1993 (12) TMI 132 - AT - Central Excise

Modvat Credit Denied for Grinding Belts and Wheels | Extended Limitation Period Upheld

JHALANI TOOLS (I) LTD. Versus COLLECTOR OF CENTRAL EXCISE, NEW DELHI

The case addressed the eligibility of grinding belts and wheels for Modvat credit under Rule 57A of the Central Excise Rules, 1944, and the applicability ... Demand - Limitation Issues Involved:1. Eligibility of grinding belts and grinding wheels for Modvat credit under Rule 57A of the Central Excise Rules, 1944.2. Whether the extended period of limitation is applicable for issuing show cause notices.Issue-Wise Detailed Analysis:1. Eligibility of Grinding Belts and Grinding Wheels for Modvat Credit:The appellants, manufacturers of hand tools such as spanners and wrenches, used grinding belts and grinding wheels to smoothen sharp edges of the tools to make them marketable. They filed declarations under Rule 57G to avail Modvat credit on these items, declaring them as raw materials. The Department issued show cause notices proposing disallowance of Modvat credit, arguing that these items were not raw materials but equipment, apparatus, tools, or appliances, and thus not eligible for Modvat credit under Rule 57A.The appellants contended that grinding wheels and belts are consumed in the manufacturing process and should be considered inputs. They argued that these items are essential for the manufacturing process, even if they do not form part of the final product. They also argued that these items are consumables, thus eligible for Modvat credit.The Department countered that grinding wheels and belts are used in machinery for grinding processes and do not qualify as raw materials. They cited the explanation to Rule 57A(1) which excludes equipment, apparatus, tools, or appliances from Modvat credit.The Tribunal considered both sides and referenced the case of Straw Products Ltd. v. Collector of Central Excise & Customs, Bhubaneshwar, which held that parts of machines used in relation to the manufacture of final products are eligible for Modvat credit. The Tribunal concluded that grinding wheels and belts serve the purpose of smoothening the surface of hand tools, thus qualifying as inputs eligible for Modvat credit under Rule 57A.2. Applicability of Extended Period of Limitation:The appellants argued that the demands were barred by limitation as the extended period of five years was not available. They referenced their letter dated 24-6-1987, which explained the nature and usage of the items to the Department. They claimed that there was no suppression on their part, and the show cause notices issued in October and November 1990 were beyond the normal six-month limitation period.The Department argued that the extended period of limitation was applicable due to the appellants' mis-declaration of the items as raw materials. They noted that the appellants continued to avail Modvat credit even after the Department raised the dispute in its communication dated 26-5-1987.Separate Judgments:Judgment by Judicial Member:The Judicial Member held that grinding wheels and belts are inputs used in the manufacture of hand tools and are eligible for Modvat credit under Rule 57A. The member cited the Straw Products case and concluded that these items are integral to the manufacturing process.Judgment by Vice President:The Vice President disagreed, stating that grinding belts and wheels are integral components or replaceable parts of the grinding machines and not raw materials. The Vice President emphasized that these items are used for the operation of the machines and not directly in the manufacture of hand tools. Therefore, they are not eligible for Modvat credit. The Vice President also upheld the extended period of limitation, noting that the appellants had been informed by the Department that Modvat credit was not admissible for these items.Final Order:Due to the difference in opinions, the matter was referred to a third member. The third member agreed with the Vice President, concluding that grinding wheels and belts are not raw materials but manufacturing apparatus. Therefore, Modvat credit is not admissible, and the extended period of limitation is applicable. The appeals were rejected based on the majority opinion.Conclusion:The final judgment held that grinding wheels and grinding belts are not eligible for Modvat credit under Rule 57A of the Central Excise Rules, 1944, as they are considered manufacturing apparatus rather than raw materials. The extended period of limitation was rightly invoked, and the appeals were rejected.