Customs, Excise and Gold Tribunal - Delhi
Ballarpur Industries Ltd. vs Collector Of Central Excise on 31 December, 1999
Equivalent citations: 2000(116)ELT312(TRI-DEL)
ORDER Jyoti Balasundaram, Member (J)
1. The issue before this Bench relates to admissibility of Modvat credit under Rule 57A of the Central Excise Rules on fuel oils such as Low Sulphur Heavy Stock (LSHS) and furnace oil for captive generation of electricity which in turn is used for manufacture of final products of the assessees. In the case of Ballarpur Industries Ltd., LSHS and furnace oil are used in Diesel Generation Sets for generation of electricity used for electrolysis in their Caustic Soda plant. In the case of Modi Cements Ltd., furnace oil and light diesel oil are used in Diesel Generating Sets for generating electricity used for firing kilns for manufacture of cement and clinker and for maintaining constant supply of electricity in the plant. In the case of Jaypee Rewa Cement, furnace oil is used in Diesel Generating Sets for generation of electricity for manufacture of cement. In the case of Modipon Ltd., Residual Fuel Oil (RFO) is used for generation of electricity used as fuel for manufacture of synthetic filament yarn. In the case of India Glycols Ltd., Residual Fuel Oil (RFO) is used in the Diesel Generating Sets for generation of electricity for the manufacture of chemicals such as mono-ethylene glycol, Di-ethylene Glycol, Tri-ethylene Glycol, etc. In the case of Risshabh Steel Ltd., light diesel oil, furnace oil and mobile oil in the Diesel Generating Sets for generation of electricity to run the furnace in which iron and steel products such as MS ingots, etc., are produced.
2. At the outset, the objection to jurisdiction of this Bench to hear the matter has been raised by Shri A.K. Jain, learned Advocate on the following grounds:
1. That the matter has been referred to a Larger Bench vide Order dated 9-12-1997 without the referring Bench expressing its opinion with regard to the correctness of any of the conflicting judgments on the issue which is not permissible, in the light of the decision of the Hon'ble Supreme Court in the case of Union of India v. Paras Laminates P. Ltd. reported in 1990 (49) E.L.T. 322 (S.C.) and in the case of Brite Automotives and Plastics Ltd. v. Collector of Central Excise, Indore reported in 1995 (75) E.L.T. 793.
2. On 13-5-1999, when the President of the Tribunal took the decision to constitute the Larger Bench, there were no conflicting judgments, since the Southern Zonal Bench had already recalled its order in the case of Ferro Alloys Corporation reported in 1997 (20) RLT 778, vide Final Order No. dated 9-3-1999, and allowed the appeal of the assessees following the decision of the Northern Regional Bench in the case of Rathi Alloys reported in 1997 (93) E.L.T. 594 (T).
3. There is no provision in the Central Excises Act and the CEGAT (Procedure) Rules, 1982 empowering the President of the Tribunal to constitute a Larger Bench in the event of conflict of judgment and that the Tribunal being a creation of Statute, it is bound by its rules and procedures. In this connection, he cites the Supreme Court judgment in the case of Gurucharan Dass Chaddha v. State of Rajasthan reported in AIR 1966 SC 1418 and the judgment in the case of Income Tax Appellate Tribunal v. Dy. CIT (Asstt.) III, Hyderabad reported in 1996 (82) E.L.T. 4 (S.C). Learned Counsel, therefore, submits that in these circumstanes, the only course open to the Bench which heard this case was to decide appeals on the basis of Rathi Alloys decision, holding that the later judgment in the case of Ferro Alloys Corporation cited supra was per inqurium.
3. The above objections are not tenable. One of the objects of constituting Larger Benches is conflict resolution. The existence of conflict of decisions has been held to be a rational and valid ground for the President of the Income Tax Appellate Tribunal to act in exercise of his administrative powers to constitute a Special Bench if he thought it fit to do so, by the Hon'ble Supreme Court in the case of IT AT v. Dy. CIT (Asstt.) III, Hyderabad reported in 1996 (82) E.L.T. 4 (S.C.) wherein the Court held that ITAT President can constitute a Larger or Full Bench in exercise of his administrative power under Section 255 of the Income Tax Act or on the basis of the judicial order passed by the Bench of the Tribunal making a reference to the President for constitution of Larger Bench. That the President is empowered to constitute a Larger Bench in terms of Section 129C(5) of the Customs Act cannot be, and is not questioned. The challenge to the power of the President to constitute a Larger Bench was raised before the Delhi High Court in the case of Paras Laminates P. Ltd. v. CEGAT reported in 1990 (45) E.L.T. 521 (Delhi) - the Court allowed the Writ Petition. However, the Delhi High Court judgment was reversed by the Hon'ble Supreme Court and its order reported in 1990 (49) E.L.T. 322 (S.C.). Relevant paragraphs of the Supreme Court judgment are reproduced below :
6. The Tribunal is constituted by the Central Government under Section 129 of the Act. One of the Members of the Tribunal is appointed by the Central Government as its President. Section 129C says that the powers and functions of the Tribunal may be exercised and discharged by Benches consttuted by the President from amongst its Members. Subject to certain exceptions, a Bench shall consist of one Judicial Member and one Technical Member [Section 129C(2)].Sub- section (5) of Section 129C provides for a reference of a case by the President in the event of differences in opinion arising amongst members on any point. This Sub-section reads :
"(5) If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ and the case shall be referred by the President for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case including those who first heard it:
Provided that where the members of a Special Bench are equally divided, the point or points on which they differ shall be decided by the President".
7. Sub-section (6) of Section 129C says that the Tribunal shall have power to regulate its own procedure and the procedure of the Benches thereon in all matters arising out of the exercise of its powers or the discharge of its functions, including the places at which the Benches shall hold their sittings."
Sub-section (7) and (8) of this section provide that the Tribunal shall, for certain specific purposes, be deemed to be a civil court.
8. There is no doubt that the Tribunal functions as a court within the limits of its jurisdiction. It has all the powers conferred expressly by the statute. Furthermore, being a judicial body, it has all those incident and ancillary powers which are necessary to make fully effective the express grant of statutory powers. Certain powers are recognised as incidental and ancillary, not because they are inherent in the Tribunal, nor because its jurisdiction is plenary, but because it is the legislative intent that the power which is expressly granted in the assigned field of jurisdiction is efficaciously and meaningfully exercised. The powers of the Tribunal are no doubt limited. Its area of jurisdiction is clearly defined, but within the bounds of its jurisdiction, it has all the powers expressly and impliedly granted. The implied grant is, of course, limited by the express grant and, therefore, it can only be such powers as are truly incidental and ancillary for doing all such acts or employing all such means as are reasonably necessary to make the grant effective. As stated in Maxwell on Interpretation of Statutes, (eleventh edition) "where an Act confers a jurisdiction, it impliedly also grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution."
9. It is true that a Bench of two members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier cases on identical matters. Classification of particular goods adopted in earlier decisions must not be lightly disregarded in subsequent decisions, lest such judicial inconsistency should shake public confidence in the administration of justice. It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench. This is what was done by the Bench of two members who in their reasoned order pointed out what they perceived to be an error of law in the earlier decision and stated the points for the President to make a reference to a larger Bench.
10. That the President has ample power to refer a case to a larger Bench is not in doubt in view of Sub-section (5) of Section 129C, which we have set out above. That provision clearly says that in the event of the members of a Bench differing in opinion on any point, and the members are equally divided, the case shall be referred to the President for hearing on any such point by one or more of the members of the Tribunal, and such point shall be decided according to the opinion of the majority of the members.
11. It is true that Sub-section (5) refers to difference of opinion arising amongst members of a Bench in a particular case, and not specifically where the members of a Bench doubt the correctness of an earlier decision. However, Section 129C confers power of reference upon the President. That power should be construed to be wide enough to enable the President to make a reference where members of a Bench find themselves unable to decide a case according to what they perceive to be the correct law and fact because of an impediment arising from an earlier decision with which they cannot honestly agree. In such cases, it is necessary for the healthy functioning of the Tribunal that the President should have the requisite authority to refer the case to a Larger Bench. That is a power which is implied in the express grant authorising the President to constitute Benches of the Tribunal for effective and expeditious discharge of its functions.
12. In our view, the Bench of two members acted within their power in stating the points of law which required clarification and the President acted equally within the bounds of his power in constituting a larger Bench to hear and decide those points.
The existence of conflicting judgments on an issue is a valid ground for referring a matter to the Larger Bench and the Referring Bench is not required to express any opinion about the correctness of any of the previous judgments. Further the practice of referring to Larger Bench when conflicting judgments are noted is being followed by the Hon'ble Supreme Court in the case of Ujagar Prints reported in 1987 (27) E.L.T. 567 (S.C.) and Collector v. Cotspun Ltd. reported in 1998 (99) E.L.T. 24 (S.C). The objection to constitution of Larger Bench on the ground that the conflict no longer existed on such date, is also not tenable because conflict did exist on the date when the Referring Bench passed its order. Once the matter has been referred to Larger Bench, it is the Larger Bench which is required to consider the issue referred to it and decide the same. In the case of Ashwin Vanaspati P. Ltd. v. Collector reported in 1994 (70) E.L.T. 754 (Tribunal), the Larger Bench of the Tribunal noted that when the matter was being heard by it, no conflict of decisions existed as the Southern Zonal Bench judgment which took a view contrary to the earlier one was set aside by the Madras High Court, but however went on to examine the issue on merits and render its independent opinion, in the case of Bajaj Auto Ltd. reported in 1996 (88) E.L.T. 355, the Larger Bench of the Tribunal answered the issue referred to it and did not merely follow the only High Court decision on the issue.
4. The Tribunal's order in the case of Brite Automotives and Plastics Ltd. cited supra by the learned Counsel does not advance his argument on jurisdiction in that case, the Bench did not note any conflict of judgments and followed the same view as expressed in an earlier decision of the Tribunal. The decision does not lay down the proposition that a Bench can place a matter before the President of the Tribunal for reference to a Larger Bench only when it expresses a view with regard to correctness of any conflicting judgment.
5. For the above reasons we over-rule the objection on jurisdiction and proceed to decide the issue on merits.
6. The question as to whether Modvat credit would be admissible on fuel oils used for generation of electricity as an input under Rule 57A of the Central Excise Rules is to be decided on the basis of a true construction of the Modvat rules as they stood at the material time i.e. prior to 16-3-1995. Clause (c) under the Explanation to Rule 57A introduced in 1994 covering "inputs used as fuel" is an inclusive definition of the expression "input". The fact that Clause (d) covering "inputs used as fuel" for generation of electricity under Explanation to Rule 57A was introduced w.e.f. 16-3-1995 cannot automatically lead to the conclusion that, prior to that date, inputs used for generation of electricity will not be entitled to Modvat credit particularly in view of the fact that fuel is used in or in relation to the manufacture of the final product, in view of the wide coverage of the expression "used in or in relation to the manufacture" occurring in Rule 57A. We find that in the case of Jay Pee Rewa Cement Final Order No. A/864/97-NB, dated 12-8-1997 reported in 1997 (95) E.L.T. 429 the Tribunal held that "looking to the facts and the use of fuel oil and also the fact that terms used "in or in relation" are wide enough, as also to the fact that fuel were treated as inputs if they were used in the process of manufacture, we hold that the furnace oil is an input and thus is admissible for Modvat credit". The Bench has relied upon the earlier order of the Tribunal in case of Indian Oil Corporation Ltd. reported in 1985 (19) E.L.T. 145. In the case of Collector v. Batliboi & Co. reported in 1997 (89) E.L.T. 696 and Rathi Alloys and Steel Ltd. v. Collector of Central Excise, New Delhi reported in 1997 (93) E.L.T. 594, Modvat credit has been held to be admissible on inputs used as fuel. In the Indian Oil Corporation case cited supra, the Tribunal considered interpretation of Notification 352/77 which exempted petroleum products falling under TI-11AA of the Schedule to the erstwhile Central Excise Tariff, produced in specified types of Refineries and used as fuel within the same premises for the production or manufacture of finished petroleum products. In that case Refinery used residual oil for the production of steam and electricity. According to the Central Excise Department, residual oil did not qualify for exemption since steam and electricity were themselves liable to duty and could not be said to be petroleum products. The majority of the Members held that residual oil used as fuel for production of steam and electricity which was in turn used for production of petroleum products, can be said to have been used as fuel within the same premises for production and manufacture of finished petroleum products and that the exemption Notification does not contain anything to support an interpretation that when steam and electricity are produced and used in that way, the fuel that was used to generate them cannot be said to have been used as fuel in the manufacture of finished petroleum products. The Tribunal held that electricity and steam were themselves not fuel but were produced by fuel and the steam and electricity generated was in turn used in the manufacture of finished petroleum products. In the subsequent decisions also the Tribunal has been taking the same view in the case of Indian Oil Corporation vide Final Order Nos. 552 to 554/88-C, dated 13-6-1988 and Final Order No. 49-50/88-C, dated 2-11-1988. It is true that the above decisions have been rendered in the context of Notification 352/77 and not while interpreting 57A of the Central Excise Rules; however, since the exemptions used are pari materia, those decisions would be applicable in the context of Modvat also and use as fuel is the requirement of both Notification 352/77 and Explanation C to Rule 57A. Therefore, an item used as fuel for generation of electricity which in turn is used in the manufacture of final products is indeed an item used as fuel in the manufacture of the final product.
7. As per Explanation (c) to Rule 57A of the Central Excise Rules, the expression "input" includes input used as fuel. The Hon'ble Madras High Court in the case of Ponds (India) Ltd. v. Union of India reported in 1993 (63) E.L.T. 3 (Mad.) has held that explanation to Rule 57A contains only an inclusive definition of the term "input". It is well settled that the inclusive definition expands the scope of the expression, and cannot be treated as restricted in any sense. Therefore, once a particular item is covered by the inclusive definition of input under the explanation to Rule 57A, we need not proceed further and examine the question as to whether fuel is used in or in relation to the manufacture of the final product. In the case of Ferro Alloys Corporation v. Commissioner of Central Excise reported in 1997 (20) RLT 778 which is relied upon by the Revenue before us, it was held that generation of electricity was not integral to the process of manufacture of the final product. However, there is no dispute that electricity was generated and ultimately used in the manufacture of the final product. We note that in the case of C.C.E., Ahmedabad v. Insat Heat Exchangers P. Ltd., 1999 (107) E.L.T. 192, the contention raised by the Revenue that use of the inputs in question was for cleaning purposes and hence those inputs were not essential inputs used for manufacture of the final product, has been negatived, holding that in the Modvat scheme once a commodity is described as input, the distinction thereof regarding essentiality or non-essentiality of input is immaterial. The question is not whether a commodity can be made without the use of another commodity. If a manufacturer chooses to use one article to manufacture another, the first article is an input as long as the item in question is used, and has to be considered as an input. In the present case, there is no dispute that fuel oils have been used for captive generation of electricity which in turn is used for manufacture of the final products of the different assessees and, therefore, they are to be held eligible to the benefit of Modvat credit under Rule 57A. We also note that the Facor decision has been recalled vide Final Order No. 540/99, dated 9-3-1999 and the Tribunal has allowed the appeal of the assessees following the decision of the Northern Regional Bench in the case of Rathi Alloys reported in 1997 (93) E.L.T. 594 in which the Tribunal has held that residual fuel oil (RFO) and low density oil (LDO) used in diesel generating sets for making electric arc furnace operational were inputs used as fuel and eligible for credit under Rule 57A, as their use was necessary for the manufacture of the final product, following the ratio of the Apex Court's decision in the case of Rajasthan State Chemical Works reported in 1991 (55) E.L.T. 444 (S.C.) wherein the Supreme Court has held that if any operation in the course of manufacture is so integrally connected with several operations which result in the emergence of manufactured goods and such operation is carried on with the aid of power, then the process "in or in relation to the manufacture" must be deemed to be one carried on with the aid of power", The Tribunal held that although the Supreme Court judgment was in a different context, yet the ratio was directly applicable inasmuch as without utilising RFO and LDO as fuel the final product viz. iron and steel will not emerge in the absence of supply of electricity by the Rajasthan State Electricity Board.
7. The next contention of the Revenue is that prior to 16-3-1995, inputs used for generation of electricity are not entitled to Modvat credit under Rule 57A, since it is only with the introduction of Clause (d) to the explanation under Rule 57A by Notification dated 16-3-1995 that inputs used for generation of electricity used within the factory of production or for any other purpose were included as inputs. However, we see no merit in the submission. Clause (d) to the explanation to Rule 57A clearly refers to "inputs used for generation of electricity". Thus the reference is not confined to inputs used as fuel for generation of electricity. Therefore, while a non-fuel input would not be covered by Clause (c) to Explanation to Rule 57A, the input used for generation of electricity would be covered by Clause (d) introduced on 16-3-1995. This according to us is the scope of the first leg of explanation Clause (d); the second leg of explanation to Clause (d) refers to electricity used in the factory for manufacture of final product or for any other purpose. After 16-3-1995, as long as electricity is used within the factory of production, it does not matter whether it was used for purpose of manufacture of final product or for some other purpose. But prior to 16-3-1995, for an input used for generation of electricity to qualify for credit under Rule 57A, it should be shown that the electricity so generated has in turn been used in or in relation to the manufacture of the final product, and if the electricity generated by use of fuel has not been used in or in relation to the manufacture of the final product, it will not be eligible for credit. Therefore, that it is not correct to contend that prior to 16-3-1995 inputs used as fuel for generation of electricity are not covered as inputs under Rule 57A. Para 67(3) of the Explanatory Notes to the Finance Bill 1995-96 states that the Notification 11/95 seeks to amend the Central Excise Rules so as to inter alia expand the scope of inputs under the Modvat Scheme. Therefore, no inference can be drawn from the Budget Explanatory Notes that the fuel used for generation of electricity was not an input prior to 16-3-1995.
8. It is the case of the Revenue that electricity is not excisable goods in the sense that it is not specified in any entry of the Schedule to the CETA 1985. However, the bar created by Rule 57C of the Central Excise Rules is not attracted since electricity is not the final product which is either wholly exempt from duty or is chargeable to nil rate of duty. The Revenue relies heavily on Rule 57D(2) of the Central Excise Rules to oust fuel oils from the benefit of Modvat credit. According to the Revenue, Modvat credit can be allowed on the fuels in question only if the intermediate product viz. electricity satisfies the conditions mentioned in proviso (b) to Rule 57D(2) viz. that it should be specified as an input or as a final product under Notification issued under Rule 57A, and since electricity is neither specified as an input nor a final product under any Notification issued under Rule 57A, credit cannot be extended. We, however, see no merit in this argument. Rule 57D(2) stipulates that credit of specified duty allowed in respect of any input "shall not be denied or varied" on the ground that an exempted intermediate product has come into existence during the manufacture of a final product. This expression cannot be equated with the expression "credit shall be allowed only on the ground mentioned in the Sub-Sectionrule". Rule 57A states that credit may be allowed on inputs subject to terms and conditions mentioned in a Notification issued thereunder. Rule 57B sets out that in respect of inputs purchased from small scale units, credit shall be allowed at the rate that was applicable to such inputs. Therefore, Rule 57A and 57B are the rules relating to allowing of credit. On the other hand, Rule 57C says that no credit of duty paid on inputs shall be allowed when the final product is exempt....". Thus Rule 57C is a Rule relating to non-allowing of credit. However, Rule 57D(2) does not refer to credit being allowed or not allowed but uses the expression "credit shall not denied or varied". To our minds, Rule 57D(2) does not set out the condition precedent for extending Modvat credit to an assessee. Non-fulfilment of condition of Rule 57D(2) cannot result in disentitlement of an assessee to credit. The scope of the Rule has been considered by the Tribunal in the case of OCL v. Collector of Central Excise reported in 1998 (102) E.L.T. 710 wherein it was held that the fuel was used in or in relation to the manufacture of the final product and the question of electricity coming in an intermediate stage is of no relevance in that case because electricity is not excisable, and, therefore, the question of specification under Notification 177/86-C.E. does not arise, and Rule 57D does not apply because the benefit is not claimed under that Rule. The assessees claim to Modvat credit was upheld by the Tribunal. Thus - in Rule 57D(2) is required to be fulfilled only by a person who wants to claim benefit under that Rule and if an assessee can otherwise establish that Modvat credit is available according to the other provisions of the Rules, he cannot be denied credit on the ground of non-fulfilment of the condition of Rule 57D(2).
9. There are many circumstances which are pointers to hold that the fulfilment of Rule 57D(2) is not a condition precedent for availing Modvat credit. Firstly, Rule 57D(2) refers to intermediate products which are exempt from duty or chargeable to nil rate of duty. Therefore, if a dutiable product comes into existence as an intermediate product, this condition is not satisfied. However, it is not the case of the Revenue that since Rule 57D refers only to exempted product or products chargeable to nil rate of duty, credit will be de- nied if the intermediate product is one on which duty is leviable. Secondly, the first proviso to Rule 57D(2) refers to intermediate product being used within the factory of production in the manufacture of final products on which duty is leviable whether in whole or in part. Therefore, if a product is not used in the factory but is cleared, certainly it cannot be an intermediate product although the first proviso to Rule 57D(2) refers to intermediate product being used within the factory. The above would clearly show that Rule 57D(2) has been enacted only out of abundant caution so as to ensure that Modvat credit is not denied in the circumstances mentioned in the Sub-Sectionrule.
10. The reliance placed by the Revenue on the decision of the Larger Bench of the Tribunal in the case of TELCO reported in 1996 (87) E.L.T. 157 is misplaced. The decision reiterates the well settled legal position that all statutory provisions are to be read as a whole and not in piecemeal, and that no Rule can be ignored. But, it would not be correct to construe that Rule 57D(2) was the proviso barring the credit. Let us analyse the decision. In that case, the Bench considered and interpreted the amendment to Rule 57E effective from 15-4-1987 while the unamended Rule did contain a provision for variation of credit consequent upon variation of duty resulting in payment of extra duty by the manufacturer of inputs. The amended Rule provided for variation of credit consequent on variation of duty resulting in payment of refund to, or recovery of more duty, from the manufacturer of inputs. In that context, it was held that Rule 57A indicates the contours of the Modvat scheme and specific rights and obligations of parties have to be decided on the basis of specific provisions applicable in an given situation. The Larger Bench held that even prior to the amendment to Rule 57E, the user assessee would be entitled to take differential credit in terms of Rule 57A itself and, therefore, the amendment to Rule 57E was only stating the obvious. Therefore, in the present case, if the assessees are otherwise covered by Rule 57A and not hit by Rule 57C, it cannot be held that prior to amendment of Rule 57D, an assessee is not entitled to the benefit under Rule 57A merely on the ground that Rule 57D has been amended.
11. The decisions of the Apex Court in the case of Novopan India Ltd. v. CCE reported in 1994 (73) E.L.T. 769 (S.C.) and Liberty Oil Mills P. Ltd. v. Collector of Central Excise reported in 1995 (75) E.L.T. 13 (S.C), relied upon by the Revenue, only state that if two views are possible, the one in favour of the Revenue is to be preferred. The principle cannot be extended to mean that even if the language of the Rule is plain and unambiguous, and does not lend itself to different interpretation, still it should be interpreted in favour of the Revenue.
12. In the light of the above discussions, we hold that the fuel oils used for generation of electricity which is used for the manufacture of final products by the assessees is eligible to Modvat credit in terms of Rule 57A.
13. In the result, appeal Nos. E/1234-1236/96-NB (M/s. Ballarpur Industries Ltd.), E/676/96-NB (M/s. Modi Cement Ltd.), E/1748/96-NB (M/s. Modipon Ltd.), E/1241/96-NB (M/s. Rishabh Steels Ltd.), E/1836-37/95-NB (M/s. Jaypee Rewa Cement) are allowed, while appeals of the Revenue No. E/1611/96-NB (CCE v. Jaypee Rewa Cement), and No. E/629/96 & E/1051/96-NB (CCE v. India Glycols Ltd.) are rejected.
Sd/- Sd/-
(Lajja Ram) (Jyoti Balasundaram)
Member (T) Member (J)
Lajja Ram, Member (J)
14. With due respects, I do not agree with the view that the fuel oils used for generation of electricity when such electricity was used for the manufacture of final products by the manufacturer of the final products, were prior to 16-3-1995, eligible to the Modvat credit in terms of Rule 57A of the Central Excise Rules, 1944 (hereinafter referred to as the 'Rules').
15. The facts leading to the present reference to the Larger Bench have been summarised in the order proposed by the ld. Member (J). The fuel oils such as Low Sulphur Heavy Stock (LSHS), furnace oil, light diesel oil, residual fuel oil and mobil oil were used in the running of the diesel engines in the process of generating electricity. The electricity so eventually generated was utilised in various processes towards the manufacture of different products like caustic soda, cement, clinkers, synthetic filament yarn, different chemicals including glycol, and iron and steel products. The issue for consideration is whether prior to 16-3-1995, Modvat credit was to be admissible on fuel oils used for generation of electricity under Rule, 57A of the Rules.
16. The question as to whether the Modvat credit was admissible on fuel oils used for generation of electricity under Rule 57 A of the Rules has rightly to be decided on the basis of a true construction of the Modvat rules as they stood at the material time i.e. prior to 16-3-1995.
Under Rule 57A the credit of any duty as specified in the relevant notifications (referred to as the 'specified duty'), paid on the goods used in or in relation to the manufacture (referred to as the 'inputs'), of the specified finished excisable goods, (referred to as 'final products'), was allowable. Such credit could be utilised towards payment of duty leviable on the final products. The eligibility of the credit and the utilisation thereof was subject to the various provisions as contained in the relevant rules, and the conditions and restrictions imposed in the concerned notifications. By way of explanation under Rule 57A the scope of the expression 'inputs' was sought to be extended by specific inclusion of certain items, and was sought to be curtailed by specific exclusion of certain items. While the coverage of the expression 'inputs' was extended by way of specific inclusions, the items enumerated in the Clauses under the explanation were to be interpreted as per the express language used. No extended or restricted meaning could be given to the items specifically included or specifically excluded in and from the purview of the expression 'inputs'.
By way of explanation under Rule 57A, goods used in or in relation to the manufacture of the final products, included, among other enumerated items, the 'fuel'. The inclusion of the inputs used as fuel in the explanation under Rule 57A was made under the Central Excise (First Amendment) Rules, 1994 vide Notification No. 4/94 C.E. (N.T.), dated 1-3-1994 when after Clause (b) in the explanation, Clause (C) for 'inputs used as fuel was inserted. By this amendment inputs used as fuel became eligible for the benefit of Modvat credit.
The expression 'inputs used as fuel' has to be interpreted in terms of the express language used. No violance could be done with the language used therein. No extended meaning could be given to the language used in Clause (C). While certain named items have been specifically included in the expression 'inputs' by virtue of the explanation under Rule 57A, each and every item so included has to be read as such. They are not illustrative.
In the case of Satya Vijay Commercial Co. v. Commissioner of Sales Tax, Maharashtra State -1984 STC (55) 186 (Bombay), the Bombay High Court had observed that in an inclusive definition the things so included by extending the definition are not by way of illustrations and that the extended meaning cannot be further extended by saying that the extended part of the definition is merely illustrative.
17. Fuel is a well recognised term. It is burned to make useful heat or power. There are a number of materials used as fuel. There are non-commercial fuels like wood, wastes, agricultural products, animal dung, etc. Commercial fuels included peat, lignites, coal, oil and natural gas. There are also special fuels like uranium and plutonium. The fuels produce energy by combustion in the presence of oxygen releasing carbon-dioxide and water.
In the Glossary of Chemical Terms, Second Edition, the fuel and fuel oil had been defined as under :-
"Fuel. Any substance that evolves heat as a result of combustion can be used as a fuel. The most common materials used for heating and electric power production are the so-called fossil fuels (coal, petroleum, and the gases or liquids derived from them). Economic feasibility is usually the critical factor in selection of a fuel for a given purpose. Many organic waste products are used as fuels in locations where they are a disposal problem, e.g. sugarcane waste, corn shucks, and other farm wastes. Rocket fuels are a special group, requiring nearly instantaneous comubstion and high temperatures; among them are hydrogen peroxide, hydrazine, and boron hydride. Quite distinct from combustible fuels are the nuclear fuels whose energy is derived from controlled disintegration of atomic nuclei; they are used exclusively in electric power reactors. See also fuel oil; boron hydride; combustible material fission. Fuel Oil. Liquid petroleum fractions or residual refinery products used for heating and power generation. There are several grades designated by numbers. No. 1 is a relatively light distillate used for vaporizing burners; No. 2, called diesel oil, is used for domestic heating and as a fuel for trucks, locomotives, and some automobiles; No. 4 is a light residual grade used for heating of large buildings such as churches, hospitals, etc.; Nos. 5 and 6 are heavier residual types called bunker oils, which must be preheated before use. All grades have flash points above 40°C (104°F), which places them above the generally accepted range of flammable liquids. See also fuel; petroleum."
In the Hawley's Condensed Chemical Dictionary Eleventh Edition, fuel and fuel oils have been defined as under :-
"Fuel. Any substance that evolves energy in a controlled chemical or nuclear reaction is. The most common type of chemical reaction is combustion, the type of oxidation occurring with petroleum products, natural gas, coal, and wood; more rapid oxidation takes place in rocket fuels (hydrogen, hydrozen peroxide, hydrazine) which approaches the rate of an explosion, the nuclear fuels used for power generation release their energy by fission of the atomic nucleus (uranium, plutonium, thorium).
See also combustion, fission.
Fuel Oil. Any liquid petroleum product that is burned in a furnace for the generation of heat or used in an engine for the generation of power, except oils having a flash point of approximately 100 F (37.7C) and oils burned in cotton or wool-wick burners. The oil may be a distillated fraction of petroleum, a residuum from refinery operations, a crude petroleum, or a blend of two or more of these.
Because fuel oils are used with burners of various types and capacities, different grades are required. ASTM has developed specifications for six grades of fuel oil. No. 1 is a straight-run-distillate, a little heavier than kerosene, used almost exclusively for domestic heating. No. 2 (diesel oil) is a straight-run or cracked distillate used as a general purpose domestic or commercial fuel in at-omizing-type burners. No.4 is made up of heavier straight-run or cracked distillates and is used in commercial or industrial burner installations not equipped with preheating facilities. The viscous residuum fuel oils, Nos. 5 and 6, sometimes referred to as bunker fuels, usually must be preheated before being burned. ASTM specifications list two grades of No. 5 oil, one of which is lighter and under some climatic conditions may be handled and burned without preheating. These fuels are used in furnaces and boilers of utility power plants, ships, locomotives, metallurgical operations, and industrial power plants."
In the Random House Compact Unabridged Dictionary fuel has been defined as combustible matter used to maintain fire, as coal, wood, oil, or gas in order to create heat or power. Fuel oil has been described as an oil used for fuel especially one used as a substitute for coal as crude petroleum.
In the case of Caltex Oil Refining (I) Ltd. v. Union of India - 1979 (4) E.L.T. 581 (Delhi), the Delhi High Court had referred to the direct usage of the fuel oil. In para-19 of the judgment, it has been referred that the fuel oil was utilised for the purposes of heating the furnaces of the various units in the refinery of the petitioner. It is used for heating purposes. It is used as fuel.
There is no doubt that fuels are used as such for providing heat and energy.
18. Electricity is not a fuel although indirectly fuels are used in the generation of electricity through the medium of steam and the mechanical energy produced by the diesel engines. Power plants burn oil to make steam, which provides the energy for running the generators. Fuel oils are also used to operate the diesel engines, which produce mechanical energy to power the electric power generators. It is the generator that converts mechanical energy into the electricity. The purpose of the fuel oils is only to produce the mechanical energy through diesel engines or some other machines that may produce mechanical energy.
Electricity is a separate form of energy that can be used for different purposes. It can produce light, heat, magnetic force and chemical changes. Electricity is produced in generators. Electricity generation in itself is a separate activity and has its own economics. It does not form part of the chain of processes in which the inputs are transformed to bring into existence a separate identifiable commodity. It has been observed by the Tribunal in the case of Indian Oil Corporation, Barauni v. Collector of Central Excise, Patna -1985 (19) E.L.T. 145 (Tribunal) that the electricity was not a fuel but electricity could be produced by the fuel oils, and the fuel oils are also usable directly as fuel. In the case of Kerala Electric Lamps Works Ltd. v. Collector of Central Excise, Cochin -1994 (74) E.L.T. 807 (Kerala), the Kerala High Court had held that the fuel were not treatable as raw material.
The Revenue has referred to the Supreme Court's decision in the case of Sales Tax Board of Revenue v. Thomas Stephen & Co. Ltd. - J.T. 1988 (1) SC 631 wherein it has been held "the cashew shells in the instant case has been used as fuel in the Kiln. The cashew shells did not get transformed into the end product. These have not been used as raw materials in the manufacture of the goods."
In the case of Commissioner of Central Excise, Surat v. Batliboi & Co. -1997 (89) E.L.T. 696 (Tribunal), the furnace oil was used in the factory as fuel for its burner; the heat from it was used to melt aluminium and to dry sand moulds. Fuel is anything that can be burned to make useful heat or power. It was to take care of such usages that Clause (c) was inserted in the Explanation under Rule 57A.
19. Prior to 16-3-1995, when Clause (d) in the explanation under Rule 57A was inserted in terms of the Central Excise (4th Amendment) Rules, 1995 vide Notification No. 11/95-C.E. (N.T.), dated 16-3-1995, inputs used as fuel were alone eligible for Modvat credit under Clause (c) of the aforesaid explanation. It were the inputs used as fuel which alone were covered by the said Clause (c). In the scheme of the Modvat rules, the goods (inputs) used as fuel should have been so used in or in relation to the manufacture of the specified final products. Electricity was not the specified final product. The generation of electricity is a separate identifiable well recognised activity. Electricity is generated for different purposes - domestic, industrial, etc. When fuel oils are used to make steam or for running the diesel engines and subsequently generating the electricity through the conversion of mechanical energy into electrical energy, there is no nexus between the goods (inputs) used as fuel in relation to the generation of the electricity, and the processing of the goods (in puts) into the manufacture of the final products. It was by way of specific inclusion that inputs used as fuel were made eligible for the benefit of Modvat credit. As already indicated above, generation of electricity is a separate activity not integrally related to the process of manufacture of the final products from the specified inputs. The burning of oil to make the steam to rotate the turbine or the use of fuel oils to run the diesel engines, the driving of generators by the mechanical energy produced by the turbine or the diesel engines, and the conversion of the mechanical energy into electrical energy by the generators and then use of electrical energy for electrolysis, firing kilns, etc. could not be considered as use in or in relation to the manufacture of caustic soda, cement, synthetic filament yarn etc. The expression 'used in or in relation to the manufacture of the said final products' as occurring in Rule 57A cannot be given such an elongated meaning as to ignore the nexus between the inputs and the final products.
In the case of J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, Kanpur (decided on 28-10-1964) 1997 (91) E.L.T. 34 (S.C.) the Supreme Court observed in para-8 that 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. It was added "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".
By way of illustration the Supreme Court had referred to the raw cotton as the raw material and the cloth as the final product. In para-8 of the judgment it has been referred that in the case of a cotton textile manufacturing concern, raw cotton undergoes various processes before cloth is finally turned out. Cotton is cleaned, carded, spun into yarn, then cloth is woven, put on rolls, dyed calendered and pressed. The Supreme Court held that all these processes would be regarded as integrated processes and included "in the manufacture" of cloth. In para 9, the Supreme Court observed that if a process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may even if after theoretically possible, be commercially inexpedient, then the goods intended for use in the process or activity as specified will qualify for special treatment. The Supreme Court clarified that every category of goods in connection with the manufacture of or in relation to the manufacture or which facilities the conduct of the business of manufacture may not be included within the said purview.
In the case of Collector of Central Excise v. Rajasthan State Chemical Works -1991 (55) E.L.T. 444 (S.C.) also the Supreme Court had referred to the integration of the raw materials with the process of manufacture of the final products. The Supreme Court observed that the handling of the raw materials was integrally connected with the process of manufacture and that the preliminary activity like pumping brine, and filling the salt pans formed integral part of the manufacturing process of manufacture of crude sodium sulphate. Para-12 from that decision is extracted below :-
"12. Manufacture thus involves series of processes. Process in manufacture or in relation to manufacture implies not only the production but the various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to, manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. 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 impossible or commercially inexpedient, that process is one in rela tion to the manufacture."
In any process raw material or intermediate products are the subject of processes and should experience change in the integral process of manufacturing the final products.
The electricity is neither a raw material nor an intermediate product in the processing of the raw materials to convert the same into the finished final products. Even the fuel are not the raw materials (refer Kerala High Court decision in the case of Kerala Electric Lamp Works Ltd. v. C.C.E., Cochin -1994 (74) E.L.T. 807 (Kerala). It was by way of specific inclusion in Clause (c) that goods (inputs) used as fuel became eligible for Modvat credit. Thus, the inputs used as fuel even when used in the generation of electricity could not be eligible for the benefit of Modvat credit when the electricity is used as energy in the production of final products, under Clause (c) of the explanation.
20. In the use of the inputs as fuel, at no stage, electricity is emerged as an intermediate product in relation to the manufacture of the final products. The generation of electricity is an independent separate activity. The observations of the Tribunal in the case of Rathi Alloys and Steel Ltd. v. Commissioner of Central Excise, New Delhi -1997 (93) E.L.T. 594 (Tribunal) that "since electricity is self-generated; which comes into existence as an intermediatory product" were in passing and not in the nature of any findings. Further, in that decision of a Single Member the residual fuel oil and low density oil were also used directly in the furnace during various stages of production. The final product in that case were the product of iron and steel and the above mentioned oils were used in the furnaces.
21. The addition of Clause (d) in the Explanation under Rule 57 A by Notification No. 11 /95-C.E. (N.T.), dated 16-3-1995 could also not be given retrospective effect. According to the general rules of Interpretation, a substantive law is intended to be prospective unless a contrary intention is manifest from the language of the Statute or arises by necessary implication. The insertion of Clause (d) was neither explanatory nor clarificatory. It was also not declaratory or remedial. The salient features of the Modvat Scheme refers to the declarations to be filed before taking credit in respect of duty paid on the inputs. Accounts are required to be maintained and returns are required to be filed and the relief is not automatic. It is subject to the various conditions, limitations and procedures laid down in the Rules. The use of the word 'and' was to indicate that the Clause (d) was the last clause under the explanation and in no way effects the independence of Clause (d).
22. In the case of Ferro Alloys Corporation Ltd. (FACOR), Shree Ram Nagar v. Commissioner of Central Excise, Vishakhapattanam - 1997 (20) RLT 778 (CEGAT-SZB), the issue directly related to the grant of Modvat credit in respect of LSHS oil and furnace oil used as fuel oil in the generation of electricity in the power plant installed in the appellants' factory for the manufacture of ferro alloys. The Tribunal after making a reference to a number of decisions of the Supreme Court observed that the integrality of the operation with reference to the manufacturing process of the particular product has to be the focus for determining the eligibility of an input, and unless' it could be shown that a particular activity was part and parcel of manufacturing process of an end product, that activity cannot be taken to be in or in relation to the manufacture of the notified finished product. Electricity cannot be taken to be generated as an intermediate product in the manufacturing stream of ferro alloys, the final products in that case. The Tribunal had taken note of the amendment in 1995 by which fuel oil had been specifically included in the eligible inputs and observed as under :-
"The appellants have also taken a plea before us that since in 1995 this fuel oil has been taken to be eligible input by reason of subsequent amendment to Rule 57A, the benefit of Modvat credit should be allowed. We observe that this would merit consideration only if it is shown that fuel oil has been used in or in relation to the manufacture of the notified finished product. Here since we have held that plants for generation of electricity cannot be taken to be part of the set up for processes for the manufacture of ferro alloys, the question of extending the benefit in respect of fuel oil for generation of electricity does not arise. We in the circumstances, dismiss the appeal."
This order was recorded by the Tribunal on 5-2-1997. Under miscellaneous order No. 251/99 Final Order No. 540/99, dated 9-3-1999 while disposing of the miscellaneous application for rectification of mistake, the Tribunal referred to the amendment by Notification No. 11/95-C.E. (N.T.), dated 16-3-1995 and on the basis of a subsequent judgement in the case of Jay Pee Rewa Cement v. Commissioner of Central Excise, Raipur -1997 (95) E.L.T. 429 (Tribunal) recalled its order dated 5-2-1997. This recall has been made among others on the ground that in Jay Pee Rewa Cement v. Commissioner of Central Excise, Raipur -1997 (95) E.L.T. 429 (Tribunal), the Tribunal had held that furnace oil was admissible for Modvat credit in generation of electricity. This judgment in the case of Jay Pee Rewa Cement is dated 12-8-1997 and the Tribunal had not noticed the earlier decision dated 5-2-1997 in the case of Ferro Alloys Corporation Ltd. referred to above. Thus, the judgment in the case of Jay Pee Rewa Cement was per incuriam and had no precedent value. It was on the basis of such a decision which was per encuriam that the decision in the case of Ferro Alloys Corporation Ltd. was recalled.
The Tribunal in the case of Jay Pee Rewa Cement Ltd. had also referred to the earlier decision in the case of Indian Oil Corporation Ltd. v. Collector of Central Excise -1985 (19) E.L.T. 145 (Tribunal).
In the case of Indian Oil Corporation Ltd. v. Collector of Central Excise -1985 (19) E.L.T. 145 (Tribunal), the dispute was about the use of residual furnace oil in the refinery at Barauni and its units. By Notification No. 74/63-C.E., intermediate petroleum products produced in the refineries falling under Item No. 11A if used as fuel within the refineries for the production or manufacture of other finished petroleum products were exempt from the whole of the duty of excise leviable thereon. By Notification No. 352/77-C.E., dated 16-2-1977, petroleum products falling under Item No. 6 to Item No. 11AA of the erstwhile Central Excise Tariff, produced in refineries wherein refining of crude petroleum or shell or blending of non-duty paid petroleum products is carried on and utilised as fuel within the same premises for the production or manufacture of finished petroleum products, were exempt from the whole of the duty of excise leviable thereon. The majority observed that neither electricity nor steam were themselves fuels but were produced by the fuel oils. It was admitted that fuel oils could be used directly as a fuel. This decision dealt with an entirely separate matter and that decision could not be imported to deal with an entirely new situation.
In the case of Jay Pee Rewa Cement v. Commissioner of Central Excise in para 4 the Tribunal had concluded as under :-
"Heard the submissions of both sides. Looking to the facts and use of fuel oil and also the fact that the terms used "in or in relation to" are wide enough as also to the fact that fuel were treated as inputs if they were used in the process of manufacture, we hold that furnace oil is an input and thus is admissible for Modvat credit."
There is no reference to the findings of the lower authorities and no discussion about the contentions of the Revenue. The reliance placed on the earlier decision in the case of Indian Oil Corporation Ltd. v. Collector of Central Excise - 1985 (19) E.L.T. 145 (Tribunal) was also not correct. Further, as already indicated above, there was already an existing decision in the case of Ferro Alloys Corporation Ltd., which was of prior date and which had not been noticed by the Tribunal in the case of Jay Pee Rewa Cement. In the case of Ferro Alloys Corporation Ltd., the Tribunal had held that LSHS oil and furnace oil used as fuel oil for captive generation of electricity which is used for production of final products i.e. ferro alloys was eligible input under Rule 57 A prior to or after amendment of the Rule in 1995 as they were not used in or in relation to the manufacture of final products. This decision was not noticed by the Tribunal in the case of Jay Pee Rewa Cement and thus decision in Jay Pee Rezva Cement had no precedent value.
23. In the case of Ponds (I) Ltd. v. Collector of Central Excise -1993 (63) E.L.T. 3 (Madras), the Hon'ble High Court had referred to the Supreme Court's decision in the case of J.K. Cotton Spinning and Weaving Mills Ltd. v. Sales Tax Officer
-1965 (16) STC 563 (S.C.) wherein emphasis had been laid on the integral process carried on in converting raw materials into finished goods. In para-19, the Madras High Court had observed as under :-
"Further, it must be noted that the abovesaid explanation to Rule 57A contains only an inclusive definition of the term "inputs". In this connection, the learned Senior Counsel also relies on the following observation in State of Bombay v. Hospital Mazdoor Sabha (AIR 1960 S.C. 610) :-"It is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted in any sense. Where we are dealing with an inclusive definition, it would be inappropriate to put a restrictive interpretation upon terms of wider denotation."
While the definition of the term 'inputs' is inclusive definition, each and every clause had to be interpreted independently and as worded. In para-22, the High Court had observed that the inter mediate products were those which had come into existence during the course of manufacture of final product. Para-22 is extracted below :-
"22. In Kusum Products Ltd. v. Collector of Central Excise [1990 (48) E.L.T. 50], the Tribunal, East Regional Bench, Calcutta, no doubt observed differently [from what it observed later in Rasoi Ltd. v. Collector of Central Excise -1990 (49) E.L.T. 522 (Tribunal) as stated above]. Its observation is as follows :-"In the explanation to Rule 57A relating to Modvat Credit which is what is claimed by the appellants, the term input has been given an inclusive coverage whereby packaging materials are included. The inputs in question are polythene granules. These are not packing materials, as such. Using them, bags which are packaging materials are manufactured. The bags represent the final stage of manufacture as far as they are concerned. They do not constitute intermediate products for the detergent powder. It has been contended by the appellants that the term - intermediate product - has not been defined in the Central Excise Rules. The term can only mean the products obtained from the raw materials in the course of manufacture of the final product. Here the final product is detergent product and it is not manufactured from either polythene granules or plastic bags which are made therefrom to enable the latter to be considered as the intermediate products for detergent powder." Here in the abovesaid 1990 (48) E.L.T. 50 (Tribunal), the Tribunal has not borne in mind the actual meaning of the words "packing materials" and went wrong in saying that polythene granules "are not packaging materials as such". Bags which were manufactured using those polythene granules were instead held by the Tribunal in the above case as packaging materials. We are of the view, as indicated above that those bags are only packages or containers and cannot be strictly called "packaging materials". Further, the Tribunal erred in saying that those bags do not constitute intermediate products for the detergent powder. As already indicated in view of Section 2(f) of the Act and the abovesaid Chapter Note 4 to Chapter 33, those bags would be "intermediate products" (for the abovesaid detergent powder) spoken to in Rule 57-D(2)."
In terms of these observations, the electricity which had not come into existence during the course of manufacture of the final products could not be termed as "intermediate product". Containers were taken as intermediate product by the High Court. By this analogy also the electricity could not be considered as an intermediate product in the manufacture of cement, caustic soda, synthetic filament yarn, etc. Reliance on this decision is thus not appropriate.
24. In view of the above discussion, for the period prior to 16-3-1995 inputs used for generation of electricity were not eligible for the benefit of Modvat credit.
25. As regards the jurisdiction, I am in agreement with the findings of the Hon'ble Member (J).
26. In the result, Appeal Nos. E/1234-1236/96-NB (M/s. Bolpur Industries Ltd.), E/676/96-NB (M/s. Modi Cement Ltd.), E/174 /96-NB (M/s. Modi Pon Ltd.), E/1241/96-NB (M/s. Rishabh Steels Ltd.), E/1836/37-95-NB (M/s. Jay Pee Rewa Cement) are dismissed, while appeals of the Revenue Nos. E/1611/96-NB (CCE v. Jay Pee Rewa Cement) and No. E/629/96-NB and E/1051/96-NB (CCE v. India Glycols Ltd.) are allowed. Ordered accordingly.
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(Lajja Ram) Member (T) C.N.B. Nair, Member (T)
27. The issue involved here is whether Modvat credit was admissible, prior to 16-3-1995, under Rule 57A of the Central Excise Rules in respect of fuel oil used for generating electricity.
28. The Tribunal (Single Bench) in Rathi Alloys and Steel Ltd. v. C.C.E., New Delhi [1997 (93) E.L.T. 594 (T) had held on 31-1-1997 that Residual Fuel Oil and LDO used in generating electricity are inputs eligible for Modvat credit. The same view was taken by the Tribunal in Jay Pee Rewa Cement v. C.C.E., Raipur in Final Order No. A/864/97, dated 12-8-1997 [1997 (95) E.L.T. 429 (T)]. However, the South Regional Bench of the Tribunal in the case of Ferro Alloys Corporation Ltd. (FACOR), Shreeramnagar v. C.C.E., Visakhapatnam [1997 (20) RLT 778 (CEGAT/SZB) 778] had taken a contrary view in its Order dated 5-2-1997. The present reference to the Larger Bench has been occasioned by the difference of opinion between these decisions. However, the conflict no more survives as Southern Regional Bench recalled its order in the Ferro Alloys case vide its order dated 12-8-1997. Thus, the matter for consideration before the Larger Bench is whether the order of the Division Bench in Rathi Alloys & Steel Ltd. should be confirmed as correct or overruled as erroneous.
29. Explanation to Rule 57A, (as it was prior to 16-3-1995) the scope of which is the subject of the dispute, stated as under :-
"Explanation :- For the purpose of this rule; "inputs" includes -
(a) Inputs which are manufactured and used within the factory of production in or in relation to manufacture of final products.
(b) Paints and Packing material
(c) Inputs used as fuel."
30. Para 11 of the decision in Rathi Alloys & Steel Ltd. deals with the scope of explanation (c). It is reproduced below for a proper understanding of the reason for holding that fuel used for generation of electricity is eligible for the benefit of Modvat credit under Rule 57A.
"11. This Explanation Clause (c) was added by Notification No. 4/94, dated 1-3-1994. This Clause (c) of the Explanation is the bone of contention. The assessees are contending that the inputs are RFO and LDO being fall within the ambit of this Explanation Clause. The Department's contention is that these inputs are utilised in generating set for manufacturing electricity, which is not excisable and hence cannot be considered as an input used as fuel. This plea cannot be accepted because the final product Iron and Steel is manufactured in an Electric Arc Furnace. For the purpose of operating the Electric Arc Furnace fuel is required, which is obtained by generating heat by electricity. Therefore, electricity is an essential ingredients, to make the Electric Arc Furnace operational. Although electricity is not an excisable item and it is supplied by the Rajasthan Electricity Board, but that 'electricity' is not the point for my consideration. The electricity which is generated in the D.G. sets through the inputs utilised in the generating sets is the one which is for my consideration. It is an admitted fact that both RFO and LDO are used as fuel for the manufacture of Iron and Steel products. If this is the position, the generation of electricity and intermediary product cannot come in the way of granting the Modvat credit in terms of the ratio laid down by the Tribunal in the case of Vam Organic Chemicals. It is further to be noticed that the Hon'ble Supreme Court in the case of Rajasthan State Chemical Works have held that if any operation in the course of manufacture is so integrally connected with the several operations which resulted in the emergence of the manufactured goods and such operation is carried on with the aid of power, then the process "in or in relation to the manufacture" must be deemed to be one carried on with the aid of power. Although this judgement is in a different context, yet the ratio is directly applicable in the present case inasmuch as without utilising these two inputs as fuel. The final product will not emerge, in the absence of supply of used electricity by RSEB. Electricity so generated is essential for making Electric Arc Furnace operational and for running of the rolling mills."
31. It is evident from the above para that the Tribunal was following the Hon'ble Supreme Court's decision in the case of Rajasthan State Chemical Works while reaching the finding that fuels used in the generation of electricity for captive consumption is eligible for exemption. The rule laid down by the Supreme Court in Rajasthan State Chemical Works case is clear; if any operation in the course of manufacture is so integrally connected with the further operations which resulted in the emergence of the manufactured goods, then the process has to be treated in or in relation to the manufacture. In the present cases, fuel is used in the generation of electricity and the electricity so generated is used in the manufacture of goods. The use of the fuel is, therefore, to be treated as use in or in relation to the manufacture of the goods. It is uncontested in all these cases that the electricity generated goes in the production of excisable goods and is not fed into a grid for distribution as electricity. Therefore, it is a case of indirect use of fuel in manufacture. The test laid down by the Supreme Court in the Rajasthan State Chemical Works is whether the process and use are integrally connected. When the electricity generation is central to the manufacture there could be no arguing that the generation of electricity is not integrally connected to the manufacture of the goods. What all arrangements a manufacturer puts together for the easy carrying out of the manufacturing activity depends upon circumstances. In a situation where the electricity is available to be drawn from a grid, the fuel used by another person for generating electricity would not be use of the fuel as 'input' in the manufacture of the goods. But when the electricity generation is a captive arrangement and requirement for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the 'input' used in that electricity generation is also an 'input used in the' manufacture. It is common knowledge that in several parts of the country, availability and voltage of electricity are quite unsatisfactory. Even price is lower, if captively generated by a manufacturer. Thus, electricity authorities of the country have disproved even the law of economy of scale. In such a situation, to argue that electricity generation is a seperate activity, even if carried out captively for use primarily in the manufacturing process is to argue against facts.
32. The incorporation of Explanation (d) in the explanation with effect from 16-3-1995 so as to include "inputs" used in the manufacture of electricity, is also no ground for holding that prior to that use of fuel in the generation of electricity for captive consumption was not covered by the already existing Explanation (c). The addition of Explanation (d) has not changed the situation anyway in respect of Explanation (c). The later provision has not deleted the earlier provision. Therefore, explanation (d) has to be understood as a seperate and additional provision. This is clear from the two provisions themselves. Explanation (c) relates to fuel and explanation (d) relates to 'inputs' whatever they be, used for generation of electricity. Therefore, whatever Modvat credit was available in terms of Explanation (c) in respect of fuels continued to be available to the industry even after the addition of Explanation (d) w.e.f. 16-3-1995.
33. In view of the discussions above, I am of the opinion that the orders in Rathi Alloys and Steel Ltd. and Jay Pee Rewa Cement require no change. They are only to be confirmed. I am in agreement with the ld. Member Judicial on this score.
34. As the arguments of both sides have been elaborately dealt with in the orders of the other ld. Members, I am not going into them. To my mind, the issue remains settled by the provisions of the Rule 57A themselves and the ruling of the Supreme Court in the Rajasihan Chemical Works case and fuels used in captive generation of electricity were eligible for Modvat credit, even prior to 16-3-1995.
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(C.N.B. Nair) Member (T) MAJORITY ORDER By majority order, the Appeal Nos. E/1234-1236/96-NB (M/s. Ballarpur Industries Ltd.), E/676/96-NB (M/s. Modi Cement Ltd.), E/1748/96-NB (M/s Modipon Ltd.), E/1241/96-NB (M/s. Rishabh Steels Ltd.), E/1836-37/95-NB (M/s. Jay Pee Rewa Cement), are allowed, while appeals of the Revenue E/1611 /96-NB (CCE v. Jay Pee Rewa Cement), and No. E/629/96 & E/1051 /96-NB (CCE v. India Glycols Ltd.) are rejected.