ORDER
R. Jayaraman, Member (T)
1. This is an appeal against the Order in Original No. 11/MP/93, dated 23-3-1993 passed by the Collector of Central Excise, Baroda. In the said order, the Collector has confirmed the demand for a total amount of Rs. 12,49,180.53 under Rule 57-I of the Central Excise Rules by invoking the extended period. The Collector has also imposed a penalty of Rs. 5 lakhs on the appellant under Rule 173Q(1) of the Central Excise Rules.
2. The appellants are engaged in the manufacture of caustic soda, chlorine, HC1 Chloromethanes, and sodium cyanide. They filed declaration for availing Modvat credit in respect of various inputs. The impugned inputs involved in this appeal are caustic soda, Hydrochloric acid and Ion Exchange resins limited to their usage in the effluent treatment plant. The other inputs are M.E.G. (Mono Ethylene Glycol) and Mefron/Freon gases, which are used in the chilling plant. Modvat credit was sought to be denied on the ground that Freon/Mefron gases are used in respect of functioning of refrigeration plant and they cannot be construed to be inputs used in or in relation to the manufacture of the final product. They are used only for operational need of the refrigeration plant, which is a plant and machinery hit by exclusion clause under Rule 57A and hence cannot be allowed Modvat credit. Likewise, M.E.G. is alleged to be used in brine solution for chilling purposes in the chilling plant and hence it is for the operational need of the refrigeration plant. As regards caustic soda, hydrochloric acid and Ion Exchange resin, used in the effluent treatment plant, it was held by the Collector that it is not in or in relation to the manufacture of the final product; but are used only in the effluent treatment, before discharge of the effluent. Hence such usage cannot be said to be used in or in relation to the manufacture of the final product. The demand covers the period from 1-3-1986 to 31-5-1990 and the show cause notice is dated 5-2-1991. The Collector has invoked the extended period alleging that they have suppressed the material facts relating to specific usage of these inputs and hence held that extended period can be invoked. For availing irregular Modvat, a penalty of Rs. 5 lakhs also has been imposed. The present appeal is against the aforesaid order.
3. Shri D.M. Mehta the ld. consultant refers to the process of manufacture of sodium cyanide in the appellant’s factory, the details of which are given in the paper book. From this write up, we find that monoethyiene glycol is used as brine solution, which is chilled to about 0 – 5 degrees C. in refrigeration system and circulated in the pipeline to maintain the temperature of HCN for the manufacture of Sodium Cyanide at 0 degree C. For purpose of anti-freezing of the solution in circulation, ethylene glycol is used. Freon/Mefron gases are used as refrigerant gases in the chilling plant. Chilled water is used in the condensor for cooling refrigeration system. In their effluent treatment plant, they use caustic soda lye, liquified chlorine, Hydrochloric acid and Ion exchange resins for destroying the traces of sodium cyanide in the effluents before discharge of the effluents outside. Shri Mehta, pleads that in regard to Monoethyiene glycol it is used as brine solution in the chilling plant for maintaining the temperature of HCN at 0 degree C. If the raw material is not maintained at this temperature, chemical reaction with caustic soda for the manufacture of [NaCN] could not be obtained. Hence it is an essential input used in relation to the manufacture of sodium cyanide. In the case of Freon/Mefron gases, he seeks to rely on this Bench decision in their own case vide Order No. 247-49/95-WRB, dated 20-2-1995. As regards caustic soda, [Hydrochloric] acid and Ion Exchange resins used in the effluent plant, he would plead that the finished product involved is sodium cyanide, which is a highly poisonous chemical and any trace of it cannot be permitted to be discharged outside. Hence an effective effluent treatment is called for and for this purpose these inputs are used. Effluent treatment to neutralise a poisonous chemical also goes with the process of manufacture and should be construed as an input. He would therefore plead for allowing the Modvat credit in all the above inputs.
4. Shri Krishnamurthi, the ld. JDR submits that MEG is only an anti-freezing agent. It is added with water to form brine solution to use in the chilling plant and it is only used in the cooling medium and cannot be said to be used in or in relation to the manufacture of the final product. He also pleads that all the three items, namely MEG, Mefron/Freon and refrigerant gases are used only in the refrigeration plant and are identifiable with the operational need of the refrigeration plant. They cannot be construed to be inputs used in or in relation to the manufacture of the final product.
5. As regards the items used in the effluent treatment plant, be points out that all these inputs are intended to destroy the trace of the final product. The final product namely sodium cyanide has already been manufactured. Whatever trace of the final product, which has gone in the effluent, is sought to be destroyed by these chemicals. Hence they cannot be said to be used in or in relation to the manufacture of the final product. They can only be said to be used in the destruction of the trace of the final product. Hence they should not be allowed Modvat credit going by provisions of Rule 57A.
6. On the ground of time bar, Shri Mehta pleaded that they have clearly indicated the use of Hydrochloric acid as well as caustic soda lye for neutralisation of soidum cyanide, which would clearly indicate that they are to be used in the effluent treatment plant. In the case of other inputs also they have clearly indicated that they are used in the chilling plant and hence the allegation of suppression or mis- declaration cannot be sustained against them. Moreover, the entire manufacturing process is within the knowledge of the deptt. and even the use of these chemicals in the effluent treatment plant and chilling plant was known to the deptt. Hence the extended period cannot be justified.
7. Shri Krishnamurthi however pleads that they have described them as raw material and hence they have misled the deptt. They have not indicated clearly that they are used in effluent treatment plant or used as refrigerating medium. They have shown them against the final product sodium cyanide and chloromethane. They cannot be construed to be a raw material used in the manufacture of these final products. Hence extended period is invokable.
8.1 After hearing both sides, we find that in the case of Freon/Mefron gas, this Bench has already taken the decision that usage of these gases in analogous to use of acetylene gas through the medium of flame torch, when acetylene gas was held to be a consumable input. These are consumable gases used in the refrigeration plant and they cannot be construed to be part of the plant. Hence we allowed Modvat benefit in respect of Mefron/Freon gases. Even in the present case, the gases are used in the refrigeration plant for keeping the input at 0°C. to enable the chemical reaction to take place. Hence they have to be construed as eligible inputs.
8.2 As regards MEG, this item is a chemical added to water for use as an anti-freezing agent in the chilling plant so that the solution does not get solidified and the process does not come to a stand still. Since it is an input used in the plant for maintaining the solution at 0°C to enable chemical reaction to take place, it has to be construed as an input used in relation to the manufacture of the final product. It has become a settled law that the inputs need not be physically present in the final product. So long as its usage is necessary for the manufacture of the final product and they are not excluded under Rule 57A, they are to be allowed Modvat credit. Even the said rule has been amended in June 1995, making this position explicit in the context of these judicial pronouncements. Hence, we hold that M.E.G. is an input used in the chilling medium for maintaining the temperature at the desired level for chemical reaction to take place and can therefore be construed to be used in relation to the manufacture of final product.
8.3 As regards the inputs used in the effluent treatment plant, we agree with the ld. J.D.R. that these inputs used in the effluent treatment plant cannot be said to have been used in or in relation to the manufacture of the final product namely Sodium Cyanide. The admitted position is that the final product has already been manufactured. The effluent containing traces of sodium cyanide are sought to be eliminated by using these inputs. In the circumstances/unless the Govt. by a policy decision based on environmental consideration, allows benefit of duty credit in respect of such inputs used for effluent treatment, extension of Modvat credit in respect of the inputs used in the effluent treatment is not permissible. They are also not used for recovery of sodium cyanide from the effluent to clear such recovered [NaCN] on payment of duty. We therefore hold that the aforesaid three items used in the effluent treatment plant are not eligible for Modvat credit. It is reported that these inputs are also used in other uses in other sections of the plant. Since the dispute is not about these other usages, our findings above are confined only to their usage in the effluent treatment plant.
9. The question of considering time bar is now an academic issue in respect of MEG, Mefron/Freon gases, since we have allowed their appeal on merits with regard to the eligibility. The time bar aspect is to be considered only in respect of demand relating to caustic soda, [Hydrochloric] acid and Ion exchange resins used in the effluent treatment plant. We have carefully looked in to this declaration. We find that there is a specific reference to effluent treatment plant against Hydrochloric acid in the declaration. In the case of caustic soda, usage is indicated as neutralisation of Sodium cyanide, which goes to indicate that it is for destroying the final product and goes with effluent treatment. It is reported that detailed process of manufacture has been filed alongwith the declaration, but no evidence in this regard is produced. All the same, going by the declaration filed and there is a scope for dispute on their eligibility for credit, we are inclined to accept the plea that there was no mala fide in giving the declaration. We therefore set aside the demand on the ground of time bar, in regard to the inputs used in the effluent treatment plant, though we hold on merits that these inputs used in the effluent treatment plant cannot be given Modvat credit.
10. As regards the penalty, in view of our aforesaid findings, there is no ground for imposing penalty. It is also set aside.
11. In the result, appeal is allowed in the above terms.