2002 (8) TMI 131 - HC - Central Excise

Summary

Issues Involved:
1. Eligibility of Modvat credit on plastic films/poly paper used for testing machines.
2. Interpretation of "use in the manufacture of" or "use in relation to the manufacture" under Rule 57A of the Central Excise Rules, 1944.

Detailed Analysis:

1. Eligibility of Modvat credit on plastic films/poly paper used for testing machines:

The applicant, M/s. Flex Engineering Limited, manufactures packaging machines and claimed Modvat credit on laminated plastic films and poly papers used for testing these machines. The adjudicating authority denied the benefit of Modvat credit, which was upheld by the Tribunal. The Tribunal referred the matter to the High Court for opinion on whether duties paid on materials used for testing machines could be eligible for credit under Rule 57A.

The applicant argued that the laminated plastic films and poly papers were used directly in the manufacturing process of filling and sealing machines. They contended that these materials were essential for testing, tuning, and adjusting the machines to ensure they met the specifications required by purchasers, thus making them part of the manufacturing process.

2. Interpretation of "use in the manufacture of" or "use in relation to the manufacture" under Rule 57A of the Central Excise Rules, 1944:

Rule 57A allows credit of duty paid on goods used in or in relation to the manufacture of final products. The applicant contended that the term "in or in relation to the manufacture" is broad and includes any process integral to the production of the final product. They argued that the testing of machines using laminated plastic films and poly papers was an essential part of the manufacturing process, as it ensured the machines met the required specifications and were marketable.

The respondent countered that the use of plastic films/poly papers for testing was not part of the manufacturing process. They argued that the machines were already fully manufactured and the testing was merely for performance verification, which did not qualify as "use in the manufacture" under Rule 57A.

The High Court examined various precedents and the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944. It concluded that the use of laminated plastic films and poly papers for testing the performance of fully manufactured machines did not qualify as "inputs" for the purpose of Modvat credit. The court held that the testing process was not part of the manufacturing process but rather a post-manufacture activity to ensure performance.

Conclusion:

The High Court answered both questions in the negative, ruling against the applicant and in favor of the respondents. The court determined that materials used for testing fully finished machines could not be considered as used "in or in relation to the manufacture" of the final product. Thus, the applicant was not entitled to Modvat credit for the laminated plastic films and poly papers used in the testing process. The reference was disposed of accordingly.