ORDER
C.N.B. Nair, Member (T)
1. The assessee is engaged in the manufacture of Heavy Duty Construction Equipment. Two such products are Vibratory compactors and wheeled tractor loader backhoe. Both these equipment require lubricating oils to be put into them to make them fit for operations. The appellant received lubricating oils for this purpose and took input credit equipment to the excise duty paid on the lubricants. At the time of removal of the machines, lubricating oils were supplied along with machines in separate 25 litre drums. No additional charge was made for the lubricating oils so supplied. The value of lubricants formed part of the price of the machinery and excise duty was paid on the full price of the machinery including the cost of lubricants supplied in 25 ltrs. drums. Dispute arose as to whether input credit was available in regard to the lubricating oil so supplied. In his order dated 28th March, 2003 the Commissioner (Appeals) held against the asseesee. His finding may be read:
I have carefully considered the written and oral submission made by the appellants as well as the case records. The appeal is being taken up for final disposal after disposing with pre-deposit of Modvat credit and penalty amount. The points before me to decide are:
(i) Whether the lubricating oil supplied in packed drums with final products (Machines) would be eligible for Modvat credit or not.
(ii) Whether the use of lubricating oil for testing of machines for its smooth working will falls under the definition of manufacture under Section 2(f) of the Act.
In respect of point No. 1, I find that use of the inputs in or in relation to manufacture of final product is a condition precedent for eligibility to Modvat credit. In the instant case the inputs were supplied as such along with the final product cleared. It is, therefore, evident that said inputs were not used in or in relation to the manufacture of final product. It is found that lubricating oil in 20 Ltrs. Packing was not used by the Appellants in the process of manufacturing excisable goods but supplied as such to the buyers. Therefore, lubricating oil supplied along with the final product cannot be considered as input in terms Rule 57A. The contention of appellant that lubricating oil is an essential accessory for their final product is not acceptable for the reason that it is a consumable for the final product. Wheeled Tractor Loader Backhoe and Vibratory Compactor sold by them to their buyers. The Appellants, therefore, are not entitled to Modvat credit on lubricating oil supplied by them to their buyers.
Appeal No. E/4143/03 of the assessee is against the above order.
2. The dispute continued for later period also and under subsequent order dated 22-6-04, 7-7-04 and 9-8-04, Commissioner (Appeals) held in favour of the assessee. The reasoning of those orders may be also read:
As far as the lubricant oil supplied along with the machines (20/25 litres drums), the Appellants have stated that these oil drums were supplied as an accessory along with the final products at the time of clearance from the factory to the buyers, so that the machines can be used immediately by the customers by using such oil which are specialized in nature and that the value of the oil is included in the value of the finished product and duty is paid on the sale value of the equipments which includes the oil cost. The lower authority did not accept the contention of the Appellants that the oil supplied along with the equipments/machines should be considered as an accessory and held that such oil is only a consumable and hence disallowed the credit even though the value of the oil has been included in the sale price of the equipment/machine. The Appellants have submitted some case laws to show that inputs supplied along with the main items as accessory would be eligible for Modvat credit. I find that in the case of Classic Electronics (P) Ltd. and Electro/lame Ltd.(supra) Modvat credit was allowed in respect of Batteries fitted with generating sets and regulator for ceiling fan and in both the cases the cost of a batteries/regulator had been included in the value of the final product. Though these judgments are not exactly similar to the facts of the present case, the under lying principle in both the cases for allowing the credit is that the cost of batteries/regulator is included in the cost of product. Similarly in this case also, as the Appellants have rightly contended, the lubricant oil which is a specialized oil supplied along with the equipments after adding the cost of such oil in the value of the finished goods should be allowed as Modvat.
Appeals No. E/4728/04, E/5226/04, E/5484/04, filed by the Revenue are directed against granting of Modvat credit under the above-mentioned orders.
3. All the appeals were heard together as the issue involved is the same. The submission of the Id. Counsel for the appellant is that the later decision of the Commissioner constitutes the correct law. It is being pointed out that lubricants in question are essential for the functioning of the machines inasmuch as the supplied quantity of lubricants is to be poured into the machines before its use and, therefore, these oils are necessary inputs in the manufacture of the machinery. He would submit that since Modvat Rule allowed credit on any input “used in or in relation to the manufacture of a final product” all necessary inputs would be eligible for credit. He has relied on the Circular No. 344/60/97-CX dated 22nd October 97 clarifying that transformer oil is an eligible input. The submission of the Id. Counsel is that the reasoning in that circular covers the appellant’s case also. Specific reference is made to the observation in the circular that transformer oil acts as a coolant which is vital to functioning of the transformer. The Id. Counsel’s submission is that the lubricating oils in the present case also play the same role.
5. The Id. Counsel has placed two technical write up about requirement for the lubricating oil and the reason for supply in separate contains. These may be read:
TECHNICAL WRITE UP
The capacity of hydraulic tank of machine in which such specialized lubricant oil is filled is approximately 80 Itrs, while the hydraulic system capacity is 158 Itrs as per the enclosed brochure. The oil sent in small size drum along with the machine is serving as ‘top up’ oil, which cannot be filled at the time of shipment because of the following technical reasons:
1. If filled completely at the time of shipment, it can overflow during transit resulting in dust deposition and contamination of hydraulic circuit.
2. Contamination would result in malfunctioning of the system/attachments, which may ultimately cause permanent damage to precisely manufactured hydraulic components of the machine.
3. Due to the above, the machine may remain non-Commissioner at the customer’s site at the time of delivery.
Hence drums of small size are sent in unopened condition with the machines to serve as top up oil for the machines at customer site. This procedure is aimed for smooth commissioning and operation of the machines at customer’s site.
Sd/-
(S.K.Bohra)
Sr. DGM
Head-Production-Assembly
& Marketing Services
6. The Id. Counsel also relied on the decision of this Tribunal in the case of Madras Aluminium Co. Ltd. v. CCE, Coimbatore 2001 (136) E.L.T. 182 wherein it was held that transformer oil used as coolant in transformer would be eligible for Modvat credit.
7. The Id. SDR would submit that Modvat credit is available only for goods, which are used in the manufacture of a final product in the factory. It is his contention that manufacturer of the machinery in question is complete in the factory before the dispatch of the machinery and in such a situation the supply of lubricating oil can only be treated as a separate supply not forming part of the supply of the machinery in question. He has also referred to the judgment of this Tribunal in the case of Collector of Central Excise, Meerut v. Bhushan Steels & Strips Ltd. , wherein the Tribunal took a view that transformer oil is not an eligible input.
8. The Revenue’s case is based on the decision of this Tribunal in the case of Bhushan Steels & Strips Ltd. That decision of a Single Bench is not good law, in view of the decision of the Division Bench in the case of Madras Aluminium Co. Ltd. The Single Bench decision also is contrary on the aforesaid circular of the board on the subject.
9. There could be no arguing that lubricating oils are not an essential input for the production of machinery because it goes contrary to the factual position noted in board’s circular that transformer oils acts as a coolant which is vital for the functioning of the transformer. The circular; thus, accepts that coolant is vital for the functioning of the machinery and is an essential input. The dispute as to whether they are parts or accessories is only academic and that dispute should not affect the claim for input credit because the credit is available on a broad spectrum of goods used in production and not limited to what falls in the category of parts. The language of Modvat Rule itself is “used in or in relation to the manufacture”. Thus, the relationship need not be one of being a part. The rule also stipulates that an input will be eligible for credit be it a part or accessory, if its value remains included in the assessable value of the final product under assessment. That requirement also is satisfied in the present case. That the lubricant is supplied separately is not determinative of whether the lubricants are input or not. That is merely a matter of convenience. The write up of the appellant clearly brings out the reasons for supplying the lubricants separately. Those reasons are valid.
10. In view of what is stated above, I am of the view that the lubricants in question are eligible input for Modvat credit. Accordingly, appeal of the assessee is allowed and appeals of the Revenue are rejected.
(Dictated & pronounced in open Court on 5-10-06)