2002 (7) TMI 156 - AT - Central Excise

Appellants entitled to Modvat credit for DG set components used in manufacturing process

The Tribunal allowed the appeal, holding that the appellants were entitled to Modvat credit on the DG set and its parts used for generating electricity in ... Modvat credit on capital goods - definition of 'capital goods' in Rule 57Q - eligibility of credit where capital goods/components are received, duty paid and used in the factory - distinction between credit for inputs and credit for capital goods - availability of credit where assembly/erection is performed by a third party - interpretation of Rule 57R and Rule 57T(7) in relation to exempt final productsModvat credit on capital goods - definition of 'capital goods' in Rule 57Q - eligibility of credit where capital goods/components are received, duty paid and used in the factory - availability of credit where assembly/erection is performed by a third party - distinction between credit for inputs and credit for capital goods - interpretation of Rule 57R and Rule 57T(7) in relation to exempt final products - Assessee entitled to take Modvat credit on duty paid on components of D.G. set received, accounted and used in its factory even though the generating set was assembled by the supplier and the generating set as a final product was exempted from duty. - HELD THAT: - The Tribunal examined whether credit could be denied because the generating set was manufactured (assembled) by the supplier and the assembled generating set was an exempt final product. It applied the established distinction between rules governing inputs and those governing capital goods: Rule 57A (inputs) requires use 'in or in relation to the manufacture' of the finished product, whereas Rule 57Q (capital goods) does not impose that requirement and permits credit where capital goods are acquired for use in the manufacturer's factory. The components received in the assessee's name, on payment of duty and used within its factory for generation of electricity for manufacture of final products, fall within the definition of 'capital goods.' Accepting the reasoning of earlier Tribunal decisions (including Gujarat Ambuja Cement and NRC Ltd.) the Tribunal held that allowing credit on the components does not amount to permitting credit on the exempted final product and that denying credit on the ground of assembly by a third party would frustrate the statutory scheme and lead to absurd results. Consequently the departmental contention based on Rule 57R/Rule 57T(7) was rejected and the assessee's claim allowed following precedent.Appeal allowed; Modvat credit on the duty paid on components of the D.G. set held admissible to the assessee.Final Conclusion: The Tribunal allowed the appeal and held that the assessee is entitled to claim Modvat credit on capital goods/components of the D.G. set received, duty paid and used in its factory, notwithstanding that the set was assembled by the supplier and that the assembled set was an exempted final product. Issues involved: Appeal against order disallowing Modvat credit on DG set and parts thereof u/s Rule 57T(1) for capital goods used in factory.Summary:The appellants, engaged in cement manufacturing, entered into an agreement for a Generating Set (DG set) with M/s. Modi Mirrlees Blackstone Ltd. (MMBL) to enhance electricity generation capacity. They filed declarations for capital goods under Rule 57T(1) and availed credit in RG 23C, Part-II. A show-cause notice challenged the credit availed, stating the DG set was manufactured by MMBL, not the appellants. The Commissioner disallowed the credit, imposed penalties, and demanded interest. The issue was whether the appellants were entitled to Modvat credit on the DG set and its parts.Shri Chandra Kumar, representing the appellants, argued that a similar issue was decided in Aditya Cement Ltd.'s case, where Modvat credit was allowed. He cited relevant case law supporting their claim for Modvat credit on components of the DG set. The Departmental Representative contended that the generating set was exempt from duty, thus credit could not be taken u/s Rule 57R(I) for capital goods used in exempted final product manufacture.The Tribunal analyzed previous cases and observed that the components of the DG set were covered under the definition of 'Capital goods' u/s Rule 57Q. It emphasized the distinction between Rule 57A and Rule 57Q regarding the usage requirement for claiming Modvat credit. The Tribunal concluded that the components were not exclusively used in the manufacture of the generating set but for generating electricity for the final product. Denying Modvat credit on this basis would contradict the law and scheme's objective. The Tribunal also clarified that the manufacturer of the generating set was not relevant for claiming credit on its components.Considering the precedents and arguments, the Tribunal accepted the appellants' contention regarding Modvat credit on DG sets and parts thereof, allowing the appeal.