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TMI Blog2012 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to comprehend the controversy at hand, a few material facts may be noticed. At the outset, it may be noted that these appeals relate to the period between August 1992 to June 1996. The appellant-assessee, a body corporate, claiming to be pioneers in the concept of flexible packaging, is engaged in the manufacture of various types of packaging machines, marketed as Automatic form fill and seal machines (for short "F&S machines"), classified under chapter heading 8422.00 of the Schedule to the Central Excise Tariff Act, 1985 (for short "the Tariff Act"). The literature placed on record shows that the assessee has prototype models of F&S machines with technical details like web width, Roll diameter, Core diameter, typical material range, the type of material to be packed, etc. According to the assessee, the machines are 'made to order', inasmuch as all the dimensions of the packaging/sealing pouches, for which the F&S machine is required, are provided by the customer. The purchase order contains the following inspection clause : "Inspection/Trial will be carried out at your works in the presence of (sic) our Engineer before dispatch of equipment for the performance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n dispute, duties paid on material, namely, plastic films/poly paper used for testing machines for forming commercial/technical opinion as to their marketability/excisability would be eligible to be taken as credit (sic) under rule 57-A read with relevant notification? (Q2) Whether such use of material in testing in view of the purposes mentioned above, could be said to be used (sic) in the manufacture of or use in relation to the manufacture of the final products viz., Machines as assembled?" 7. As aforesaid, the High Court has answered both the questions in the negative, opining that testing the performance of a final product is not a process of manufacture and therefore, materials used for testing the performance of the F&S machine cannot be termed as 'inputs' for the purpose of allowing Modvat credit. According to the High Court, anything required to make the goods marketable must form a part of the manufacture and any raw material or any materials used for the same would be a component part of the end product. It has observed that materials used after manufacture of the final product, viz. the F&S machine, is complete, is only to detect the deficiency in the final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ukul Gupta, learned senior counsel appearing for the revenue, supporting the decision of the High Court, contended that Modvat credit is available only on the inputs which are actually used in the manufacture of the final product. According to the learned counsel, testing of a machine can take place only after the manufacture of the machine is complete and therefore, any goods used in a process subsequent to the completion of the process of manufacture cannot be termed as inputs within the meaning of Rule 57A of the Rules. 11. Before analysing the rival submissions, it would be appropriate to refer to the relevant statutory provisions. 12. The Modvat scheme, introduced with effect from 1st March 1986, was aimed at allowing credit to the manufacturers for the excise duty paid by them in respect of the inputs used in the manufacture of the finished product. Rules 57A and 57C of the Rules, which make a manufacturer eligible to avail of the credit for the duty paid on the inputs read as follows : "RULE 57A : Applicability. - (1) The provisions of this section shall apply to such finished excisable goods (hereinafter referred to as the "final products") as the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; crates and glass bottles used for aerated waters. (2) 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 condition 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 this 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. Rule 57C. Credit of duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2007) 7 SCC 347 = 2007 (214) E.L.T. 481 (S.C.) this Court while examining the scope and purport of the expression "in or in relation to the manufacture of the final products" observed that these words have been used to widen and expand the scope, meaning and content of the expression "inputs" so as to attract goods which do not enter into finished goods. Speaking for the Bench, S.H. Kapadia, J. (as his Lordship then was) held as follows : "11. Lastly, we may point out that in order to appreciate the arguments advanced on behalf of the Department one needs to interpret the expression "in or in relation to the manufacture of final products". The expression "in the manufacture of goods" indicates the use of the input in the manufacture of the final product. The said expression normally covers the entire process of converting raw materials into finished goods such as caustic soda, cement, etc. However, the matter does not end with the said expression. The expression also covers inputs "used in relation to the manufacture of final products". It is interesting to note that the said expression, namely, "in relation to" also finds place in the extended definition of the word "manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich a reference was made in Solaris Chemtech Limited (supra), this Court had held that any operation which results in the emergence of the manufactured goods would come within the ambit of the term manufacture. This is because of the words used in Rule 57A, namely, goods used in or in relation to the manufacture of final products. 16. At this juncture, it would also be apposite to refer to Circular No. 33/33/94-CX.8, dated 4th May 1994, issued by the Central Board of Excise and Customs, relating to the Modvat scheme. The relevant part of the Circular reads as under : "Subject : Instruction regarding Modvat Scheme. 1........ 2. With a view to consolidate the instructions and streamline of procedures, the following instructions are issued in supersession of all the instructions issued on or before 31st December, 1993, in relation to Modvat - (i) Modvat credit is available for all excisable goods used as inputs in or in relation to the manufacture of finished goods. It is, therefore, clarified that the input credit is admissible whether such input is physically present in the finished excisable goods or not so long such inputs are use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89 (40) E.L.T. 280 (S.C.) or hydrolysate in C.C.E. v. Ambalal Sarabhai Enterprises (P) Ltd., (1989) 4 SCC 112 = 1989 (43) E.L.T. 201 (S.C.) the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalisation. The fact that the goods are not in fact marketed is of no relevance." 9. It may be noticed that in the cases referred to in the passage, quoted above, the reasons for holding the articles "not marketable" are different, however, they are not exhaustive. It is difficult to lay down a precise test to determine marketability of articles. Marketability of goods has certain attributes. The essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold. The fact that the product in question is generally not being bought and sold or has no demand in the market would be irrelevant. The plastic bod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t saleable, it will not be marketable and consequently the process of manufacture would not be held to be complete and duty of excise would not be leviable on it. The corollary to the above is that till the time the step of manufacture continues, all the goods used in relation to it will be considered as inputs and thus, entitled to Modvat credit under Rule 57A of the Rules. In the present case, as aforesaid, each machine is tailor made according to the requirements of individual customers. If the results are not in conformity with the order, then the machine loses its marketability and is of no use to any other customer. Thus, the process of manufacture will not be said to be complete till the time the machines meet the contractual specifications and that will not be possible unless the machines are subjected to individual testing. Even though the revenue has alleged that the process of manufacture is complete as soon as the machine is assembled, yet it has not discharged the onus of proving the marketability of the machines thus assembled, prior to the stage of testing. Moreover, as has been held in the case of Hindustan Zinc Ltd. v. Commissioner of Central Excise, Jaipur, (2005) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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