Customs, Excise and Gold Tribunal - Tamil Nadu
Andhra Pradesh Paper Mills Ltd. vs Collector Of Central Excise on 4 April, 1990
Equivalent citations: 1990(50)ELT252(TRI-CHENNAI)
ORDER V.P. Gulati, Member (T)
1. These two appeals are against the common impugned order of the Collector or Central Excise (Appeals), Madras dated 29-4-1988. Therefore, the appeals filed before the Tribunal are also being disposed of by a common order.
2.,_The issue involved in the appeals relates to the benefit of MODVAT credit in respect of the following items - (i) Chipper knives (ii) Wire netting (iii) Dandy covers (iv) Wollent felts (v) Transmission and conveyor belting and aso (vi) hydrochloric acid (vii) P.M. acetate (viii) alfloc powder (ix) bleaching powder and (x) Soda Ash. The use of each of these items is stated to be as under:-
(i) Hydrochloric Acid:- It is used in cleaning of the wire mesh whenever the same is clogged with fibrous material and dirt.
(ii) P.M. Acetate: - It is used as a slimecide to avoid formation of slime in the pipe line during process.
(iii) Alfloc Powder: - This is used in the boiler water treatment but not for maintenance of boiler.
(iv) Bleaching Powder: - Bleaching Powder is used as a germicide in the water treatment instead of chlorine when the same is not available. Chlorination process is stated to reduce the slime formation in the pipe line and is stated to be used in the course of manufacture of paper and not for maintenance of machinery.
(v) Soda Ash: - Soda Ash alongwith lime is used in water treatment plant in softening of water being fed to the boiler to generate steam which is used at different stages of paper manufacture.
(vi) Chipper Knives: - These are used for cutting the wood and bamboo to the desired sizes for further use in the manufacture of paper.
(vii) Wire netting: - The same is used on the paper machines on which the paper gets finally formed and these have to be replaced periodically.
(viii) Dandy covers: - These are used as part of the paper machine for proper formation of sheets for writing and printing paper.
(ix) Woollen felts: Pulp is spread on the felts till its conversion into paper sheets and are replaced from time to time.
(x) Transmission & Conveyor belting: - Power is transmitted by the beltings from motors to different equipments in the manufacturing process of paper.
3. The learned lower appellate authority has held that the items in the nature of chemicals etc. could not be taken to have been used in or in relation to the manufacture of paper as the same are either used in the manufacture of other items not suffering duty or are used for the maintenance of machinery. He has also held that the items sclely required for the maintenance of machinery such as wire netting, dandy covers, woollen felts etc. are not elgible for the benefit of the MODVAT credit as the same are solely required for the maintenance of machinery which itself is not eligible for the benefit.
4. The learned Consultant for the appellants in this connection stated that all the items mentioned above are used in or in relation to the manufacture of paper and, therefore, in terms of Rule 57A are eligible for the benefit of the MODVAT credit. In this connection he pleaded that in the context of Notification No. 201/79 which allowed credit of duty paid on inputs used in the manufacture of finished product, the Hon'ble Supreme Court in the case of CCE v. Ballurpur Industries [1989 (43) ELT 404] have amplied the scope of the words 'in the manufacture of used in the context of the chemicals used in the paper industry and drew our attention to the observations of the Hon'ble Supreme Court.
5. The learned consultant also cited the judgement of the Hon'ble Supreme Court in the case of Member, Board of Revenue, West Bengal v. Phelps and Co. (P) Ltd. (1972) 29 STC 101 SC. He pleaded that the gloves used by the workers while they were working in the factory have been held to have been used in the manufacture of finished product when they are engaged in hot jobs or in handling corrosive substances. He pleaded that the Hon'ble Supreme Court in this case have followed the ratio of the earlier decision of the Court in the case of J.K. Cotton Spg. and Wvg. Mills Co. Ltd. v. Sales Tax Officer, Kanpur (1965) 16 S.T.C. 563 (S.C.) - (1965) I.S.C.R. 900. He pointed out that the Hon'ble Supreme Court has re-affirmed the observations in the JK Cotton Spg. and Wvg. Mills which are reproduced below for convenience of reference:-
"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'."
6. The learned consultant pleaded that the collector has erred in holding that some of the chemicals used in the generation of steam which does not suffer any duty but which was used in various stages of manufacturing process in the factory could not be held to have been used in or in relation to the manufacture of paper. He pleaded under rule 57D intermediate products even if they are not chargeable to duty would not disentitle the inputs which had been used to produce the same from the benefit of MOD-VAT credit. He pleaded that these chemicals were also used in relation to the manufacture of the finished product. In regard to chipper knives, dandy covers, etc. he stated that no doubt the same were used on the machines but the fact remains that these items were not figuring under the excluded category of goods specified under Rule 57A and so long as their use was in relation to the manufacture of paper, be it on the machines, the benefit of MODVAT credit is available to them.
7. The learned SDR for the Department pleaded that in so far as chipper knives are concerned this specifically stood excluded from the scope of Rule 57A. He pleaded these were in the nature of tools and equipments which were used for bringing about a change in the wood and bamboo in relation to the manufacture of the final product. Such items of tool he pleaded stood excluded under Rule 57A(l)(b)(l). He further pleaded that the case of Phelps & Co. cited by the appellant related to a Sales Tax matter where Section 5(2) of the West Bengal Sales Tax Act fell for consideration as to the exclusion of the turnover of some of the goods purchased by the appellants. He pleaded that the Hon'ble Supreme Court in that case was interpreting as to whether the gloves which were worn by the workers when they were engaged in the manufacture of the goods was for use in the manufacture of goods for sale or not. He pleaded that the point to be considered in the proceedings before us is whether the goods in question are used in the manufacture or in relation to the manufacture of the finished goods. He pleaded that so far as the Soda Ash which is used for softening of the water was concerned, it could be taken to be used in relation to the manufacture of paper as the water was required to be softened for being used in the process of manufacture of paper. However, so far as the other chemicals were concerned, they were either used for maintenance work or for cleaning of the pipe-line and, therefore, they cannot be taken to be used in the manufacture or in relation to the manufacture of paper. So far as knives are concerned the learned DR reiterated that the same were in the nature of tools which stand excluded from the scope of Rule 57A.
8. In regard to Alfolc powder he pleaded that no doubt it was used in the treatment of water in the boiler but inasmuch as steam which was stated to have emerged as an intermediate product and did not suffer any duty the benefit of MODVAT credit in respect of alfolc powder cannot be given. He pleaded that the steam was in fact not an intermediate product in the manufacture of paper.
9. We observe that the appellants' pleas will have to be considered in the light of the law laid by the Supreme Court as to the scope of the term "in the manufacture of the goods" as pointed out by the learned Consultant for the appellants in the case of J.K. Cotton Spinning & Weaving Mills Co. Ltd. The Hon'ble Supreme Court has held that the expression 'in the manufacture of goods' should normally encompass the entire process carried on for converting raw materials into finished goods and that where any particular product is used in a process so integrally connected with the ultimate production of goods that but for that process, manufacture or processing of goods would commercially be inexpedient the goods required in that process would fall within the expression 'in the manufacture of goods'.
10. In the same context of MODVAT credit, the Hon'ble Supreme Court in the case of CCE, Calcutta-II v. Easter Paper Industries Limited [1990 (26) ECR 10 (SC)] have held as under:-
"...Anything required to make the goods marketable must form part of the manufacture and any material or any material used for the same would be component part for the end product..."
It is thus seen that the Hon'ble Supreme Court has held that so long as it can be shown that the materials used as inputs have a nexus with the process which is integrally connected with the ultimate production of goods till the same are fit for being put in the marketing stream and such process is so integrally connected with ultimate production of goods that it would be commercially inexpedient to produce the finished goods without that process, all such inputs would get the benefit of credit of duty. It is observed that the stress is on the processes which are integrally connected with the production of the goods. Therefore, for the items to pass the test of eligibility to the benefit of the MOD-VAT credit will be such that they participate in the process of manufacture without which the end product cannot be produced. In the present case, in the case of chemicals used, the learned SDR fairly concedes that so far as softening of water is concerned, the same is a process which is for the manufacture of paper and softening of water is a requirement for the manufacture of paper. He has thus conceded that soda ash used in this process would also be eligible for the benefit of MODVAT credit. In regard to the other chemicals the position is, however, different. Hydrochloric acid is used for cleaning of the wire mesh as and when the same is found to have been clogged. The question is whether this cleaning operation can be considered to be a process of manufacture. Admittedly it is a process of maintenance of the wire mesh to keep it in the desired condition. Therefore, it cannot be said to have been used in the process of manufacture of paper. However, a point can be made that the same is used in relation to the manufacture of paper. The expression "used in relation to the manufacture" of paper no doubt has a wider meaning than the words "in the manufacture", in the context of the credit scheme and, therefore, it can be pleaded that hydrochloric acid has been used in relation to the manufacture of paper. The expression "in relation to" has to be read in the context of the manufacturing process of the finished goods covered under the MOD-VAT scheme. There may be processes which are preparatory in nature and anterior to the start of the manufacturing stream of the finished product but which have to be essentially carried out before the actual manufacturing process of the goods can start or these may be related to the preparing of the material which have ultimately to go into the manufacturing stream or in preparing of certain materials which directly or indirectly participate in the manufacturing process in a manner that these help in the process of manufacture to be carried a step further. The inputs used in these processes for manufacture of the products which are in turn used in the manufacturing stream of the finished product can be taken to have been used in the manufacture of the or in relation to the manufacture of finished product. Generation of steam which ultimately participates in the manufacturing processes is one such item. The other may be pre-treatment of the raw material which go into the manufacturing stream or the materials which may be used for making the end product ready for marketing. The use of the materials has to be such that they carry by their participation, in the manufacturing stream the process of manufacture a step further. The materials used for maintenance of the machines etc. are for cleaning the pipe lines as and when the situation warrants cannot be held in this context to have been used in relation to the manufacture of the end product but can be taken to have been used in relation to the maintenance of the machinery which participate in the manufacturing process. Therefore, all the goods which have been found to be for the maintenance purpose cannot be said to have been used in relation to the manufacture of paper.
In the result we hold that while soda ash and alfloc would be eligible for the MOD-VAT credit the other items of chemicals would not be eligible.
11. So far as chipper knives are concerned these are used for cutting of wood and bamboo and will have to be taken to be in the nature of tools and tools are specifically excluded from the purview of the MODVAT credit under Rule 57A, therefore, cannot be held to be eligible for MODVAT credit. So far as dandy covers, wire netting and woollen felts are concerned these are essentially parts of the paper making machinery and their use has to be held to be to keep the paper making machinery functional for the production of paper. While these participate in the manufacture of the end product by being a part of the paper making machinery these by themselves do not participate in the process which are carried out in processing the materials which ultimately lead to the manufacture of paper. We observe that while allowing MODVAT credit regard will have to be had to the purpose of the scheme i.e. to reduce cascading effect of the duty on the finished product by way of relief on the duty paid in respect of the goods which are used in or in relation to the manufacture of the finished product. The machineries, equipments and apparatus by themselves have been precluded from the benefit of the MODVAT credit. Cascading effect of the duty paid on the machinery used in or in relation to the manufacture of the finished goods is not to be mitigated and as a corollory thereto the parts which are used in these machineries to make them functional also are not entitled to the benefit of the MODVAT scheme. These parts which are used as replacement from time to time have to be held to have been used in relation to the machines themselves and not in relation to the manufacture of the goods. In the scheme of MODVAT if the parts of the machines are included there is no reason why the lighting equipment and other structural fittings which are used in the factory in which the goods are produced would not have to be allowed the benefit of the input duty relief under the MODVAT scheme. Going by the ratio of the judgment of the Hon'ble Supreme Court cited supra, it has to be concluded that the credit has to be allowed only in respect of such of those inputs which are used in the process of manufacture and which go directly into the manufacturing stream by themselves or are used in the manufacture of materials which go into the manufacturing stream resulting in the manufacture of the end product. The parts of the machines which produce the finished goods do not pass this criterion and in that view of the matter we hold that the appellants have rightly been denied the MODVAT credit in relation to chipper knives.