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2012 (1) TMI 17 - SC - Central ExciseCenvat / Modvat Credit - plastic films/poly paper used for testing machines - for forming commercial/technical opinion as to their marketability/ excisability - whether plastic films/poly paper would be eligible for credit - whether use of plastic films/poly paper used for testing machines would be held as used in the manufacture of or use in relation to the manufacture of the final products - held that - the process of testing the customised FandS machines is inextricably connected with the manufacturing process, in as much as, until this process is carried out in terms of the afore-extracted covenant in the purchase order, the manufacturing process is not complete; the machines are not fit for sale and hence not marketable at the factory gate. - the manufacturing process in the present case gets completed on testing of the said machines and hence, the afore-stated goods viz. the flexible plastic films used for testing the FandS machines are inputs used in relation to the manufacture of the final product and would be eligible for Modvat credit under Rule 57A of the Rules. - Decided in favor of assessee.
Issues Involved:
1. Eligibility of Modvat credit on materials used for testing machines. 2. Interpretation of "in or in relation to the manufacture" under Rule 57A of the Central Excise Rules, 1944. Detailed Analysis: 1. Eligibility of Modvat Credit on Materials Used for Testing Machines: The primary issue revolves around whether materials like Flexible Laminated Plastic Film and Poly Paper used for testing Automatic form fill and seal machines (F&S machines) can be considered as 'inputs' under Rule 57A of the Central Excise Rules, 1944, thereby making them eligible for Modvat credit. The appellant-assessee, engaged in manufacturing F&S machines, used these materials to test the machines before dispatch, as per the customer-specific requirements. The testing was essential to ensure the machines met the specified packaging requirements. The appellant claimed Modvat credit for these materials, arguing that they were integral to the manufacturing process. However, the adjudicating authority, Commissioner (Appeals), and the Tribunal denied the benefit, stating that materials used for testing do not qualify as 'inputs' under Rule 57A. The High Court upheld this view, stating that testing is not part of the manufacturing process and materials used post-manufacture cannot be considered 'inputs'. 2. Interpretation of "In or In Relation to the Manufacture" Under Rule 57A: The second issue concerns the interpretation of the phrase "in or in relation to the manufacture" in Rule 57A. The appellant argued that this phrase is broad and includes all materials used directly or indirectly in the manufacturing process, including those used for testing to ensure marketability. The Supreme Court analyzed the statutory provisions and relevant case law, including: - Rule 57A: Allows credit for excise duty paid on inputs used "in or in relation to the manufacture" of final products, whether directly or indirectly. - Rule 57C: Specifies that no credit is allowed if the final product is exempt from duty. The Court referred to precedents like *Collector of Central Excise v. Solaris Chemtech Ltd.* and *J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO*, which emphasized that "in relation to" should be interpreted broadly to include processes necessary for making the final product marketable. The Court noted that the manufacturing process is complete only when the product is marketable. Thus, testing to ensure the machines meet customer specifications is integral to the manufacturing process. The materials used for testing are, therefore, 'inputs' under Rule 57A. Conclusion: The Supreme Court concluded that the process of testing the F&S machines is inextricably linked to the manufacturing process. The materials used for testing are essential to make the machines marketable and hence qualify as 'inputs' eligible for Modvat credit under Rule 57A. The Court set aside the High Court's judgment, allowing the appeals and recognizing the materials used for testing as eligible for Modvat credit.
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