2006 (1) TMI 275 - AT - Central Excise

Cenvat/Modvat - Capital goods - input services - capital goods installed in the Research Development wing - Confiscation - penalty - Whether the items were Capital goods or not within the meaning of Rule 57Q? - HELD THAT - As it is seen that for earning the credit in terms of the said Rule the only requirements for such specified capital goods should be used in the factory of the manufacturer of the final products. Undisputedly Research Laboratory is situated in the licensed factory premises of the appellants and are being used for the manufacture of the excisable goods. As such going by the definition of the capital goods the disputed items in question earn the credit irrespective of their not being actually used in the production of the final products. Following the Hon ble Supreme Court 2001 (7) TMI 118 - SUPREME COURT . Though the period before the Supreme Court was different when the definition of capital goods meant differently. However the said definition underwent a change as already observed by us and the earlier requirement of the various capital goods being used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final products was done away with and the only requirement was that the specified goods in the table annexed with Rule 57Q should be used in the factory of the manufacture of the final products. Admittedly Research Laboratory being situated within the factory premises disputed capital goods were used in the factory for manufacture of final products and thus would get covered by the definition of capital goods under Rule 57(2) as they existed at the relevant time and would earn the credit. Thus we set aside the impugned demand against M/s. USV Ltd. as also the penalties imposed upon them as also on the other appellants. Confiscation of the goods is also set aside. In a nutshell all the appeals are allowed with consequential relief to the appellants.

Summary

Issues:
1. Denial of Modvat credit for capital goods in a research laboratory.
2. Imposition of penalties and confiscation based on the denial of credit.
3. Interpretation of Rule 57Q regarding the use of capital goods in the manufacture of final products.
4. Reference to relevant legal precedents and trade notices for clarification.

Analysis:

Issue 1: Denial of Modvat Credit
The Commissioner of Central Excise denied Modvat credit for capital goods worth Rs. 40,51,307 installed in a Molecular Medicines Research Laboratory, stating they lacked a nexus with the final products. The appellants contended that Rule 57Q allowed credit for capital goods installed in the factory without the condition of actual use in final product manufacture. They referenced a Trade Notice and the Finance Minister's speech to support their claim.

Issue 2: Penalties and Confiscation
The Commissioner imposed a personal penalty and confiscation of assets, including land and machinery, alongside the denial of credit. The penalties were based on Rule 57Q and Rule 209A of Central Excise Rules, 1944. The appellants, including the Managing Director and Sr. Manager, were penalized for the alleged misuse of Modvat credit.

Issue 3: Interpretation of Rule 57Q
The Tribunal analyzed Rule 57Q's definition of capital goods, emphasizing their use in the factory of the manufacturer of final products. Despite not being directly involved in final product manufacturing, the disputed capital goods were deemed eligible for credit as they were used in the factory premises for manufacturing excisable goods. The Tribunal cited a Trade Notice to support its interpretation, highlighting that the goods need only be used within the factory of production to qualify for credit.

Issue 4: Legal Precedents and Clarifications
The Tribunal referred to a Large Bench decision and a Supreme Court ruling, emphasizing that the disputed capital goods, if used within the factory premises for manufacturing final products, qualified for Modvat credit. The earlier requirement of goods being used for production or processing was no longer applicable, and the focus shifted to their use in the factory of the manufacturer. Based on these precedents and the definition of capital goods under Rule 57Q, the Tribunal set aside the demand, penalties, and confiscation, granting relief to the appellants.

In conclusion, the Tribunal's judgment favored the appellants, highlighting the importance of the location of capital goods within the factory premises for Modvat credit eligibility. The decision was supported by legal precedents and trade notices clarifying the interpretation of Rule 57Q.