1992 (6) TMI 117 - AT - Central Excise

Issues Involved:
1. Eligibility of MODVAT credit for countervailing duty on Lap Film.
2. Classification of Lap Film as an input under Rule 57A of the Central Excise Rules, 1944.
3. Interpretation of the term "input" in the context of MODVAT credit.
4. Relevance of the Certificate from the Department of Electronics.
5. Impact of Customs Notification No. 347/86-Cus. on the eligibility for MODVAT credit.

Detailed Analysis:

1. Eligibility of MODVAT Credit for Countervailing Duty on Lap Film:
The appellants contested the denial of MODVAT credit amounting to Rs. 2,07,858.84 on Lap Film by the Assistant Collector of Central Excise, Udaipur, and the Collector of Central Excise (Appeals), New Delhi. The primary argument was that Lap Film, used in the Burnisher Machine to remove excess magnetic oxide from magnetic diskettes, should be considered an input component in the manufacture of floppy disks. The appellants emphasized that the burnishing process, facilitated by Lap Film, is crucial for the final quality of the floppy disks.

2. Classification of Lap Film as an Input under Rule 57A:
The Assistant Collector argued that Lap Film is not used in or in relation to the manufacture of magnetic disks but is a tool or appliance of the Burnisher Machine. Consequently, it was deemed ineligible for MODVAT credit under Rule 57A. The Collector (Appeals) upheld this view, stating that although burnishing is essential, Lap Film, like the machines used, does not qualify as an input since it does not form part of the final product.

3. Interpretation of the Term "Input" in the Context of MODVAT Credit:
The appellants cited several judicial precedents to argue that an input need not form part of the final product to be eligible for MODVAT credit. They referenced cases like *Collector of Central Excise v. Titaghur Paper Mills* and *Collector of Central Excise v. HMM*, where it was held that a raw material contributes to the quality or character of the final product even if it does not physically form part of it. The Tribunal's decision in *Union Carbide (I) Ltd. v. Collector of Central Excise* was also highlighted, which stated that materials used up in the manufacturing process qualify as inputs.

4. Relevance of the Certificate from the Department of Electronics:
The appellants produced a Certificate from the Joint Director of the Department of Electronics, which clarified that Lap Film is a consumable used to remove excess magnetic material and should be considered an input for MODVAT credit purposes. The learned SDR, Shri Rakesh Bhatia, countered that this certificate was issued after the impugned order and was not considered by the Collector (Appeals).

5. Impact of Customs Notification No. 347/86-Cus. on the Eligibility for MODVAT Credit:
The appellants argued that the exemption of Lap Films from part of the import duty under Customs Notification No. 347/86-Cus. further supports their claim that Lap Films are legitimate inputs for the manufacture of floppy diskettes. The Tribunal observed that the Lap Film, when used, loses its original identity, similar to the BOPP film in the *Weldekar Laminates Pvt. Ltd.* case, and should be regarded as an input under Rule 57A.

Conclusion:
The Tribunal concluded that the lower authorities misinterpreted the MODVAT Scheme and Rule 57A. The explanation to Rule 57A excludes machines, tools, etc., but not materials used in these machines for manufacturing the final product. The argument that Lap Film does not form part of the final product was rejected based on judicial precedents. The Tribunal found that the Lap Film is directly used for finishing the final product, thus qualifying as an input. The appeal was allowed, and the impugned orders were set aside, granting consequential relief to the appellants.

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