be correct to construe the expression `used for processing of any goods for the manufacture of the final product as synonymous with `used for bringing about any change in any substance for the manufacture of the final product. The contention of the Revenue that clause 1(a) would confine itself to production machinery used for bringing about any change in any substance for the manufacture of the final product will also imply that the Supreme Court s decision in Indian Farmers Fertilizer Coop. Ltd. and J.K. Cotton Spg. Wvg. Mills Co. Pvt. Ltd. case extending the coverage of Section 8(3)(b) to items such as motor vehicles and locomotives, cane baskets, laboratory fittings, electricals humidifier exhaust fan and similar equipments, would be wrong, but this obviously is not permissible. In fact, precisely this contention was raised by the Revenue in Gujarat High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the above. Wires and cables would be covered by the expression `plant being an item necessary for the assessee to carry on his business and being an item not in the nature of a consumable, but an item having fairly high degree of durability. It therefore, satisfies the definition of plant. 40. Similarly, the other items involved in these cases namely control panels, cables, welding electrodes, etc. will also qualify as capital goods under Rule 57Q and would be eligible for Modvat credit and we order accordingly. 41. In the light of the above, the issue as to whether the amendment effected in Notification 11/95, dated 16-3-1995 under Rule 57Q and Notification 14/96-C.E. dated 23-7-1996 is retrospective, becomes academic. We have to decide the matter according to the language of the provision as it stood at the material time. We are required to examine Explanation 1(a) as it stood in 1994-95 and 1995-96 and we therefore, see force in the contention of the assessees that the items which are recognised as eligible to capital goods credit by Notification 14/96 are items covered by Explanation 1(a) and it cannot be contended by the Revenue that these items are not cove ..... X X X X Extracts X X X X X X X X Extracts X X X X
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