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CASE NO.: Appeal (civil)  6465-6475 of 2001

PETITIONER: Commnr. of Central Excise & Ors

RESPONDENT: M/s. Solaris Chemtech Limited & Ors

DATE OF JUDGMENT: 24/07/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.6465-6475 OF 2001 with  Civil Appeal No.6477 of 2001 Civil Appeal Nos.6075-6080 of 2001 Civil Appeal No. 3236 of 2007 arising out of S.L.P. (C)No.17046 of 2001 Civil Appeal No. 3237-3239 of 2007 arising out of S.L.P. (C)No.16294-16296 of 2001 Civil Appeal No. 649 of 2002 Civil Appeal No. 3240 of 2007 arising out of S.L.P. (C)No.10017 of 2002 Civil Appeal No. 3241 of 2007 arising out of S.L.P. (C)No.20627 of 2003 Civil Appeal No.6011 of 2004 Civil Appeal No.2465-2469 of 2001

KAPADIA, J.

       Leave granted in special leave petitions. 2.      In this batch of civil appeals the short question which arises for  determination is : whether the assessee is entitled to MODVAT credit under  Rule 57A on Low Sulphur Heavy Stock (LSHS) and furnace oil used for  generating electricity captively consumed for the manufacture of the final  products such as caustic soda, cement etc.

3.      For the sake of convenience we may refer to the facts in the case of  Civil Appeal No.6465-6475 of 2001 \026 Commr. Of Central Excise & others  v. M/s. Solaris Chemtech Ltd. and others (earlier known as ’M/s. Ballarpur  Industries Ltd.’).

4.      Low Sulphur Heavy Stock (LSHS) is used by the assessees as fuel for  generating electricity which in turn is captively consumed for the production  of caustic soda and cement. 5.      Rule 57A (MODVAT Rule) reads as under: "Rule 57A. Applicability. - (1) The provisions of this  section shall apply to such finished excisable goods  (hereinafter referred to as the "final products"), as the  Central Government may, by notification in the Official  Gazette, specify in this behalf, for the purpose of  allowing credit of any duty of excise or the additional  duty under section 3 of the Customs Tariff Act, 1975 (51  of 1975), as may be specified goods used in or in relation  to the manufacture of the said final products (whether  directly or indirectly and whether contained in the final  product or not) (hereinafter referred to as the "inputs")  and for utilising the credit so allowed towards payment of  duty of excise leviable on the final products, whether  under the Act or under any other Act, as may be specified  in the said notification, subject to the provisions of this  section and the conditions and restrictions that may be  specified in the notification :

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Provided that the Central Government may specify the  goods or classes of goods in respect of which the credit  of specified duty may be restricted. Explanation. For the purpose of this rule, "inputs"  includes - (a) Inputs which are manufactured and used within the  factory of production in or in relation to manufacture of  final products. (b) Paints and Packing material, (c) Inputs used as fuel. (d) inputs used for the generation of electricity, used  within the factory of production for manufacture of final  products or for any other purpose.

but does not include \026  

(i)     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 in or in relation to the  manufacture of the final products; (ii)    packaging materials in respect of which any  exemption to the extent of the duty of excise  payable on the value of the packaging materials is  being availed of for packaging any final products; (iii)   packaging materials the cost of which is not  included or had not been included during the  preceding financial year in the assessable value of  the final products under section 4 of the Act; (iv)    cylinders for packing gases; (v)     plywood for tea (chests; or). (vi)    bags or sacks made out of fabrics (whether or not  coated, covered or laminated with any other  material) woven from strips or tapes of plastics."  

6.      Explanation clause (c) was added by Notification No.4/94 dated  1.3.94.  This clause is the bone of contention.   

7.      The assessees contend that LSHS fall within the ambit of Explanation  clause (c).  The Department’s contention is that these inputs are utilized for  manufacturing electricity which is not excisable and hence cannot be  considered as an input used as fuel in terms of Explanation clause (c).  It is  the case of the Department that LSHS does generate electricity.  However, it  cannot be said that LSHS has been used in or in relation for manufacture of  final product, namely, caustic soda and cement.  According to the  Department, LSHS has been basically used in the generation of electricity  which is not specified as final product and hence no MODVAT credit of  duty paid on LSHS is admissible.  According to the Department, generation  of electricity by heating LSHS is a process which is independent of the  process of manufacturing cement and caustic soda.  According to the  Department, LSHS generates electricity but that process does not result into  manufacture of cement and caustic soda and, therefore, MODVAT  credit  was not admissible for the duty paid on LSHS.   

8.      In our view, there is no merit in this civil appeal filed by the  Department.  At the outset, we may clarify that electricity is not an excisable  item.  Further, in this batch of civil appeals we are concerned with the  electricity which is generated inside the plant by heating of LSHS and which  is captively consumed and used to manufacture cement/caustic soda.  Rule  57A, quoted above, has an Explanation clause which stated as to what inputs  are included in MODVAT credit.  Explanation clause (c) refers to "input  used as fuel".  This clause was introduced by Notification No.4/94.  At that  time the Government made it clear that inputs used as fuel were entitled to  MODVAT credit.  That fuel either utilized directly or for generating  electricity, as an intermediary product, is integrally connected with several

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operations which results in the emergence of the final product, namely,  cement/caustic soda.  It is important to note that without utilization of LSHS,  it is not possible to manufacture cement/caustic soda.  The electrolysis  process is dependent on continuous flow of electricity.  If there is disruption  in the supply of electricity from the Electricity Board then the entire plant of  the assessees would fail and the manufacture of cement/caustic soda would  not take place.  Therefore, LSHS would come within the ambit of the  expression "used in or in relation to the manufacture of the final product".   Further, in the case of Collector of Central Excise  v.  Rajasthan State  Chemical Works - 1991 (55) ELT 444 (SC), it has been held that any  operation in the course of manufacture, if integrally connected with the  operation which results in the emergence of manufactured goods, would  come within the term "manufacture".  This is because of the words used in  Rule 57A, namely, "goods used in or in relation to the manufacture of the  final products".  Electricity is one form of heat.  It gets generated in several  ways.  LSHS is a fuel used in the generation of electricity.  Since, electricity  is self-generated and since it comes into existence as an intermediary  product, its utilization for production of final product is crucial.  Hence,  MODVAT credit on LSHS used in production of electricity cannot be  denied.  Lastly, we may point out that in order to appreciate the arguments  advanced on behalf of the Department one needs to interpret the expression  "in or in relation to the manufacture of final products".   The expression "in  the manufacture of goods" indicates the use of the input in the manufacture  of the final product.  The said expression normally covers the entire process  of converting raw-materials into finished goods such as caustic soda, cement  etc.  However, the matter does not end with the said expression.  The  expression also covers inputs "used in relation to the manufacture of final  products".  It is interesting to note that the said expression, namely, "in  relation to" also finds place in the extended definition of the word  "manufacture" in Section 2(f) of the Central Excises and Salt Act, 1944 (for  short, ’the said Act’).  It is for this reason that this Court has repeatedly held  that the expression "in relation to" must be given a wide connotation.  The  Explanation to Rule 57A shows an inclusive definition of the word "inputs".   Therefore, that is a dichotomy between inputs used in the manufacture of the  final product and inputs used in relation to the manufacture of final products.   The Department gave a narrow meaning to the word "used" in Rule 57A.   The Department would have been right in saying that the input must be raw- material consumed in the manufacture of final product, however, in the  present case, as stated above, the expression "used" in Rule 57A uses the  words "in relation to the manufacture of final products".  The words "in  relation to" which find place in Section 2(f) of the said Act has been  interpreted by this Court to cover processes generating intermediate products  and it is in this context that it has been repeatedly held by this Court that if  manufacture of final product cannot take place without the process in  question then that process is an integral part of the activity of manufacture of  the final product.  Therefore, the words "in relation to the manufacture" have  been used to widen and expand the scope, meaning and content of the  expression "inputs" so as to attract goods which do not enter into finished  goods.  In the case of M/s. J.K. Cotton Spinning and Weaving Mills, Co.  Ltd. v. The Sales Tax Officer, Kanpur and another - AIR 1965 SC 1310,  this Court has held that Rule 57A refers to inputs which are not only goods  used in the manufacture of final products but also goods used in relation to  the manufacture of final products.  Where raw-material is used in the  manufacture of final product it is an input used in the manufacture of final  product.  However, the doubt may arise only in regard to use of some  articles not in the mainstream of manufacturing process but something  which is used for rendering final product marketable or something used  otherwise in assisting the process of manufacture.  This doubt is set at rest  by use of the words "used in relation to manufacture".  In the present case,  the LSHS is used to generate electricity which is captively consumed.   Without continuous supply of such electricity generated in the plant it is not  possible to manufacture cement, caustic soda etc.  Without such supply the  process of electrolysis was not possible.  Therefore, keeping in mind the  expression "used in relation to the manufacture" in Rule 57A we are of the  view that the assessees were entitled to MODVAT credit on LSHS.   In our

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opinion, the present case falls in clause (c), therefore, the assessees were  entitled to MODVAT credit under Explanatory clause (c) even before  16.3.95.  Inputs used for generation of electricity will qualify for MODVAT  credit only if they are used in or in relation to the manufacture of the final  product, such as cement, caustic soda etc.  Therefore, it is not correct to state  that inputs used as fuel for generation of electricity captively consumed will  not be covered as inputs under Rule 57A.

9.      Before concluding, we may point out that in some of the cases  electricity generated is consumed by the residential colony of the factory’s  workers’ families, schools etc., to that extent MODVAT credit will not be  admissible.   

10.     Subject to what is stated above, there is no merit in the civil appeals  filed by the Department and accordingly they are dismissed with no order as  to costs.