1997 (1) TMI 275 - AT - Central Excise

Summary

Issues Involved:
1. Denial of Modvat Credit on RFO and LDO used for generating electricity.
2. Interpretation of Rule 57A and its Explanation clauses.
3. Eligibility of inputs used as fuel for Modvat Credit.

Issue-wise Detailed Analysis:

1. Denial of Modvat Credit on RFO and LDO used for generating electricity:
The appellants are engaged in manufacturing iron and steel products and availed Modvat Credit for Residual Fuel Oil (RFO) and Low Density Oil (LDO) used in Diesel Generating (D.G.) sets to generate electricity for captive consumption. The Additional Collector and the Commissioner of Customs (Appeals) denied the Modvat Credit on the grounds that RFO and LDO were not used directly in the manufacture of final products but in generating electricity, which is not an excisable commodity.

2. Interpretation of Rule 57A and its Explanation clauses:
The appellants argued that Rule 57A, particularly its Explanation clause (c), includes "inputs used as fuel" for Modvat Credit. They contended that the electricity generated by D.G. sets using RFO and LDO is used in the manufacture of final products, thus qualifying for Modvat Credit. The department, however, argued that the inputs must be directly used in manufacturing the final products and that electricity, being non-excisable, does not qualify under the rule.

3. Eligibility of inputs used as fuel for Modvat Credit:
The appellants supported their argument by citing the Supreme Court judgment in Collector of Central Excise v. Rajasthan State Chemical Works, which held that operations integrally connected with manufacturing and carried out with the aid of power fall under the term "manufacture." They also referred to the Larger Bench judgment in Union Carbide India Ltd. v. Collector of Central Excise, which stated that the explanation clause of Rule 57A is self-contained and complete, including inputs used as fuel.

Judgment Analysis:

The tribunal considered the arguments and records, noting that the term "in or in relation to the manufacture of the said final product" in Rule 57A has been interpreted in various judgments. The tribunal found that the inputs RFO and LDO, used to generate electricity for operating Electric Arc Furnaces and rolling mills, are essential for manufacturing iron and steel products. Therefore, the generation of electricity as an intermediary product should not prevent granting Modvat Credit.

The tribunal emphasized that the explanation clause (c) of Rule 57A, added by Notification No. 4/94, includes "inputs used as fuel," and the addition of clause (d) with the conjunctive word "and" further clarifies the eligibility of such inputs. The tribunal concluded that the interpretation of "inputs used as fuel" should include all types of fuel generating heat, including electricity generated by D.G. sets using RFO and LDO.

The tribunal rejected the department's restrictive interpretation and held that the Modvat Credit on RFO and LDO used to generate electricity for manufacturing final products is allowable. The tribunal set aside the impugned orders and allowed the appeals.