Commissioner of Central Excise, Commissionerate vs Madras Cements Ltd.

This appeal is by the revenue challenging the order passed by the Tribunal holding that the Assessee is eligible for credit in terms of the definition of capital goods covered under Chapter 85.

The Assessee M/s. Madras Cements Ltd., Mathod, are the manufacturers of O.P. Cement falling under Chapter 2502.00 of Central Excise Tariff Act, 1985 (hereinafter referred to as ''the Act'' for short). On gathering intelligence that the Assessee has taken CENVAT credit on ineligible items, the preventive unit of Davangere Division visited the unit on 14-2-2002 and verified the CENVAT documents. During such verification, it was observed that the Assessee has taken CENVAT credit on electric bulbs and rubber strips, which are neither eligible capital goods as per Rule 2(b)(i) of the CENVAT Credit Rules, 2001 (hereinafter referred to as ''the Rules'' for short) nor the spares/components/ accessories of the capital goods as defined under Rule 2(b)(ii) of the Rules. The representative of the Assessee contended that the credit of the capital goods were taken as the same were used within the factory premises. He also assured the authorities that the discrepancy noticed will be looked into and the credit taken will be reversed in consultation with their corporate office. Subsequently, the Assessee vide their letter dated 25-2-2002 informed that they have reversed the CENVAT Credit of Rs. 34,527 vide Debit Entry Sl. No. 636, dated 25-5-2002 in CENVAT account in respect of the items mentioned above. Therefore, a show-cause notice was issued on 19-7-2002 asking the Assessee to show-cause as to why the irregular credit of duty of Rs. 34,527 availed should not be demanded and recovered from them under Rule 12 of the Rules read with Section 11A of the Central Excise Act, 1944 and as to why the CENVAT credit entry already reversed should not be appropriated towards the demand made and also as to why penalty should not be imposed on them in terms of Rule 13 of the Rules.

In reply to the show-cause notice, the Assessee submitted that the bulbs for which credit were taken, were meant for providing proper light in different parts of their cement plant. In a process industry like theirs, adequate lighting is a pre-requirement and the cement plant as a whole includes, mechanical, electromechanical and electrical equipment, apparatus etc., and bulbs which are integral part to electrical system have to be construed as an accessory and hence, CENVAT is allowed to be taken on bulbs in terms of Rule 2(b)(ii) of the Rules. They further contend that the tariff classification is irrelevant and all components, spares and accessories are eligible for CENVAT credit as long as they are used in the factory for the manufacture of final product. It is further contended that, insofar as the rubber strips are concerned, again they are used in their plant to ensure safety against electric shocks. The strips are used wherever open and concealed wiring is available and the rubber strips are used to avoid any direct contact with the live wires and cables. Though the rubber strips do not directly participate in the manufacture of cement, but they are required to be used as an accessory of electrical system and hence, the rubber strips are deemed to be ''Capital Goods'' in terms of Rule 2(b)(ii) of the Rules. Therefore, they contend that the proposed action is illegal and they should be dropped.

However, the adjudicating authority rejected the contention of the Assessee and held that they are not covered under Rule 2(b)(i) and Rule 2(b)(ii) of the Rules as the capital goods nor as the spares/components or accessories. They are consumables in nature and are not entitled for CENVAT credit and therefore, confirmed the demand and imposed the penalty of Rs. 5,000. Aggrieved by the same, the Assessee preferred an appeal before the Commissioner of Central Excise (Appeals), Bangalore. After careful examination of the rival contentions, the appellate authority held that the electric bulbs and rubber strips are used in the production center without which their production of final product will hamper. Electric bulbs, Vaccum and Gas filled bulbs are covered under Chapter 85.39 and they are rightly eligible for CENVAT credit as definition of ''Capital Goods'' covers Chapter 85. It has further held that the tube light fittings are covered under Chapter 94.05, which is excluded in the definition of "Capital Goods". Both are meant for lighting purpose only. When credit can be allowed for small gas filled bulbs falling under Chapter 85.39, why not for lamps and light fittings falling under Chapter No. 91.05 when both are used in the same factory on production lines and therefore, it upheld that contention of the Assessee that the electric lights falling under Chapter 94.05 should be construed as ''Capital Goods'' covered under Rule 2(b)(ii) of CENVAT Credit Rules as accessories to electric system. Therefore, it held that, both electric bulbs and rubber strips are eligible capital goods and CENVAT credit can be extended to them. Thus, it set aside the order of the adjudicating authority by allowing the appeal and granted the relief to the Assessee.

Aggrieved by the said order, the revenue preferred an appeal before the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Bangalore. The Tribunal held that, as it has already held in the case of Maihar Cement v. Collector of Central Excise 2000 (125) ELT 629 (Trib.), wherein it is upheld that the grant of MODVAT credit in respect of protective devices for electricity used in the factory is permissible, the electric bulbs, Vaccum and Gas filled bulbs are covered under Chapter 85.39 and they are eligible for credit in terms of definition of ''Capital Goods'', which covers Chapter 85 also. Without both these items, the final product cannot be manufactured and therefore, dismissed the appeal. Aggrieved by the said order, the revenue has filed the present appeal.

At the time of admission of this appeal, the following substantial question of law is framed for consideration:

(a) Whether "Electric Bulbs" and "Rubber Strips" in question are eligible to be described as "Capital Goods" under Rule 2(b)(i) or eligible to be described as "Spares/Components/Accessories of the Capital Goods under Rule 2(b)(ii) of the CENVAT Credit Rules, 2001?

(b) Whether the Department is right in demanding and recovering the irregular availment of CENVAT Credit under Rule 12 of CENVAT Credit Rules, 2001, read with Section 11(A) of the Central Excise Act, 1944 in the facts and circumstances of the case?

(c) Whether an Assessee who has contravened the provision of Rule 2(b)(ii) of the CENVAT Credit Rules, 2001 and wrongly availed the CENVAT credit reserves the entry after being warned by the Internal Audit Party but before issuance of show-cause notice, is liable to pay penalty under Rule 13 of the CENVAT Credit Rules, 2001?

We have heard the learned advocates appearing on both sides and perused the records.

Chapter 85 deals with electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles. The Notes to the said Chapter sets out what are the items which are not covered under the said Chapter. It is not in dispute that the electric bulb is not one such item which is included. On the contrary, Item 85.39 reads as under:

Chapter 85.39: Electric filament or discharge lamps, including sealed beam lamp units and ultra-violet or infra-red lamps; Arc lamps.

Vaccum and gas filled bulbs of retail sale price not exceeding Rs. 20 per bulb.

Chapters 85.46 and 85.47 reads as under:

Chapter 85.46: Electrical insulators of any material.

Chapter 85.47: Insulating fittings for electrical machines, appliances or equipment, being fittings wholly of insulating material apart from any minor components of metal (for example, threaded sockets) incorporated during moulding solely for purposes of assembly, other than insulators of Heading No. 85.46; electrical conduit tubing and joints therefore, of base metal lined with insulating material.

In this case, we are now concerned with electric bulbs. The Shorter Oxford Dictionary gives the meaning of the bulb as under:

Bulb: The glass bulb-shaped container of the incandescent filament used for producing electric light in a glow lamp.

Therefore, the important component in an electric bulb is electric filament which produces light. For the purpose of Chapter 85, it falls within the electrical machinery. When this is compared with Chapter 94 which deals with furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated signs, illuminated name-plates and the like; prefabricated buildings. The Notes to the said Chapter sets out what are not covered in the said Chapter. Note 1(f) says, lamps and lighting fittings of Chapter 85 do not fall within Chapter 94. What falls within Chapter 94 is clearly mentioned at Chapter 94.05, which reads as under:

Chapter 94.05: Lamps and lighting fittings including searchlights and spotlights and parts thereof, not elsewhere specified or included; illuminated signs, illuminated name-plates and the like, having a permanently fixed light source, and parts thereof not elsewhere specified or included.

Therefore, it is clear from the aforesaid descriptions that the lamp and light fittings which are not illuminated with the help of electricity falls under Chapter 94 and lamps and light fittings illuminated by electricity falls under Chapter 85. Once the electric filament or discharge lamps falls within Chapter 85, they stand excluded from the application of Chapter 94. At this juncture, it is necessary to note the heading of Chapter 94, i.e., the miscellaneous manufactured articles. Though these articles which are not covered under the earlier Chapters are covered under Chapter 94, and if they are covered earlier, they are excluded from Chapter 94.

The rubber strip which is used as an accessory falls within Chapters 85.46 and 85.47. It is in the nature of an accessory of an electric wiring and therefore, it falls under Chapter 85.

The definition of ''Capital Goods'' in the Rules reads as under:

Rule 2(b): ''capital goods'' means:

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Tariff Act.

(ii) Components, spares and accessories of the goods specified at (i) above.

Therefore, it is clear that the present case falls within Chapter 85 and the components, spares and accessories of such goods falls within the definition of ''capital goods'' and therefore, the Assessee is entitled to CENVAT credit. The learned Counsel for the revenue relied on a judgment of the Tribunal in the case of 2000 (70) ECC 566 wherein at Para 16, it has been held as under:

Para 16: The next item is lighting fittings where the duty involved is Rs. 1,63,274. The claim made in their respect is that in the absence of illumination, the work could not go on. This is a far-fetched argument. In the discussion earlier, we had held that an item or equipment even with remote association with production or process would qualify but an electrical lighting fittings would not meet that requirement. We uphold the rejection of this claim by the Addl. Commissioner.

The aforesaid observation of the Tribunal runs counter to the law declared by the Apex Court in the case of J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO 1997 (91) ELT 34, wherein the Supreme Court has observed as under:

Para 12: The expression "electricals" is somewhat vague. But in a factory manufacturing cotton and other textiles, certain electrical equipment in the present stage of development would be commercially necessary. For instance, without electric lighting it would be very difficult to carry on the business. Again electrical humidifiers, exhaust fans and similar electrical equipment would in the modern conditions of technological development normally be regarded as equipment necessary to effectually carry on the manufacturing process. We are not prepared to agree with the High Court that in order that ''electrical equipment'' should fall within the terms of Rule 13, it must be an ingredient to the finished goods to be prepared, or "it must be a commodity which is used in the creation of goods." If, having regard to normal conditions prevalent in the industry, production of the finished goods would be difficult without the use of electrical equipment, the equipment would be regarded as intended for use in the manufacture of goods for sale and such a test, in our judgment, is satisfied by the expression "electricals". This would of course not include electrical equipment not directly connected with the process of manufacture. Office equipment such as fans, coolers, air-conditioning units, would not be admissible to special rates u/s 8(1).

That apart, while coming to the aforesaid conclusion, the Tribunal has not noticed the express provisions contained by way of definition of ''capital goods'' with reference to Chapter 85 and also Chapter 94. From the judgment of the Tribunal, we cannot make out whether they have noticed these entries in Chapter 85 at all. In that view of the matter, we are not inclined to accept the said thinking of the Tribunal.

Thus, the order passed by the appellate authorities are strictly legal and valid and they do not suffer from any legal infirmity. They do not call for interference. Accordingly, the substantial question of law framed are answered in favour of the Assessee and against the revenue.

The appeal is rejected. Parties to bear their own costs.