Customs, Excise and Gold Tribunal - Delhi
Commr. Of Cus. And C. Ex. vs Modi Rubber Ltd. on 19 May, 2000
Equivalent citations: 2000(72)ECC783, 2000(119)ELT197(TRI-DEL)
ORDER P.G. Chacko, Member (J)
1. The issue which stands referred to this Bench on account of conflicting decisions of the Tribunal is whether Modvat credit was admissible on lubricating oils and greases under Rule 57 A of the Central Excise Rules during the period prior to 1-3-1997. In all the appeals before us the periods of dispute are between July 1995 and March 1997. However, in appeal No.E/1934/97-NB filed by the Revenue, the period of dispute has been shown to be 1-10-1996 to 31-3-1997, which period extends a little beyond 1-3-1997. In this connection, in answer to a query from the Bench,^ Ld. Consultant for the respondents has submitted that the period of dispute is, in fact, prior to 1-3-1997. This submission has not been contested by Ld. JDR appearing for the appellant - Revenue. Thus, for our purposes, in all the appeals, the dispute relates to a period prior to 1-3-1997.
2. In the case of Pragati Paper Mills (P) Ltd. v. Collector of Central Excise, Meerut 1996 (15) RLT 177, a Single-Member Bench of the Tribunal held lubricating oils and greases to be eligible inputs for the Modvat credit under Rule 57A. Again, a Two-Member Bench of the Tribunal held to the same effect in the case of Sipta Coated Steel Ltd. v. Commr. of C.Ex., Aurangabad 1998 (99) E.L.T. 553 (Tribunal). The same view was taken by a Single-Member Bench of the Tribunal, while dealing with a reference application filed by the Revenue, in the case of Commissioner of Central Excise, Cal.II v. Black Diamond Beverages Ltd. 1999 (32) RLT 375 (CEGAT) relying on the decisions of the Tribunal in Pragati Paper Mills (P) Ltd. (supra) v and Sipta Coated Steel Ltd. (supra). However, a learned Single Member of the Tribunal took a diametrically opposite view on the issue in the case of Kanoria Sugar & General Mfg Co.Ltd. v. Collector of Central Excise, Allahabad 1996 (87) E.L.T. 522. Reference of the issue to this Bench has been occasioned by the above conflicting decisions.
3. The provisions for allowing credit of duty paid on specified excisable goods used as 'inputs' in or in relation to manufacture of specified final products were incorporated in the Central Excise Rules for the first time with effect from 1-3-1986. Among these provisions, Rule 57A authorised the Central Government to specify the inputs, duty paid on which could be taken as credit and utilised by manufacturers of specified final products towards payment of duty leviable on such final products, subject to such conditions and restrictions as might be stipulated by the Government. The stood definition of 'input' stood inbuilt in the provisions of Rule 57A. With effect from 16-3-1995, inclusion and exclusion clauses were added to Rule 57A by way of an explanation thereto, whereby certain items stood included in, and certain others stood excluded from, the category of 'inputs' under the Rule. For the period relevant to our purpose, Sub-rule (1) of Rule 57A reads 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 Government may, by notification in the Official Gazette, specify 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 (hereinafter referred to as the "specified duty") paid on the goods used in or in relation to the manufacture of the said final products [whether directly or indirectly and whether contained in the final product or not] (hereinafter referred to as the "inputs") and for utilising the credit so allowed 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 said notification, subject to the provisions of this section and the conditions and restrictions that may be specified in the notification :
Provided that the Central Government may specify the goods or classes of goods in respect of which the credit of specified duty may be restricted.
[Explanation.- For the purposes of this rule, "inputs" includes -
(a) inputs which are manufactured and used within the factory of production, in or in relation to, the manufacture of final products,
(b) paints and packaging materials,
(c) inputs used as fuel,
(d) inputs used for generation of electricity, used within the factory of production for manufacture of final products or for any other purpose, and
(e) accessories of the final product cleared alongwith such final product, the value of which is included in the assessable value of the final product, ] but does not include -
(i) [machines, machinery, plant, equipment, apparatus, tools, appliances or capital goods as defined in rule 57Q] used for producing or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products;
(ii) packaging materials in respect of which any exemption to the extent of the duty of excise payable on the value of the packaging materials is being availed of for packaging any final products;
(iii) packaging materials or containers, the cost of which is not included in the assessable value of the final products under section 4 of the Act;] [and] [(iv) crates and glass bottles used for aerated waters.]"
4. According to the definition of 'input' inbuilt in the above provisions, 'inputs' are goods 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. The question to be resolved is whether lubricating oils and greases used, by the various assessees before us for lubricating their machines and machinery will be covered by the expression 'inputs'.
5. It is not in dispute that the lubricants were used for the purpose of lubricating the machines and machinery which were used for the manufacture of the final products. It has been submitted on behalf of the assessees that lubrication of the machinery is essential for the smooth process of manufacture. Without such lubrication, the machines will come to a grinding halt due to the heat generated by friction between their surfaces of contact. Further, the heat so generated would disturb the optimum conditions of temperature etc. required for the process of manufacture. In this view of the matter, lubrication of the machinery using the lubricants is quite essential for the manufacture of the final products. It has been therefore, contended on behalf of the assessees that lubricants were used in or in relation to the manufacture of their final products directly or indirectly and therefore the items qualified to be 'inputs' within the meaning of this expression under Rule 57A. Learned Consultant for the respondents in appeal Nos. E/779-790/99 and appeal No. E/1934/97 has drawn support from the decisions of the Tribunal in Pragati Paper Mills (P) Ltd., Black Diamond Beverages Ltd. and Sipta Coated Steel Ltd. (supra). He has also relied on the decision of the Patna High Court in the case of Collector, Central Excise, Patna and Ors. v. Tata Engineering & Locomotive Company Ltd., Jamshedpur and Ors. 1999 (31) RLT 800 (Patna). Reliance has also been placed on the decisions of the Supreme Court in the cases of Indian Farmers Fertiliser Coop.Ltd. v. CCE, Ahmedabad 1996 (86) E.L.T. 177 (SC) and J.K.Cotton Spg.& Wvg. Mills Co. Ltd. v. Sales Tax Officer, Kanpur AIR 1965 SC 1310. Learned Advocate for the appellants in appeal No. E/173/98 has heavily relied on the decision of the Tribunal (Larger Bench) in the case of Union Carbide India Ltd. v. Collector of C.Ex.,Calcutta-I 1996 (86) E.L.T. 613 (Tribunal).
6. Ld. JDR, Shri Sanjeev Srivastava has contended that lubricants are used only for the better operation of machinery and cannot be considered to be 'essential' for the process of manufacture and therefore; would not qualify to be 'inputs' within the meaning of this expression under Rule 57A. He has relied on the decision of the Single Member Bench in Kanoria Sugar & General Mfg. Co. Ltd. (supra).
7. We have carefully examined the rival submissions and have noted the case law cited before us.
8. In Pragati Paper Mills (P) Ltd. (supra), the Single Member Bench applied the test of commercial expediency as laid down by the Supreme Court in the case of J.K. Cotton Spg .& Wvg.Mills Co. Ltd. v. STO [AIR 1965 SC 1310] and held that the use of lubricating oil was in relation to the manufacture, though not directly as raw material in the manufacturing process. Without such use of lubricating oil in the machinery used for manufacture of paper, such manufacture would become commercially inexpedient. In Sipta Coated Steel Ltd. (supra), the Two-Member Bench took note of the generation of heat from the friction in movement of the working surfaces of tractor machine, in the absence of lubrication, and found that lubricating oil was essential to obviate the friction and ensure smooth functioning of the machinery. It held that the lubricating oil being essential for the operation of the machinery, was an 'input' for the purpose of modvat credit under Rule 57A and did not fall within the excluded category of inputs specified in the Explanation to the Rule. The Bench relied on the decision of the Tribunal [Larger Bench] in the case of Union Carbide India Ltd. (supra). In the case of Black Diamond Beverages Ltd. (supra), a learned Single Member followed the decisions in Pragati Paper Mills (P) Ltd. (supra) and Sipta Coated Steel Ltd. (supra). The learned Member further examined the provisions of Rule 57A as they stood during the relevant period (i.e. prior to 1-3-1997) and found that lubricating oil was not in the excluded category of inputs during such period.
9. In the case of J.K.Cotton Spg. & Wvg. Mills Co. Ltd. (supra), the Supreme Court, interpreting the expression "in the manufacture of goods" under the Central Sales Tax Act, 1956, had held: "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 judgment, fall within the expression "in the manufacture of goods", (emphasis added). The above view was reiterated by the apex Court in its judgement in Collector of Central Excise v. Eastend Paper Industries Ltd. 1989 (43) ELT 201 (SC). Drawing support from the decisions in J.K.Cotton Spg. & Wvg. Mills Co.Ltd. (supra) and Eastend Paper Industries Ltd. (supra), the apex Court widened the ambit of the expression 'process of manufacture' in the case of Indian Farmers Fertiliser Coop. Ltd. (supra) wherein certain processes carried out by the urea-manufacturers in their off-site plants-viz. water treatment, steam generation and inert gas generation-were held to be part of the process of manufacture of urea even though such off-site processes were related to the manufacture only indirectly.
10. In the case of Union Carbide India Ltd. (supra), the emphasis was on the expression 'in relation to the manufacture' in Rule 57A. The 3-Member Larger Bench, in that case, took note of the Supreme Court's decision in the case of Doypack Systems (Pvt.) Ltd. 1988 (36) E.L.T. 201 (SC), wherein the expression 'in relation to' occurring in Section 4(1) of the Swadeshi Cotton Mills Company Limited (Acquisition and Transfer of Undertakings) Act, 1986 had been held to be equivalent to or synonymous with the expressions 'concerned with' and 'pertaining to'. The Bench then proceeded to examine the purpose of incorporating the words 'in relation to the manufacture' in Rule 57A and observed as follows :-
"The purpose is certainly to widen further the scope, ambit and content of "inputs". The purpose is to widen the ambit so as to attract also goods which do not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of finished goods."
11. The Bench, in Union Carbide India Ltd. (supra), also followed the decision of the Calcutta High Court in Singh Alloys & Steels Ltd. v. Assistant Collector of Central Excise 1993 (66) E.L.T. 594. The High Court, in the said case, had held that goods which were not raw materials converted into finished products and which were charged into furnace as fettling materials to dissolve and seal the crevices in the refractory walls of the furnace and were consumed in the process, should be held to have been used 'in relation to1 the manufacture of finished goods. The High Court further held that it did not matter whether the goods were used in the machinery or for the purpose of the machinery.
12. The Bench, in Union Carbide India Ltd. (supra), had also taken note of the concept of integrality of processes expounded by the apex Court in J.K. Cotton (supra) and reiterated by the Court in Eastend Paper Industries (supra) and had applied the concept to the context obtaining under Rule 57A while examining the scope of the expression "in relation to the manufacture".
13. The aforesaid decision of the Tribunal [Larger Bench] in Union Carbide India Ltd. was approved by a Division Bench of the Patna High Court in the case of Tata Engineering & Locomotive Company Ltd. (supra).
14. We have already noted the precise function of the lubricants as stated by Ld. Consultant vide para (5) of this order. We agree with his submissions on the point. Unless the machinery of the assessees are lubricated with the lubricants, heat will be generated on account of mechanical friction between the working surfaces of the machinery leading to adverse consequences affecting the process of manufacture as rightly submitted by Ld. Consultant. The friction and the resultant heat are also sure to cause damage to the machinery. These facts would suffice to hold that lubrication of the machines and machinery is essential for their working and, for that matter, for the smooth process of manufacture of final products. Ld. DR's plea that the lubricants are used only for better operation of the machines is not tenable. Again, it does not matter whether the goods are used in the machinery or for the purpose of the machinery. Lubrication of the machinery is an activity which is concerned with or pertaining to the manufacture of the finished goods. It is rather integrally connected with the manufacture. The use of lubricants in the machinery is certainly in or in relation to the manufacture of the finished products.
15. It follows from the foregoing discussion that the question whether lubricants used for lubrication of machinery employed for the manufacture of finished products are 'inputs' within the meaning of this term under Rule 57A requires to be answered in the affirmative by squarely following the ratio of the decision of this Tribunal in Union Carbide India Ltd. (supra). Accordingly, we hold that the lubricants in question were used in or in relation to the manufacture of paper products and the same qualified to be "inputs" for the purpose of Modvat credit under Rule 57A during the relevant period.
16. In the light of our decision, the views taken in the cases of Pragati Paper Mills (supra), Black Diamond Beverages Ltd. (supra) and Sipta Coated Steel Ltd. (supra) have to be accepted as correct in law.
17. We shall now advert to the contra decision of the Tribunal in the case of Kanoria Sugar & General Mfg.Co. Ltd. (supra) which was strongly relied on by Ld. JDR. In that case, the Single Member Bench formulated the issue to this effect: whether the lubricating oils and greases used for maintenance of the machinery used for manufacture of sugar and molasses qualified to be inputs for the purpose of Modvat credit under Rule 57A. The Bench observed that Rule 57A did not define 'input' and sought to draw a line between inputs which were essential for the manufacture of the final products and those which were not so essential. According to the Bench, inputs which are essential for the manufacture of the final products are eligible for the modvat credit under Rule 57A regardless of whether they are used directly or indirectly or whether they are lost in the process of manufacture or whether they are visible or not in the end-products. Other inputs which are not essential for the manufacture would not qualify as 'inputs' for the purpose of modvat credit. On this basis, learned Single Member held that the lubricants in question which (according to Ld. Member) were used only for the better operation of the machinery fell outside the category of essential inputs and hence, did not qualify for Modvat credit under Rule 57A. Though Ld. Member was right in his observation that lubricants and greases were not in the exclusion category, it was not correct to observe that Rule 57A did not define 'inputs'. The definition of 'inputs' is inbuilt in the rule as we have already observed. The finding of the Bench to the effect that the lubricants were used for better operation of the machinery was not only inapposite to the issue formulated by it but also was erroneous inasmuch as the said goods used for lubrication of the machinery were essential for manufacture of the finished products. The Bench sought to draw a line between essential inputs and non-essential ones and classified lubricants in the category of the latter. Such a drawing of line itself was not essential for deciding the issue. Hon'ble Supreme Court has lucidly brought out the fallacy of drawing line of strict demarcation in para 9 of their judgment in the case of Collector of C.Ex. v. Ballarpur Industries Ltd. 1989 (43) E.L.T. 804 (SC), which reads as under :-
"9. Now a word about Sri Ganguly's insistence on drawing a line of strict demarcation between what can be said to be 'goods' merely "used" in the manufacture and what constitute goods used as "Raw-Material" for the purpose.
We are afraid, in the infinite variety of ways in which these problems present themselves it is neither necessary nor wise to enunciate principles of any general validity intended to cover all cases. The matter must rest upon the facts of each case. Though in many cases it might be difficult to draw a line of demarcation, it is easy to discern on which side of the border-line a particular case falls.
Sri Ganguly's insistence, however, serves to recall the pertinent observations of an eminent author on the point. It was said:
"...A common form of argument used by counsel in legal cases is to suggest that if the court decides in favour of the opposing counsel's arguments, it will become necessary to draw lines which may be very difficult or impossible to draw. "Where will you draw the line" is, of course, a question which must be faced by a legislator who is actually proposing to lay down lines for all future cases, Out it is not a question which needs in general to be faced by common law courts who proceed in slow stages, moving from case to case...."
[See : "Pragmatism and Theory in English Law; page 75; Hamlyn Lectures of 1987] The learned Author recalls Lord Lindley's "robust answer" to the question Where will you draw the line?
"Nothing is more common in life than to be unable to draw the line between two things. Who can draw the line between plants and animals? And yet who has any difficulty in saying that an oak-tree is a plant and not an animal?"
[See Att.-Gen.v. Brighton & Hove Co-operative Assoc. (1900) 1 Ch. 276 at p. 282] Again, Lord Coleridge in Nayor of Southport v. Morris (1983) 1QB.359 at 361 said:
"The Attorney-General has asked where we are to draw the line. The answer is that it is not necessary to draw it at any precise point. It is enough for us to say that the present case is on the right side of any line that could reasonably be drawn."
18. For the reasons already recorded, we hold that the Single Member Bench has not laid down the correct law on the issue in the case of Kanoria Sugar & General Mfg. Co. Ltd. (supra).
19. The referred issue stands answered in favour of the assessees. Appeal Nos. E/1749/97-NB, E/1934/97-NB, E/2271/97-NB and E/779 to 790/99-NB(DB) of the Department are rejected. Appeal Nos. E/173/98-NB is allowed and the order impugned therein is set aside.
20. In appeal No. E/1579/97, we note, the original and first appellate authorities had disallowed the Modvat credit on lubricants on the further ground that the credit had been taken by the party on the strength of original copy of invoice without having satisfied the jurisdictional Assistant Commissioner that the "duplicate for transporter" copy of invoice had been lost. The Modvat credit had been taken in November 1995. The fact (as found by the lower authorities) that the appellants had not satisfied the A.C. of the loss of the duplicate copy of invoice before taking the credit is also not disputed. We find that a similar factual situation was considered by a 3-Member Larger Bench of this Tribunal in the case of C.C.E., New Delhi v. Avis Electronics Pvt. Ltd. and Ors. 2000 (37) RLT 501 wherein the Bench, in respect of periods subsequent to 20.5.94, held thus "When a particular thing is directed to be performed in a manner prescribed by Rules, it should be performed in that manner itself and not otherwise. A combined reading of the provisions contained in the Rules makes it clear that a manufacturer who wants to take credit of the duty paid on input must base his claim on the duplicate copy of the invoice. In case the duplicate copy has been lost in transit, he can take credit on the basis of the original. This can be done only if he satisfies the concerned Asstt. Collector about the loss of the duplicate copy in transit." We would follow this decision to hold that the modvat credit taken as above was not admissible to the assessee. The appeal fails on this count.
21. In appeal No. E/1814/97-NB, we find that the question whether modvat credit on lubricants as inputs under Rule 57 A is liable to be allowed where the goods are declared as capital goods under Rule 57Q instead of as inputs under Rule 57A is also involved. We note that a similar question was considered by a Two-Member Bench of this Tribunal in the case of Devyani Beverages Ltd. v. CCE, Meerut 1999 (33) RLT 73 wherein the Bench held that the declaration filed by the assessee in terms of Rule 57Q was sufficient for the purpose of extending credit on glass bottles which were inputs within the meaning of Rule 57A. We also hold similar view in the instant case and sustain the appellant's challenge against the impugned order of the Commissioner (Appeals) denying Modvat credit on the ground that the declaration was not in terms of Rule 57A. The appeal is, therefore, allowed.