IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA Excise Reference No. 4 of 2002 Date of decision: September 15, 2008 Commissioner of Central Excise …Petitioner(s). Versus. M/s Sirmaur Alloys Ltd. …Respondent(s). __________________________________________________________________ Coram: The Hon’ble Mr. Justice Deepak Gupta, Judge . The Hon’ble Mr. Justice V.K.Ahuja, Judge. Whether approved for Reporting ? No. For the Petitioner(s) : Mr. Sandeep Sharma, Assistant Solicitor General of India. For the Respondent(s): Mr. Rahul Mahajan, Advocate. Deepak Gupta, J (Oral) This Excise Reference has been admitted on the following question of law:- “Whether the credit was still available to LDO used in the generation of electricity when the same is not excisable and was not included under rule 57A for taking Modvat Credit.” To decide the aforesaid question, it would be relevant to refer to the provisions of Rule 57A of the Central Excise Rules, which read as follows:- 2 “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 utilizing 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. 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, the manufacture of final products, and (b) paints and packing materials, (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 - (i) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing or 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; 3 (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.” The manufacturer claimed that the LDO used for generation of electricity is an input for the manufacture of the end product and, therefore, it was entitled to claim credit of the same. On the other hand, the stand of the revenue is that the LDO is not required for the manufacture of goods but is an input to produce electricity and is not included in the definition of inputs. The short question to be decided in the present petition is that whether the LDO used for generation of electricity is an input within the meaning of Rule 57 or not?. Shri Sandeep Sharma, learned Assistant Solicitor General has relied upon a judgment of the Karnataka High Court in 1998 (98) ELT 81, titled Canara Steel Ltd. versus. Union of India & others, wherein the Karnataka High Court had dis- allowed the claim of the manufacturer for the grant of Modvat Credit benefit by holding that Ramming Mass etc., are used as lining material and insulating material for electric arc furnaces 4 and are also used for the brick lining and they have nothing to do with the manufacture of the final goods and therefore, have to be treated as a part of the machinery and not as an input. On the other hand Shri Rahul Mahajan, leaned counsel for the respondent has relied upon the judgment of the Apex Court in Collector of Central Excise versus Solaris Chemtech Limited, 2007(214) E.L.T.481 (SC). In the case before the apex Court, the manufacturer was using Low Sulphar Heavy Stock for generating electricity which was captively consumed for manufacture of final product such as caustic soda, cement etc. On an interpretation of Rule 57A, the apex Court held as follows:- “……..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 ra- 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 Excise 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 5 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 expands the scope meaning and content of the expression “inputs” so as to attract goods which do not enter into finished goods. ………………………………… 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 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. 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 family, schools etc., to that extent MODVAT credit will not be admissible.” 6 The present case is squarely covered by the aforesaid decision of the apex Court in Solaris Chemtech’s case (supra). It would be pertinent to mention that it is not the stand of the revenue that the electricity was being consumed in the residential colony etc. The electricity was being consumed for running of the machinery to produce the final product. Therefore, the LDO used for production of such electricity would be a fuel used in relation to the manufacture of the final product and is an input within the meaning of the Rule 57A. In view of the above discussion, we answer the question in favour of the assessee and against the revenue. The excise reference is rejected accordingly. (Deepak Gupta ), J. September 15, 2008 ( V.K.Ahuja ), J. s.