REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL  APPEAL NO. 3976 OF 2007

RAMALA  SAHKARI  CHINI  MILLS LTD., U.P.

— APPELLANT  

VERSUS

COMMISSIONER  CENTRAL  EXCISE, MEERUT-I

— RESPONDENT

WITH

                 CIVIL APPEAL NO.3747 OF 2007,         CIVIL APPEAL NO.4704 OF 2007,         CIVIL APPEAL NO.5896 OF 2008 &

                            CIVIL APPEAL NO.5894 OF 2008

O R D E R  

D.K. JAIN, J.:

1. Challenge in these civil appeals, filed under Section 35(L) of  

the Central Excise Act, 1944 (for short “the Act”) is to the orders  

passed  by  the  Customs,  Excise  and  Service  Tax  Appellate  

Tribunal  (for  short  “the  Tribunal”),  inter  alia,  holding  that  

welding electrodes used in the maintenance of machines were not  

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eligible for credit  as “inputs” under the CENVAT Credit Rules,  

2002 (for short “the 2002 Rules”).

2. In view of the order we propose to make in all these appeals,  

at this stage, we deem it unnecessary to narrate  the facts in each  

of  the  tagged  appeals. However,  in  order  to  comprehend  the  

controversy in these appeals, a brief reference to the facts in Civil  

Appeal No.3976 of 2007 would suffice:

The appellant viz. Ramala Sahkari Chini Mills, (hereinafter  

referred to as “the assessee”) engaged in the manufacture of V.P.  

sugar  and  molasses,  availed  of  CENVAT  credit  on  welding  

electrodes,  falling  under  sub-heading  8311.00  of  the  Central  

Excise Tariff Act, 1985 (for short “the Tariff Act”), under Rule 2 of  

the 2002 Rules. The Range Superintendent, vide his letter dated  

21st November, 2002 asked the assessee to furnish details of use of  

welding  electrodes  in  their  factory.  The  assessee  replied  to  the  

said letter on 28th November, 2002 stating that the said goods are  

used in the maintenance of their plants and machinery.

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3. Thereafter, three show cause notices dated 4th October 2002,  

3rd April 2003 and 7th July 2003 were issued to the assessee  

for the periods February 2002, March 2002 to October 2002  

and November 2002 to April 2003, respectively proposing to  

recover the wrongly availed credit amount for those periods  

amounting to a total of `1,33,871/- together with interest and  

penalty.

4. The Assistant Commissioner,  Central Excise, Meerut,  vide  

Order-in-Original  dated  20th August  2004  confirmed  the  

demand  of  `1,33,871/-.  The  Assistant  Commissioner  also  

imposed  a  penalty  of  equal  amount  under  Rule  13 of  the  

2002 Rules and charged interest under Section 11AB of the  

Act.   

5. Being aggrieved by the said order, the assessee preferred an  

appeal  before  the  Commissioner  (Appeals),  Customs  and  

Central Excise, Meerut, who rejected the same vide his order  

dated 31st March 2005.

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6. The assessee, thereafter, carried the matter in appeal before  

the  Tribunal.  The  Tribunal,  vide  its  order  dated  12th  

February 2007, dismissed the appeal of the assessee,  inter  

alia, observing that:

“4. The adjudicating authority, on the basis of material  on  record  and  the  decision  of  the  Tribunal  in  CCE,  Belgaum  Vs.  Panyam  Cements  &  Mineral  Inds.  2003 (54)  RLT 557,  has held that welding electrodes  used  for  maintenance  of  machines  were  not  eligible  modvat credit. It was found that the welding electrodes  were used for repair and maintenance of machinery for  welding  purposes.  The  adjudicating  authority  also  noted  that  in  Kanoria  Sugars  &  General  Manufacturing  Co.  Vs.  CCE 1996 (16)  RLT 571,  the  Tribunal had held that welding electrodes used only for  the  purpose  of  welding  were  not  eligible  for  modvat  credit as also in CCE, Noida Vs. DCM Ltd., decided by  the  Tribunal  on  27.5.2003.  Following  the  decision  of  the  Larger  Bench  in  Jaypee  Rewa  case  reported  in  2003(57)RLT739,  the  adjudicating  authority  came  to  the conclusion that welding electrodes were not eligible  inputs  under  Rule  2 of  the Cenvat  credit  rules.  The  Commissioner (sic)  (Appeal)  upheld these findings by  applying the ratio of the said decisions and held that  welding electrodes were not eligible for credit either as  input  or  as  capital  goods.  This  issue  has  been  concluded by the Larger Bench in Jaypee Rewa Plant  which  has  been  followed  in  J.P.  Cement  Works  Vs.  CCE, Jaipur decided by the Tribunal  by order dated  11.12.2006 in Excise Appeal Nos. 99 and 109 of 2005- SM  Branch.  The  authorities  below  have  therefore,  rightly held that welding electrodes which were used  

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by the appellant were not eligible for credit either as  capital goods or as inputs.

5. As regards the issue of penalty, it was contended by  the learned counsel  for  the appellant that there was  conflict  amongst  the  judicial  pronouncements  on  the  issue and, therefore, no intention to evade duty could  be  inferred.  Considering  the  issue  of  penalty,  the  Commissioner  (Appeals)  has  held  that  the  appellant  was aware that Cenvat credit on the said item was not  available and despite that they availed credit to evade  payment of duty. In fact, the appellant did not respond  to the letters of the Superintendent sent on 5.04.2002,  requiring  them  to  reverse  the  credit  as  it  was  not  admissible.  The  appellant  cannot  rely  upon  a  self- created uncertainty  when the provisions of  law were  (sic) clear and by the decision of the Tribunal rendered  as far as back in 1996 in CCE, Belgaum Vs. Panyam  Cements  &  Mineral  Inds.,  it  was  held  that  welding  electrodes used for maintenance of machines were (sic)  not  eligible  for  Modvat  credit.  The authorities  below  have made the impugned orders imposing penalty and  directing  interest  to  be  recovered  for  valid  reasons,  warranting no interference by this Court. The appeal,  is, therefore, dismissed.”

7. Hence, the present civil appeals.

8. Mr.  Prakash  Kumar  Singh,  learned  counsel  appearing  on  

behalf of the appellants while assailing the impugned orders,  

strenuously urged that in light of the decisions of this Court  

in  Maruti  Suzuki  Limited  Vs.  Commissioner  of  Central  

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Excise, Delhi-III1 and Vikram Cement Vs.  Commissioner of   

Central  Excise,  Indore2, welding  electrodes  would  come  

within the ambit of “inputs” as defined in Rule 2(g) of the  

2002 Rules, in as much as they are used in relation to the  

manufacture of the final product.

9. Per  contra,  Mr.  Harish  Chander,  learned  senior  counsel  

appearing on behalf of the revenue urged that the impugned  

orders deserve to be affirmed.  

10. As aforestated  “Inputs” are defined under Rule 2(g) of the  

2002 Rules as follows:

“2.  Definitions.-  In  these  Rules,  unless  the  context  otherwise requires,-…………………………………………. ………………………………………………………………..… …………………………………………………………………..  (g) ‘input’ means all goods, except light diesel oil, high  speed diesel oil and motor spirit, commonly known as  petrol, used in or in relation to the manufacture of final  products  whether  directly  or  indirectly  and  whether  contained  in  the  final  product  or  not,  and  includes  lubricating  oils,  greases,  cutting  oils,  coolants,  accessories of the final products cleared along with the  final  product,  goods  used  as  paint,  or  as  packing  material, or as fuel, or for generation of electricity or  

1 (2009) 9 SCC 193 2 (2006) 2 SCC 351

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steam used for manufacture of final products or for any  other purpose, within the factory of production.

Explanation 1.-  The light  diesel  oil,  high speed  diesel oil or motor spirit,  commonly known as petrol,  shall  not  be  treated  as  an  input  for  any  purpose  whatsoever.

Explanation 2.- Inputs include goods used in the  manufacture of capital goods which are further used in  the factory of the manufacturer.”

11. In  Maruti  Suzuki  Limited  (supra),  this  Court  while  

examining the scope and purport of the term “input” in Rule 2(g)  

of  the  2002  Rules  observed  that  the  said  definition  had  three  

components viz. (i) the specific part, (ii) the inclusive part, and (iii)  

place of use, and unless all the three parts were satisfied, credit  

cannot be claimed on a good as an “input”. The Court held that:

“28. Coming  to  the  statutory  definition  of  the  word  “input”  in  Rule  2(g)  in  the  CENVAT  Credit  Rules,  2002, it  may be noted that the said definition of  the  word “input” can be divided into three parts, namely: (i) specific part (ii) inclusive part (iii) place of use Coming to  the specific  part,  one finds  that the word  “input” is defined to mean all goods, except light diesel  oil,  high  speed  diesel  oil  and  petrol,  used  in  or  in  relation to the manufacture of final products whether  directly  or  indirectly  and  whether  contained  in  the  final  product  or  not.  The  crucial  requirement,  therefore, is that all goods “used in or in relation to the  manufacture” of final products qualify as “input”. This  

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presupposes  that the element of  “manufacture”  must  be  present…………………………………………………… ………………………………………………………………… …….. 34.  In the past, there was a controversy as to what is  the meaning of the word “input”, conceptually. It was  argued by the Department in a number of cases that if  the identity of the input is not contained in the final  product then such an item would not qualify as input.  In  order  to  get  over  this  controversy  in  the  above  definition of “input”, the legislature has clarified that  even if  an item is not contained in the final  product  still  it  would  be classifiable  as  an “input”  under  the  above definition. In other words, it has been clarified  by  the  definition  of  “input”  that  the  following  considerations will not be relevant: (a)  use  of  input  in  the  manufacturing  process  be  it  direct or indirect; (b)  even  if  the  input  is  not  contained  in  the  final  product, it would still be covered by the definition. These considerations have been made irrelevant by the  use of the expression “goods used in or in relation to  the  manufacture  of  final  product”  which,  as  stated  above,  is  the crucial  requirement  of  the definition of  “input.”

35.  Moreover,  the said expression viz.  “used in or in  relation to the manufacture of the final product” in the  specific/substantive  part  of  the  definition  is  so  wide  that it would cover innumerable items as “input” and  to  avoid  such  contingency  the  legislature  has  incorporated  the  inclusive  part  after  the  substantive  part qualified by the place of use. For example, one of  the categories mentioned in the inclusive part is “used  as packing material”. Packing material by itself would  not suffice till it is proved that the item is used in the  course of manufacture of final product. Mere fact that  the item is a packing material whose value is included  

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in the assessable value of final product will not entitle  the  manufacturer  to  take  credit.  Oils  and lubricants  mentioned  in  the  definition  are  required  for  smooth  running of machines, hence they are included as they  are  used  in  relation  to  manufacture  of  the  final  product. The intention of the legislature is that inputs  falling in the inclusive part must have nexus with the  manufacture of the final product.

36. Coming to the analysis of the inclusive part of the  definition one finds that it covers: (a) lubricating oils, greases, cutting oils and coolants; (b) accessories; (c) paints; (d) packing materials; (e) input used as fuel; (f) input used for generation of steam or electricity.

37.  In our earlier discussion, we have referred to two  considerations  as  irrelevant,  namely,  use  of  input  in  the manufacturing process, be it direct or indirect as  also  absence  of  the  input  in  the  final  product  on  account  of  the  use  of  the  expression  “used  in  or  in  relation to the manufacture of final product”. Similarly,  we  are  of  the  view that  consideration  such  as  input  being  used  as  packing  material,  input  used  as  fuel,  input used for generation of electricity or steam, input  used as an accessory and input used as paint are per se  also  not  relevant.  All  these  considerations  become  relevant only when they are read with the expression  “used  in  or  in  relation  to  the  manufacture  of  final  product”  in  the  substantive/specific  part  of  the  definition.

38.  In each case it  has to be established that inputs  mentioned  in  the  inclusive  part  are  “used  in  or  in  relation to the manufacture of final product”. It is the  functional  utility  of  the  said  item  which  would  

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constitute the relevant consideration. Unless and until  the  said  input  is  used  in  or  in  relation  to  the  manufacture  of  final  product  within  the  factory  of  production, the said item would not become an eligible  input. The said expression “used in or in relation to the  manufacture”  has  many  shades  and  would  cover  various situations based on the purpose for which the  input  is  used.  However,  the  specified  input  would  become  eligible  for  credit  only  when  used  in  or  in  relation to the manufacture of final product…………… ………………..…  …………………………………………… ……………………..…………………………………………… …………………….. 40. As stated, the definition is in three parts, namely,  specific  part,  inclusive part and place of  use.  All  the  three parts are required to be satisfied before an input  becomes an eligible input.”

12. The effect of the afore-mentioned decision is that in order to  

fall  within  the  ambit  of  the  term  “inputs”  within  the  

meaning of  Rule 2(g) of the 2002 Rules, the goods must be (i)  

used in or in relation to the manufacture of the final product,  

whether directly and indirectly, and whether the said goods  

are contained in the final product or not, (ii) covered within  

the six categories of goods enumerated in Rule 2(g) and (iii)  

used within the factory of production. We are constrained to  

observe that while the subject  goods must qualify the first  

and third parts of the definition, viz. the specific part and  

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location of use, as enumerated in the said judgment, but to  

confine the goods only to the inclusive part of the definition  

that is to  the six categories of goods mentioned therein may  

fall foul of the definition of the word “inputs” in Rule 2(g) of  

the  said  Rules.  Prima  facie,  we  are  of  the  view that  the  

legislature  did  not  intend  to  restrict  the  definition   of  

“inputs” to only those six categories.  

13. At  this  juncture,  it  would  be  expedient  to  refer  to  the  

observations  in  The  State  of  Bombay  &  Ors.  Vs.  The  

Hospital  Mazdoor  Sabha  &  Ors.3,  wherein  a  three  judge  

Bench of this Court has held that:

“10.  There is another point which cannot be ignored.  Section  2(j)  does  not  define  “industry”  in  the  usual  manner by prescribing what it means; the first clause  of  the  definition  gives  the  statutory  meaning  of  “industry” and the second clause deliberately refers to  several other items of industry and brings them in the  definition in an inclusive way. It  is  obvious that the  words used in an inclusive definition denote extension  and cannot be treated as restricted in any sense. (Vide:  Stroud’s “Judicial  Dictionary”,  Vol.  2,  p.1415).  Where  we are dealing with an inclusive definition it would be  inappropriate to put a restrictive interpretation upon  terms of wider denotation.”

3 AIR 1960 SC 610

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14. Similarly, in  Regional Director, Employees’ State Insurance  

Corporation Vs. High Land Coffee Works of P.F.X. Saldanha  

and Sons & Anr.4, another three judge Bench of this Court  

had observed that:

“The amendment is in the nature of expansion of the  original  definition  as  it  is  clear  from the  use  of  the  words  “include  a  factory”.  The  amendment  does  not  restrict the original definition of “seasonal factory” but  makes  addition  thereto  by  inclusion.  The  word  “include” in the statutory definition is generally used to  enlarge the meaning of the preceding words and it is by  way of  extension,  and not with restriction.  The word  ‘include’  is  very  generally  used  in  interpretation  clauses  in  order  to  enlarge  the meaning  of  words or  phrases occurring in the body of the statute; and when  it is so used, these words or phrases must be construed  as comprehending, not only such things as they signify  according to their natural import but also those things  which the interpretation clause declares that they shall  include.”

15. Therefore, it is trite that generally the word “include” should  

be  given  a  wide  interpretation  as  by  employing  the  said  

word,  the  legislature  intends  to  bring  in,  by  legal  fiction,  

something  within  the  accepted  connotation  of  the  

substantive part.(Also see:  C.I.T., Andhra Pradesh Vs.  M/s.  

4 (1991) 3 SCC 617

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Taj  Mahal  Hotel,  Secunderabad5;  Indian  Drugs  &  

Pharmaceuticals  Ltd.  &  Ors.  Vs.  Employees’  State  

Insurance  Corporation  &  Ors.6; T.N.  Kalyana  Mandapam  

Assn. Vs. Union of India & Ors.7). It is also well settled that  

in order to determine whether the word “includes” has that  

enlarging effect, regard must be had to the context in which  

the  said  word  appears.  (See:  The  South  Gujarat  Roofing  

Tiles  Manufacturers  Association  & Anr.  Vs.  The State  of   

Gujarat & Anr.8; R. D. Goyal & Anr. Vs. Reliance Industries  

Ltd.9 and  Philips  Medical  Systems  (Cleveland)  Inc.  Vs.   

Indian MRI Diagnostic and Research Limited & Anr.10).

16. Thus, as already stated above, having regard to the language  

of  Rule  2(g)  of  the  2002  Rules,  and  the  analysis  of  the  

aforenoted  decisions,  it  appears  that  by  employing  the  

phrase “and includes”, legislature did not intend to impart a  

restricted  meaning  to  the  definition  of  “inputs”  and  

therefore,  the  interpretation  of  the  said  term  in  Maruti  5 (1971) 3 SCC 550 6 (1997) 9 SCC 71 7 (2004) 5 SCC 632 8 (1976) 4 SCC 601 9 (2003) 1 SCC 81 10 (2008) 10 SCC 227

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Suzuki  Limited  (supra),  may require  reconsideration  by a  

larger bench.

17. Accordingly,  we  direct  that  the  papers  of  these  cases  be  

placed  before  the  Hon’ble  Chief  Justice  of  India  for  

constituting a larger bench.

.……………………………………               (D.K. JAIN, J.)  

                             .…………………………………….              (H.L. DATTU, J.)

NEW DELHI; NOVEMBER 29,  2010 RS

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