2015 (5) TMI 593 - HC - Central Excise

Denial of MODVAT Credit - Welding electrodes - Held that - Welding Electrodes as such have nothing to do with manufacture of sugar and molasses and other products, but, same is used for the purpose of repair and maintenance of machines, worn out during the process of running of factory. If no repair or maintenance is required for certain period, Welding Electrodes shall never be used. Thus, for the purpose of manufacture of sugar and molasses and other by-products in which business the appellant is engaged, the requirement of Welding Electrodes is not at all necessarily an integral part. It is only when repair or maintenance of machines is needed that requirement of Welding Electrodes may be necessary. - it can be safely said that under Rules 57A and 57B, there is no term within which Welding Electrodes , as such, may fall. Our attention was drawn to Rule 57B(1)(iv), where MODVAT credit has been allowed to inputs used for manufacture of final products or for any other purpose within the factory of production. Similarly, our attention was also drawn to Rule 57B(1)(vi) which allowed MODVAT credit on accessories on final products cleared alongwith such final products, value of which is included in the assessable value of final products. Learned counsel for appellant could not explain as to how Welding Electrodes can be said to be used for manufacture of final products or accessories of final products, so as to bring within provisions. Capital goods and inputs as defined in Rule 2 of Rules, 2001, includes the same items, to which Rule 57A, 57B and 57Q were applicable. No substantial distinction, we have found so as to find that during the period when Rules, 2001 are applicable, Welding Electrodes stand included within the definition of capital goods or inputs as the case may be, so as to entitle for MODVAT credit - Decision in the case of M/s Upper Ganges Sugar & Industries Ltd. Vs. Commissioner Customs & Central Excise 2015 (5) TMI 569 - ALLAHABAD HIGH COURT followed - Decided against assessee.

Summary

Issues Involved:
1. Whether the authorities were justified in disallowing Modvat Credit on welding electrodes used for the maintenance and repair of machinery in the factory.
2. Whether "Welding Electrodes" would be entitled to MODVAT credit as 'capital goods' or 'input' as per rules applicable during the relevant period.

Issue-wise Detailed Analysis:

1. Justification in Disallowing Modvat Credit on Welding Electrodes:

The appellant, a sugar mill also engaged in manufacturing chemicals and paper, claimed MODVAT credit on "Welding Electrodes" used for maintenance and repair of machinery. The Assistant Commissioner, Moradabad, issued a show-cause notice rejecting the claim, stating that "Welding Electrodes" do not qualify for MODVAT credit. The appellant argued that these electrodes are used in rebuilding worn-out parts of machines and connecting pipelines, thus relating to the manufacture of finished products. However, the Assistant Commissioner rejected this argument, raising a demand of Rs. 183,672 and imposing an equivalent penalty.

The appellant's appeal to the Commissioner (Appeals, Central Excise, Meerut-II) was also rejected, with the Commissioner holding that "Welding Electrodes" are used in the fabrication and repair of old machinery, not in the manufacture of final products. The Tribunal upheld this decision but set aside the penalty.

The High Court, while considering the appeal, noted that the "Welding Electrodes" are used for repair and maintenance of machinery and not directly in the manufacture of final products. The court emphasized that the term 'input' under Rules 57A and 57B refers to goods used in or in relation to the manufacture of final products, either directly or indirectly. The court concluded that "Welding Electrodes" do not qualify as 'input' since they are not integral to the manufacturing process but only required for maintenance.

2. Entitlement of Welding Electrodes to MODVAT Credit as 'Capital Goods' or 'Input':

For the period in dispute, the rules governing MODVAT credit were Rules 57A, 57B, and 57Q of the Central Excise Rules, 1944, and later the CENVAT Credit Rules, 2001. The court examined whether "Welding Electrodes" could be classified as 'capital goods' under Rule 57Q. In a previous judgment (Central Excise Appeal No. 135 of 2005 - M/s Upper Ganges Sugar & Industries Ltd. Vs. Commissioner Customs & Central Excise), the court had already determined that "Welding Electrodes" do not satisfy the requirements of "capital goods" under Rule 57Q. The court followed this precedent, finding no reason to deviate from the earlier decision.

Under the CENVAT Credit Rules, 2001, the definitions of 'capital goods' and 'input' remained substantially similar to those under the earlier rules. The court found no substantial distinction that would include "Welding Electrodes" within these definitions during the relevant period. Consequently, "Welding Electrodes" were not entitled to MODVAT credit as either 'capital goods' or 'input'.

Conclusion:

The High Court dismissed the appeal, affirming the decisions of the lower authorities and the Tribunal. The court held that "Welding Electrodes" do not qualify for MODVAT credit under the rules applicable during the relevant period, either as 'input' or 'capital goods'. The appeal lacked merit and was dismissed with no order as to costs.