1997 (4) TMI 241 - AT - Central Excise

Appellate Tribunal allows Modvat credit for fuel oil used in steam generation

The Appellate Tribunal CEGAT, Mumbai allowed the appeal, ruling in favor of the appellant's entitlement to Modvat credit on duty paid for fuel oil and ... Modvat credit - intermediate product - input used in or in relation to manufacture - Rule 57D interpretation - Rule 57C applicability - effect of amendment to Rule 57D(2)Intermediate product - Modvat credit - Steam generated by burning fuel oil and light diesel oil for use in manufacturing pigments is an intermediate product for the purposes of input credit. - HELD THAT: - The Tribunal accepted the appellant's contention that steam, produced by burning fuel oils and used either within reaction vessels to provide heat and pressure or circulated along drying-chamber walls to dry pigments, qualifies as an intermediate product. Reliance was placed on the principle applied in earlier decisions where items produced specifically for use in manufacture (for example, plastic jars or sand moulds) were treated as intermediate products permitting credit. The Court observed that although steam is not a final product intended for clearance, it is produced specifically as part of the manufacturing process to enable conversion of raw materials into the finished pigment; accordingly it falls within the concept of an intermediate product entitling the manufacturer to credit of duty paid on inputs used to produce it.Steam so generated is an intermediate product and is eligible for Modvat credit.Rule 57C applicability - input used in or in relation to manufacture - Rule 57C does not preclude Modvat credit in respect of duty-paid mineral oils used to generate steam that is an intermediate product in manufacture of pigments. - HELD THAT: - The Departmental contention that steam must be treated as an ''input'' exempt from duty such that Rule 57C would bar credit was rejected. The Court held that the steam in question was not a final product the assessee intended to manufacture and clear; rather it was produced to effect the manufacture of the pigments. Consequently the deeming or treatment under Rule 57C for exempt inputs does not operate to deny credit where the item in question (steam) is treated as an intermediate product produced for use in manufacture.Rule 57C is not attracted so as to deny credit on mineral oils used to generate steam which is an intermediate product.Effect of amendment to Rule 57D(2) - Rule 57D interpretation - The 18-5-1995 amendment to Rule 57D(2) does not imply that prior to the amendment Modvat credit on inputs used to generate steam was unavailable. - HELD THAT: - The Tribunal considered the Departmental argument that the insertion of a proviso allowing credit in respect of inputs used for generation of electricity or steam demonstrated a prior legislative intent to deny credit. The Court rejected this inference, noting that the proviso is not confined to steam used in manufacture of final products but also refers to electricity or steam used for any purpose within the factory. The words are plain and intelligible; the amendment therefore does not lead to the inescapable conclusion that credit was previously unavailable on inputs used to generate steam. Consequently the amendment does not retrospectively alter the availability of credit where, on proper interpretation, steam is an intermediate product.The amendment to Rule 57D(2) does not imply that Modvat credit on inputs used to generate steam was previously unavailable; it does not change the entitlement in the present case.Final Conclusion: The appeal is allowed; the impugned order is set aside and the assessee is entitled to Modvat credit on duty paid on fuel oil and light diesel oil used to generate steam employed as an intermediate product in the manufacture of pigments. Issues:- Entitlement to Modvat credit on duty paid for fuel oil and light diesel oil used to generate steam for manufacturing pigments.Analysis:The appeal before the Appellate Tribunal CEGAT, Mumbai centered around the question of whether the assessee is entitled to Modvat credit of the duty paid on fuel oil and light diesel oil used to generate steam for the manufacturing process of pigments. The appellant argued that the steam produced from burning the fuel oils was an intermediate product used either in the reaction vessel for converting raw materials into pigments or in drying chambers to dry the pigments after formation. The appellant relied on a previous Tribunal order to support their claim.The Departmental Representative raised three objections to the appellant's claim. Firstly, he argued that Rule 57D applies to intermediate products that arise during the manufacturing process of the final product. He contended that steam, being specifically generated independently of the manufacturing process, does not qualify as an intermediate product. Secondly, he asserted that steam is an input used in or in relation to the manufacture of the final product, and as it is exempted from duty, credit for duty paid on mineral oils used in its generation cannot be allowed. Lastly, he pointed out an amendment to Rule 57D, which he believed clarified that credit was not available on inputs used for generating steam before the amendment.The Tribunal referred to a decision where it was held that credit could be taken on duty paid for fuel oil used to produce steam for manufacturing final products. In response to the Departmental Representative's objections, the Tribunal cited a decision of the Madras High Court where it was established that certain items, even if exempted from duty, could still be considered intermediate products for the purpose of claiming credit on inputs used in their manufacture.The Tribunal determined that in the present case, steam was a final product for the appellant, even though it was used in the manufacturing process of the ultimate product, pigments. The Tribunal emphasized that the provisions of Rule 57C did not apply to steam in this scenario. It rejected the argument that the amendment to Rule 57D implied that credit was not available on inputs used for generating steam before the amendment, stating that the plain language of the rule did not support such a conclusion.Ultimately, the Tribunal allowed the appeal, setting aside the impugned order and ruling in favor of the appellant's entitlement to Modvat credit on the duty paid for fuel oil and light diesel oil used to generate steam for manufacturing pigments.