V.P. Gulati, Member (T)
1. The issue in the appeal relates to grant of Modvat credit on capital goods under Rule 57Q of the Central Excise Rules, 1944 in respect of humidification plant.
2. The learned C.C.E. (Appeals) has held as under :
3.2 So far as the humidification plant and accessories are concerned, I find that they have been installed in the factory in June, 1994 after the amendment to the 2nd proviso to Rule 57S according to which the concept of capital goods has been enlarged to include goods ‘used in or in relation to the manufacture of the final product’. This expression as has been hold by many judicial pronouncements, has wider scope than the expression ‘used in the manufacture of final products’. Inasmuch as the humidification plant is required for maintaining proper humidity in the spinning plant, I consider the same as eligible for Modvat credit.
3. The revenue is aggrieved of the findings of the learned C.C.E. (Appeals) and has urged as under in the grounds of appeal.
4. In the instant issue the humidification plant is used to maintain the moisture at a desired level. Other than this it has no other function. However, these goods which are classified under sub-heading 8419.00 have been specifically included under the category of Capital Goods only from 16-3-1995 under Notification No. 11/95-C.E. (N.T.) under Explanation (l)(d)(i) to Rule 57Q. Thus, it is implied that prior to. 16-3-1995 these goods were not included under Capital Goods and as a result not eligible for Modvat credit prior to 16-3-1995.
4. The learned DR for the Revenue has reiterated the grounds of appeal. He has pleaded that in terms of Rule 57Q such of those notified items of capital goods are allowed the benefit of Modvat credit as are used for production or processing or bringing about any change in any substance for the manufacture of the final product. He has pleaded that therefore there should be a physical nexus between the use of the machinery and the goods produced. He has urged that the term process has to be given a restricted meaning. His plea is that humidification plant is not for processing or production of the final product. At best, it is to create atmosphere at the factory floor. The wordings under Rule 57Q used are machinery for production or processing or bringing out any change and humidification would not come within the ambit of capital goods eligible to the benefit of Modvat credit.
5. The learned Counsel for the respondents has pleaded that humidification has necessarily to be done in the textile plant for production and also for ensuring certain level of quality of the goods produced. He has pleaded that humidification plant has a nexus with the production of the goods and therefore, the benefit of Modvat credit should be allowed.
6. We have considered the pleas made by both the sides. Rule 57Q for the purpose of convenience of reference is reproduced below :
“RULE 57Q. Applicability. – (1) The provisions of this section shall apply to finished excisable goods of the description specified in the Annexure below (hereinafter referred to as the “final products”) for the purpose of allowing credit of specified duty paid on the capital goods used by the manufacturer in his factory and for utilising the credit so allowed towards payment of duty of excise leviable on the final products, or as the case may be, on such capital goods, if such capital goods have been permitted to be cleared under rule 57S, subject to the provisions of this section and the conditions and restrictions as the Central Government may specify in this behalf :
Provided that credit of specified duty in respect of any capital goods produced or manufactured –
(a) in a free trade zone and used for the manufacture of final products in any other place in India; or
(b) by a hundred per cent export oriented undertaking or by a unit in an Electronic Hardware Technology Park [or by a unit in Software Technology Parks] and used for the manufacture of final products in any place in India,
shall be restricted to the extent of duty which is equal to the additional duty leviable on like goods Under Section 3 of the Customs Tariff Act, 1975 (51 of 1975) equivalent to the duty of excise paid on such capital goods.”
The capital goods as set out in the said rules under heading “explanation” are also reproduced below :
Explanation. – For the purposes of this section, –
(1) “capital goods” means –
(a) machines, machinery, plant, equipment, apparatus, tools o1 appliances used for producing or processing of any goods or for bringing about any change in any substance for the manufacture of final products;
7. It is observed that as urged by the learned DR for the Department, the definition of capital goods as set out under the rules is restrictive and the words used are that capital goods should be such as are used for production, processing or for bringing out any change in the substance for the manufacture of the final products. The three words used in the rules viz. production, processing or for change in the substance would go to show that the capital goods have to be used as one in which the process and manufacture or change in the products are brought about. The term production and process as set out in the Oxford Dictionary are reproduced below for convenience of reference:
Process’ n 1. Progress, course; in ~ of time
as time goes on; natural or involuntary
operation, series of changes; course of action,
proceeding, esp. method of operation in
manufacturer printing, photography, etc. 2. Produ’ction n.
(Print from block produced by) method producing;
(e.g. chemical or photographic) other than things(s)
simple engraving by hand; block, block produced;
for printing from, produced by such literary or
method. 3. Action at law; formal commencement artistic work.
of this; summons or writ; ~- server,
sheriff's officer who serves processes
or summonses. 4. (anat, zool., bot.)
Outgrowth, protuberance. ~ v.t. 1.
Institute legal process against "
(person.) 2. Treat (material), preserve
(food), reproduce (drawing etc.) by a process.
It is observed that production or process would mean physical processing of the goods and the capital goods must have a nexus for bringing about any change in the substance of the goods by direct participation in the manufacturing stream. Humidification only creates atmosphere and does not answer to the use as above. There is no dispute that humidification is required to be done for having certain level of humidity to get the yarn of a particular quality and that by itself does not mean that the humidification plant can be considered as equipment used for production, process or for bringing about any change in the substance in the manufacture of the final products. In the above view of the matter, the appeal of the Revenue is allowed.