REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  3760 OF 2003   

COMMISSIONER OF CENTRAL  EXCISE, JAIPUR

— APPELLANT

VERSUS

M/S RAJASTHAN SPINNING &  WEAVING MILLS LTD.  

— RESPONDENT

J U D G M E N T

D.K. JAIN, J.:

1.Challenge  in  this  appeal,  by  special  leave,  is  to  the  order  

dated 11th June, 2002 passed by the Customs, Excise and Gold  

(Control)  Appellate  Tribunal  (for  short  “the  Tribunal”),  as  it  

existed  then,  in  Appeal  No.E/725/2001-NB(SM).   By  the  

impugned order, the Tribunal has held that the respondent (for  

short “the assessee”) is entitled to avail of MODVAT credit in  

respect of steel plates and M.S. channels used in the fabrication

of chimney for the diesel generating set, by treating these items  

as  capital  goods in  terms of  Rule  57Q of  the Central  Excise  

Rules, 1944 (for short “the Rules”).

2.Briefly stated, the material facts, giving rise to the present  

appeal, are as follows:

The assessee is a public limited company engaged in the  

manufacture of yarn. They availed MODVAT credit on “capital  

goods” described in the Table given below Rule 57Q in respect  

of steel plates and M.S. channels used by them for erection of  

chimney for the diesel generating set, falling under Chapter 85  

of  the  Central  Excise  Tariff  Act,  1985  (for  short  “the  Tariff  

Act”).

3.A show cause notice, dated 20th August 1999, was issued to  

the assessee, alleging  therein that MODVAT credit availed of  

on  steel plates and M.S. channels used in the fabrication of  

chimney,  was  inadmissible   as  the  subject  items  were  not  

“capital  goods”,  as  described  in  the  said  Table.  Therefore,  

MODVAT credit had been wrongly availed of by the assessee.  

In reply to the show cause notice, the assessee pleaded that the  

items in question being components of chimney which in turn  

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was  an  accessory  of  the  diesel  generating  set,  falling  under  

heading  85.02,  they  also  qualify  the  test  of  “capital  goods”  

specified  against  serial  No.5  of  the  Table,  and  therefore,  

MODVAT  credit  in  respect  of  the  said  items  was  clearly  

admissible.  It was asserted that chimney was a vital part of the  

generating set for discharge of gases arising out of burnt fuel,  

mandatory under the Pollution Control laws.  

4.The Assistant Commissioner was of the view that since steel  

plates  and  M.S.  channels  were  not  used  as  input  in  the  

manufacture of final product, these could not be covered under  

any  of  the  chapter  headings  in  the  Table  under  Rule  57Q,  

MODVAT  credit  on  the  said  items  was  inadmissible.   He,  

accordingly,  disallowed  the  MODVAT  credit  amounting  to  

Rs.1,16,650/- availed of by the assessee and imposed a penalty  

of  Rs.2000/-.   Being  aggrieved,  the  assessee  filed  an  appeal  

before the Commissioner (Appeals) but without any success on  

the question of MODVAT credit. The Commissioner (Appeals),  

however,  deleted  the  penalty  levied  on  the  assessee.   The  

assessee took the matter further in appeal to the Tribunal.  The  

Tribunal has come to the conclusion that since the chimney is  

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used as an accessory to the diesel  generating set,  and  steel  

plates  and  M.S.  channels  were  used  in  the  fabrication  of  

chimney these items also fall within the ambit of serial No.5 of  

the said Table and therefore, MODVAT credit on these items  

could not be  denied.  Not being satisfied with the order of the  

Tribunal, the Revenue is before us in this appeal.  

5.Mr. Harish Chandra,  learned Senior Counsel appearing for  

the  Revenue  submitted  that  the  Tribunal  has  failed  to  

appreciate that  “capital goods”  as described in the Table under  

Rule 57Q would include only those goods which are specified  

against      serial Nos.1 to 4 of the said Table and, thus, the  

“capital  goods”  in  the  present  context  cover  only  the  diesel  

generating set and its components, spares and accessories and  

not  steel  plates  or  M.S.  channels,  which  are  independently  

classifiable  under  Chapter  Sub-heading  7208.11  and 7216.10  

respectively.  It was argued that both the subject items were  

not used as input in manufacture of final product so as to make  

them eligible for MODVAT credit in terms of serial No.5 of the  

said Table.  Learned counsel thus, urged that the order of the  

Tribunal deserves to be set aside.  

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6.Per contra, Mr. B.L. Narsimhan, learned counsel appearing  

on behalf of the assessee supported the decision of the Tribunal.  

He  submitted that the issue sought to be raised by the Revenue  

in this appeal stands concluded in favour of the assessee by a  

decision  of  this  Court  in  Commissioner  of  Central  Excise,   

Coimbatore & Ors.  Vs. Jawahar Mills  Ltd.  & Ors.1,  wherein  

observing that the exemption notification must be so construed  

as to give due weight to the liberal language it uses and that  

any goods that may be used in the factory of the manufacturer  

of final product would be “capital goods” and would be entitled  

to MODVAT credit.  It was, thus, asserted that the said items  

used  in  the  fabrication  of  chimney,  which  in  turn  is  an  

important component of diesel generating set, qualify the test of  

“capital goods” and would be entitled to MODVAT credit.  

7.The short question arising for determination is whether the  

assessee was right in availing MODVAT credit in respect of the  

afore-stated items by treating them as “capital goods” in terms  

of Rule 57Q?   

1 (2001) 6 SCC 274

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8.Rule 57Q was substituted by Notification No.6/97-C.E. (N.T.)  

dated  1st March,  1997.   It  enables  the  manufacturers  of  

specified goods to claim MODVAT credit of duty paid on capital  

goods  used  by  them  in  the  factory  for  manufacture  of  final  

product.  The Rule, insofar as it is relevant for this case, reads  

as under:

“RULE 57Q.  Applicability.- (1) The provisions of this  section shall apply to goods (hereafter in this section,  referred  to  as  the  “final  products”)  described  in  column (3) of the Table given below and to the goods  (hereafter,  in  this  section,  referred  to  as  “capital  goods”),  described  in  the  corresponding  entry  in  column (2) of the said Table, used in the factory of the  manufacturer of final products.  

TABLE S.No

.

Description of capital goods  falling within the Schedule  to the Central Excise Tariff  Act,  1985  (5  of  1986)  and  used  in  the  factory  of  the  manufacturer  

Description  of  final products

(1) (2) (3) 1. …………………. …………. 2. …………………. 3. All  goods  falling  under  

chapter  85  (other  than  those falling under heading  Nos.  85.09 to  85.13,  85.16  to 85.31, 85.39 and 85.40);

4. …………………. 5. Components,  spares  and  

accessories  of  the  goods  

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specified against S. Nos. 1  to 4 above;”

9.The  language  of  Rule  57Q  is  clear  and  unambiguous.  It  

applies  to  the  final  products  described  in  column  (3)  of  the  

Table  under  the  Rule  as  also  to  other  goods,  referred  to  as  

“capital goods”, described in the corresponding entry in column  

(2) of the said Table, used in the factory of the manufacturer of  

final product. The parties are ad idem that diesel generating set  

falls under Chapter 85 under Heading No. 85.02, as described  

at serial No.3 of the afore-extracted Table.  Similarly there is no  

dispute  that  chimney  attached  with  the  generating  set  is  

covered by the items described in serial No.5 thereof.  However,  

the controversy centres around the question whether the steel  

plates  and M.S.  channels  used in the fabrication of  chimney  

would fall within the purview of serial No.5 of the Table below  

Rule 57Q.

10.Having examined the question in the light of the language  

employed in Rule 57Q and the case law on the point, we are of  

the opinion that the appeal is devoid of any merit.   

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11.In  Jawahar Mills Ltd. (supra),  heavily relied upon by the  

learned counsel for the assessee, the question which came up  

for consideration was whether the claim of MODVAT credit by  

some  manufacturers  in  respect  of  certain  items  by  treating  

them as capital goods in terms of Rule 57Q was in order. Some  

of the items under consideration were power cables, capacitors,  

control panels, cable distribution boards, air compressors, etc.  

The Court examined the question in the light of the definition of  

capital goods given in Explanation to Rule 57Q, which read as  

follows:

“capital goods” means—

(a) machines, machinery, plant, equipment, apparatus,  tools or appliances used for producing or processing of  any  goods  or  for  bringing  about  any  change  in  any  substance for the manufacture of final products;

(b)  components,  spare  parts  and  accessories  of  the  aforesaid  machines,  machinery,  plant,  equipment,  apparatus,  tools  or  appliances  used  for  aforesaid  purpose; and

(c) moulds and dies, generating sets and weighbridges  used in the factory of the manufacturer.”

12.Inter  alia observing  that  capital  goods  can  be  machines,  

machinery, plant, equipment, apparatus, tools or appliances if  

any of these goods is used for producing or processing of any  

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goods or for bringing about any change in the substance for the  

manufacture of final product, although this view was expressed  

in the light of the afore-noted definition of “capital goods” in the  

said Rule, which is not there in Rule 57Q, as applicable in the  

instant case, yet the “user test” evolved in the judgment, which  

is required to be satisfied to find out whether or not particular  

goods could be said to be capital goods, would apply on all fours  

to the facts of the present case.  In fact, in para 6 of the said  

judgment, the Court noted the stand of the learned Additional  

Solicitor General, appearing for the Revenue, to the effect that  

the  question  whether  an  item  falls  within  the  purview  of  

“capital goods” would depend upon the user it is put to.   

13.Applying the “user test” on the facts in hand, we have no  

hesitation in holding that the steel plates and M.S. Channels,  

used in the fabrication of chimney would fall within the ambit  

of “capital goods” as contemplated in Rule 57Q.  It is not the  

case of the Revenue that both these items are not required to be  

used in the fabrication of chimney, which is an integral part of  

the  diesel  generating  set,  particularly  when  the  Pollution  

Control  laws  make  it  mandatory  that  all  plants  which  emit  

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effluents  should  be  so  equipped  with  apparatus  which  can  

reduce  or  get  rid  of  the  effluent  gases.   Therefore,  any  

equipment used for the said purpose has to be treated as an  

accessory  in  terms  of  serial  No.5  of  the  goods  described  in  

column (2) of the Table below Rule 57Q.   

14.We  are,  therefore,  of  the  opinion  that  the  Tribunal  was  

correct in law in holding that the assessee was entitled to avail  

of  MODVAT credit  in  respect  of  the  subject  items  viz.  steel  

plates and M.S. channels used in the fabrication of chimney for  

the  diesel  generating  set,  by  treating  these  items  as  capital  

goods in terms of Rule 57Q of the Rules.  

15.For  the  foregoing  reasons,  we  find  no  substance  in  the  

appeal  preferred  by  the  Revenue.   The  same  is  dismissed  

accordingly.  Parties are left to bear their own costs.  

……………………………. J.

(D.K. JAIN)

                              …………………………….J.  (C.K. PRASAD)

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NEW DELHI; JULY 9, 2010.

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