2005 (5) TMI 228 - AT - Central Excise

Summary

Issues Involved:
1. Whether replacing engines and/or alternators in old DG Sets amounts to 'manufacture.'
2. Whether Modvat credit availed on inputs used in repairing DG Sets should be reversed.

Issue-wise Detailed Analysis:

1. Whether replacing engines and/or alternators in old DG Sets amounts to 'manufacture':

The appellants are engaged in the manufacture of Diesel Generating Sets (DG Sets) and were visited by Preventive Officers of Central Excise. The officers found that the appellants had replaced engines or alternators in some DG Sets received for repairs. The Commissioner concluded that such replacements amounted to 'manufacture,' leading to a demand for duty. However, the appellants contended that this activity did not amount to 'manufacture' as per precedent decisions of the Tribunal and the Hon'ble Supreme Court, which have held that changing parts does not result in the emergence of a new product. The Tribunal referred to several decisions, including Shriram Refrigeration Industries Ltd. v. CCE, Hyderabad, and Metro Tyres Ltd. v. CCE, Chandigarh, which supported the appellants' view that such activities are repairs, not manufacture. The Tribunal concluded that replacing engines/alternators in old DG Sets does not amount to 'manufacture' because the DG Sets received and cleared remained DG Sets, without emerging as a new, distinct product.

2. Whether Modvat credit availed on inputs used in repairing DG Sets should be reversed:

The Commissioner denied Modvat credit on new engines/alternators used in repairing 3 DG Sets, asserting that since these DG Sets were cleared without payment of duty, Modvat credit was not available as per Rule 57C. The Tribunal, while agreeing that the activity did not amount to manufacture, noted that the legal consequence would be that no credit would be available for inputs used in repairs. The Tribunal held that the appellants must reverse the credit on the engines and alternators used for the repair of DG Sets. However, Member (Technical) disagreed, arguing that the Tribunal cannot go beyond the issues raised in the show cause notice and that reversing credit would amount to making a new case. He also noted that the procedure adopted by the appellants was revenue-neutral. Given the disagreement, the matter was referred to a third member, who agreed with Member (Judicial) that reversing Modvat credit should be examined by the lower authority in remand proceedings.

Final Order:

The majority held that the repairing activity does not amount to manufacture. However, the Modvat credit availed on inputs used in such repairing activity must be reversed. The appeal was remanded to the original adjudicating authority for quantifying the demand of duty and adjudging the penalty accordingly.