Customs, Excise and Gold Tribunal - Delhi
Allied Electronics And Magnetics Ltd. vs Collector Of C. Ex. on 9 June, 1992
Equivalent citations: 1992(62)ELT129(TRI-DEL)
ORDER N.K. Bajpai, Member (T)
1. This is an appeal against the orders of the Assistant Collector of Central Excise, Udaipur and Collector of Central Excise (Appeals), New Delhi both of whom have denied the MODVAT credit of countervailing duty of Rs. 2,07,858.84 on Lap Film to the appellants.
2. Briefly stated, the facts are that appellants manufacture magnetic disks. Lap films are imported by them on payment of countervailing duly. These films are used in the Burnisher Machine which removes excess magnetic oxide from the surfaces of magnetic diskettes. The appellants's claim in the appeal before us is that the manufacture of floppy disks cannot be said to have been completed unless it is burnished properly with the help of a lap film which provides a sort of lubrication and gliding surface finish to the media surface. In other words, the function of a lap film is to evenly line the deposit of magnetic oxide for faultless recording of data. It is on this ground that lap film is claimed as an "input component' for the manufacture of a disk. Lap films when imported into India for the purpose of manufacture of "Floppy diskettes" are exempt from import duty under Notification No. 347/86-Cus., dated 11-6-1986 in excess of 55% ad valorem subject to the following conditions, namely :-
(a) an officer, inter alia of the Department of Electronics or of the Directorate of General Technical Development is satisfied that the goods in question are required for the purpose specified above and recommends grant of the above exemption.
(b) the importer executes a bond with the Assistant Collector of Customs binding himself to pay, on demand, the duty leviable on goods as are not proved to have been used for the aforesaid purpose.
3. The appellants' claim is that they have produced a Certificate dated 17-10-1990 from the Joint Director of the Department of Electronics which reads as under :-
"M/s. Allied Electronics and Magnetics Ltd., Udaipur has represented to this Department that your office has issued a Demand Notice for recovering of Rs. 2,07,858.84 as a Modvat credit availed by the party against certain items of consumables (LAP Film). The copy of the order passed by you has been studied in detail. It is to clarify that LAP film is essentially a consumable to remove excess coating of magnetic material and to reorient the Magnetic particles on the media. In our opinion the item should be considered as an input for purposes of MODVAT Credit.
This issues with the approval of Shri R.K. Singh, Director (Tech.) Yours faithfully, Sd/-
(P.C. SACHEDEVA) JOINT DIRECTOR"
(Emphasis added)
4. The Assistant Collector has, on the other hand, taken the view that
(a) Lap film is not used in, or in relation to, the manufacture of magnetic disks.
(b) Lap film is used as a tool or appliance or part of burnisher machine which is designed for removing excess magnetic oxide from the surface of magnetic diskettes.
(c) Lap film is held on the tape spool assembly and it polishes and burnishes the magnetic surface and this function is similar to that of abrasives used for polishing the surface of tiles and marbles.
(d) Lap film is a tool or appliance of the burnisher machine and is not eligible for taking Modvat credit as an "input" under Rule 57A of the Central Excise Rules, 1944.
5. Collector (Appeals) has upheld the order on the ground that though burnishing is an essential process in the manufacture of magnetic disks but so is the functioning of the installed machines for producing magnetic diskettes. Since the machines are not considered as an input, the Lap film can also not be considered as an input but only a tool or appliance or a part of the Burnisher Machine. He has also rejected the appeal on the ground that Lap film indisputably does not form part of the final product and it is also not directly used for 'finishing' of the final product.
6. Arguing for the appellants, Shri Jitendra Singh, the learned Counsel cited a number of decisions in which it has been held that a raw material need not form part of the final product for purposes of eligibility of set off of duty under Notification 201/79-C.E., dated 4-6-1979 [ Collector of Central Excise v. Titaghur Paper Mills-1985 (21) E.L.T. 901 ]; that a true raw material or a component is one whose absence will subtract from the quality or character of the ultimate product and the product that is manufactured is lacking in smaller or larger measure as essential part whether it is colour, flavour, hardness, softness, odour or whatever was to be contributed by the missing ingredient from its total aggregation. [ Collector of Central Excise v. HMM - 1985 (22) E.L.T. 810 ]. Shri Jitendra Singh submitted that in view of these decisions it is clear that it was not necessary for the Lap film to form part of the magnetic disk Similarly, a floppy disk even if it comes into existence would be lacking in its essential quality of evenness of surface without burnishing by a Lap film. The learned Counsel also cited the decision of the Supreme Court in the case of Collector of Central Excise v. Jay Engineering Works -1989 (39) E.L.T. 169 in which the Court held that anything used in making an article marketable would also be considered input for purposes of set-off under Notification 201/79-C.E. even if the article can perform essential functions without it. This was decided in the context of affixing name plates of brand name owners of electric fans manufactured by job workers. A similar view was taken by the Supreme Court in the case of Collector of Central Excise v. East End Paper Industries -1989(43) E.L.T. 201 in which it was held that wrapping paper used for wrapping was a raw material and component part of wrapped paper which was not marketed without wrapping, and was entitled for exemption under Notification 18A/83-C.E., dated 9-7-1983. The Court observed thus in paragraph-6 of its order :-
"6. To be able to be marketed or to be marketable, it appears to us, in the light of facts in the appeals, that it was an essential requirement to be goods, to be wrapped in paper. Anything required to make the goods marketable, must form part of the manufacture and any raw material or any materials used for the same would be component part for the end-product. In our opinion, the Tribunal was right in the view it took. There is no ground to interfere in these appeals."
7. Shri Singh also referred to the decision of the Tribunal in the case of Union Carbide (I) Ltd. v. Collector of Central Excise -1989 (43) E.L.T. 286 in which, while holding that cello poly film for packing batteries was not an input or raw material used in the manufacture of batteries and not entitled to set-off under Notification 201/79, the Tribunal observed in paragraphs 10, 11 & 12 through Shri H.R. Syiem :-
"10. ...To be an input, a material must be used and consumed in the process of manufacture of the finished product. It is not, of course, necessary for the input or raw material to form part of the finished product when it finally comes out of the end of the manufacturing process; but as long as the input is used up necessarily in the process that carries forward and furthers the process of bringing out and completing the manufactured product, I shall hold that the article or raw material was an input or a raw material used in the manufacture of the finished product...".
"11. ...A substance cannot be an input or a raw material if it does not directly enter, react, contribute or in some may promote the creation of the finished product. ...In this respect we can learn much from the judgment of the Supreme Court in J.K. Cotton Spinning Mills....".
"12. 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"."
"13. The Supreme Court also observed at p. 569: the expression "in the manufacture" takes within its compass all processes which are directly related to the actual production."
8. Shri Jitendra Singh also cited the decision of the Tribunal in the case of Collector of Central Excise v. Weldekar Laminates Pvt. Ltd. - 1990 (49) E.L.T. 538 in which it was held that BOPP Film used in the manufacture of laminate sheets are not construable either as apparatus or an equipment or appliance even though used as separator between two layers of sheets to prevent them from sticking together and do not form part of the final product. He cited the following from the concluding part of the decision :-
"In the context of the scientific and technical meanings given in the recognised dictionary, the BOPP films which are nothing but films made of synthetic resins cannot be construed as either an apparatus or an equipment or an appliance. Even going by the normal understanding of the aforesaid terms, we are unable to be convinced that these films could be construed as apparatus, equipment or appliance. Moreover, seeing the samples produced of the films both before usage in lamination and after usage, we find that the film loses its identity completely and becomes akin to a translucent paper. Hence we are convinced that these films get partly consumed in the process of manufacture of lamination sheets and lose their identity. They directly go in the process of lamination. Though, no doubt, they are retrieved and do not form part of the final product, they lose their identity. We do not subscribe to the view that for availing MODVAT Scheme the input should form part of the final product because MODVAT Scheme extends even to packing materials and the requirement is only that the inputs should be used in or in relation to the manufacture of the final product...".
9. The learned Counsel also referred to the decision of the Tribunal in the case of Addisons & Co. Ltd. v. Collector of Central Excise - 1990 (48) E.L.T. 281 in which MODVAT credit was held to be available to anti-rust and anti-corrosion oil applied to finished tools because before putting the goods in the market stream, application of oil was considered to be a process incidental or ancillary to the manufacture of the product under Rule 57A. In the case of Collector of Central Excise v. Ballarpur Industries Ltd. -1989 (43) E.L.T. 804 , the Supreme Court held that sodium sulphate used for chemical reaction at the pulp stage is treatable as "raw material" used in the manufacture of paper even if it is burnt up and does not retain its identity in the end-product.
10. All that the learned SDR Shri Rakesh Bhatia had to say was that the certificate of the Department of Electronics was issued after the impugned order was passed by the Assistant Collector. The certificate was also not brought to the notice of Collector (Appeals).
11. We have carefully considered the appeal and the submissions of the learned Counsel who has dealt with the matter elaborately. We observe from the samples of the fresh Lap film and the used Lap film which was produced at the hearing, that while the fresh Lap film is translucent in character, the used Lap film has horizontal parallel lines marked on it indicating that it has been subjected to use. It appears to us that the decision of the Tribunal in the case of Weldekar Laminates (supra) regarding BOPP film which are used as separators between two layers of laminates and loses its identity in that process is fully applicable to the present case. The Lap film should be regarded as an input for purposes of Rule 57A.
12. Both the lower authorities have taken the view that because of its use in the burnishing machine, the Lap film becomes a tool and just as Modvat credit is not admissible to the machines in terms of Explanation to Rule 57A, Lap film which is a part of the machine is also not entitled to the credit. In order to see the validity of this argument we will have to refer to the Explanation itself which is as under :-
"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, and
(b) paints and packaging materials, but does not include -
(i) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any changes in any substance in or in relation to the manufacture of the final products."
13. A plain reading of the Explanation shows that what are excluded from the purview of the Modvat credit are :--
(a) Machines...tools or appliances
(i) used for producing or processing of any goods
(ii) for bringing about any change in any substance in or in relation to the manufacture of the final products.
14. The Explanation covers only machines etc. Thus, it is the machines etc. mentioned in the Explanation which are not entitled to Modvat credit. The Explanation does not say that whatever is used in the machines etc. is also excluded from the scope of Modvat credit; to extend the scope of the expression "machines etc." to cover the inputs or any substance or materials used in the machines for the manufacture of the final product would mean importing something into the Explanation which is not there. Besides, from the practical point of view, it would amount to rendering the provisions totally nugatory and unworkable because no goods can be produced by the machines etc. by themselves without some inputs being used in the machines. Thus, the interpretation that because Lap films are used in the burnishing machine, they too get excluded as part of machine, is not warranted.
15. The other ground on which Modvat credit has been denied to Lap film is that it "indisputably does not form part of the final product and it is also not directly used for 'finishing' the final product". The first point stands settled in the decision of the Tribunal in the Titaghur Paper Mills case (supra), in the H.M.M. case (supra) and in the Union Carbide case (supra). So far as the contention that Lap film is not directly used for 'finishing' the final product is concerned, this contention does not appear to be well-founded on facts because it is on record that the Lap film is held on the tape spool assembly and polishes and burnishes the magnetic surface of the disks. In view of the foregoing it is evident that the orders of the lower authority have been passed without proper understanding of the Modvat Scheme and the provisions of Rule 57A.
16. The fact that there is a Notification under the Customs Act exempting Lap films when imported into India for the purpose of manufacture of floppy diskettes from part of the duty would further strengthen the appellants' claim in the appeal that Lap films are permissible inputs for manufacture of floppy diskettes under Rule 57A. The Certificate of the Department of Electronics, though issued later, further supports such a view. The impugned orders are, therefore, set aside and the appeal is allowed with consequential relief to the appellants.