2015 (4) TMI 569 - SC - Central Excise

Railway Tracks Within Manufacturing Plants Qualify as Capital Goods Under Rule 57Q for MODVAT Credit Claims

M/s Jayaswal Neco Ltd. Versus Commissioner of Central Excise, Raipur

The SC held that railway tracks installed within a manufacturing plant qualify as capital goods under Rule 57Q, as they are integral and inseparable from ... MODVAT / Cenvat Credit - Capital goods - railway track material used for handling raw materials, processed goods - goods 'in connection with' manufacture of or 'in relation to' manufacture - definition of capital goods - availing MODVAT credit on various capital goods and parts thereof under Rule 57Q of the Rules - Whether the railway tracks installed within the plant would come within the definition of capital goods under Rule 57Q of the Rules or not? Held that:- It follows from the bare reading of the Rule 57Q that for the purpose of allowing credit on specified duty paid on the capital goods, such capital goods are to be used by the manufacturer in his factory and are to be utilised for the purpose of manufacturing of final product. The explanation gives the meaning of 'capital goods'. As per clause (a) thereof, machines, machinery, plants, equipment, apparatus, tools or appliances which are used for producing or processing goods or in bringing about any change in any substance for the manufacture of final product are to be treated as 'capital goods' - It is clear from the reading of the definition of capital goods that when machines, machinery, plants, equipment, etc., are used for producing or processing any good or bringing about any change in any substance for the manufacture of final product, it would qualify as 'capital goods' and MODVAT credit thereon would be permissible. The process squarely meets the test laid down by this court in M/s. J. K. Cotton Spinning & Weaving Mills Co. Ltd.'s case [1964 (10) TMI 2 - SUPREME COURT]. It is clear that the railway tracks are installed not only within the plant, but the main objective and purpose for which the capital expenditure on laying these railway tracks is incurred by the appellant is for transporting hot metal in ladle placed on ladle car from blast furnace to pig casting machine through ladle car where hot metal is poured into pig casting machine for manufacture of pig iron. It is clear from the above that the use of railway tracks inside the plant not only form the process of manufacturing, but it is inseparable and integral part of the said process inasmuch as without the aforesaid activity for which railway tracks are used, there cannot be manufacturing of pig iron. We find from the order of the Commissioner that in spite of taking note of the aforesaid use of the railway tracks and accepting the same as correct, the Commissioner denied the relief to the appellant on an extraneous ground, i.e., railway tracks were used for other purposes as well, namely, apart from conveying hot metal and hot pigs, it was used for carrying raw materials and finished goods as well. This can hardly be a ground to deny the relief inasmuch as by incidental use of the railway tracks for some other innocuous purpose, it does not lose the character of being an integral part of the manufacturing process. The Commissioner has further observed in his order that the railway track is not utilised directly or indirectly for producing or processing of goods or bringing about any change for manufacture of final product. This conclusion, obviously, is completely erroneous and amounts to misreading of the process. CEGAT has not even adverted to and examined the issue from the aforesaid angle, which was the only method for arriving at a finding as to whether the railway tracks installed within the plant would come within the definition of capital goods under Rule 57Q of the Rules or not. The order of the CEGAT is stoically silent. It has affirmed the order of the Commissioner by simply observing that the Commissioner has arrived at the conclusion that these goods are not being used directly or indirectly for producing or processing the goods or for bringing about any change for the manufacture of the final product. We set aside the order of the Commissioner as well as of CEGAT insofar as it pertains to item 'railway track material used for handling raw materials, process goods' and hold that the appellant has rightfully claimed for MODVAT credit in respect of this item which credit is wrongly reversed by the authorities below - Decided in favour of assessee. ISSUES: Whether railway track material used within a manufacturing plant for handling raw materials and processed goods qualifies as 'capital goods' under Rule 57Q of the Central Excise Rules, 1944.Whether incidental use of such railway tracks for purposes other than manufacturing process affects their classification as capital goods.Interpretation of the term 'capital goods' and the scope of 'used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final products' under Rule 57Q. RULINGS / HOLDINGS: The railway track material used for transporting hot metal and handling raw and processed goods within the plant is held to be 'capital goods' under Rule 57Q, as their use is 'an integral part of the manufacturing process' and without such use, 'commercial production would be inexpedient'.Incidental use of the railway tracks for other innocuous purposes does not negate their character as capital goods; such incidental use cannot be a ground to deny MODVAT credit.The definition of 'capital goods' under Rule 57Q includes machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing goods or bringing about any change in any substance for manufacture of final products, and this definition must be applied in light of the test laid down by the Supreme Court in M/s. J. K. Cotton Spinning & Weaving Mills Co. Ltd.'s case. RATIONALE: The Court applied the legal framework of Rule 57Q of the Central Excise Rules, 1944, which allows credit of specified duty paid on capital goods used by the manufacturer in his factory for manufacturing final products.The Court relied on the precedent set in M/s. J. K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, Kanpur, which held that goods used in a process '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' qualify as being used 'in the manufacture of goods'.The Court rejected the narrower interpretation that capital goods must be directly involved as ingredients or commodities in the creation of goods, emphasizing instead the broader understanding of integral processes and equipment necessary for commercial manufacture.The Court found the authorities below erred in fact and law by ignoring the integral role of the railway tracks in the manufacturing process and by failing to apply the correct legal test, as the tribunal did not address the issue substantively.No dissent or doctrinal shift was noted; the judgment reaffirmed established principles concerning the definition and scope of capital goods under excise law.