Advocates Appeared:
T.R. Andhyarujina, P.V. Patankar,K.M. Mondal

ORDER

R. Jayaraman, Member (T)

1. This is an appeal directed against the order of the Collector (Appeals) bearing No. V-2(72) 2521/87 3454, dated 1-3-1988.

2. Facts of the case for the purpose of disposal of this appeal can be stated as below:

3. The appellants are manufacturers of iron and steel products. They had opted for availing of MODVAT benefit in respect of inputs used in or in relation to the manufacture of finished product and accordingly they filed a declaration as required under Rule 57G of the Central Excise Rules. The department objected to the extension of credit in respect of refractory products, namely Bricks, Blocks and other ceramic materials like ramming mass, refractory mortar. Before denial of the MODVAT credit, a show cause notice was issued to the appellant and after observing principles of natural justice, the Assistant Collector passed an order holding that the aforesaid goods, which are claimed as inputs are not covered by the explanation to the term 'in put' given in Rule 57A of the Central Excise Rules and therefore disallowed the appellants for availing of MODVAT credit in respect of duty paid on these goods. The matter was taken up in appeal before the Collector (Appeals), which also came to be rejected. The present appeal is against the aforesaid order of the Collector (Appeals).

4. Shri T.R. Andhyarujina, the learned senior counsel, appearing on behalf of the appellants referred to the provisions of Rule 57A and also to the Notification issued under the MODVAT scheme showing that these inputs are covered by Notification as also their final products, namely iron and steel. He also pointed out that under Rule 57A the main criterion is that the inputs are to be used in or in relation to manufacture of the finished product. He, therefore, contended that the term 'inputs' has got a wider connotation. It is not merely restricted to raw-materials or components. If the material is used even in relation to manufacture of the finished product, it becomes the input as per the provisions of Rule 57A. He pointed out that the department has objected to the extension of MODVAT benefit in respect of refractory goods, only on the ground that these are used as lining material in the furnace and in other equipments and hence is hit by the explanation provided under Rule 57A relating to the term 'inputs'. Elaborating on this point further, he contended that the allegation of the Department is that refractory is a part of the machinery. He emphatically denied that these refractories can ever be called as part of the machinery. The machinery manufacturers do not produce refractory items. Refractory material gets consumed in the process of manufacture of steel. They also participate in the chemical process and also contribute to the quality of steel making unlike in the case of machinery. Hence it cannot be equated with machinery and thus denied the MOD VAT benefit. He also pointed out that refractory material is to be chosen with reference to type and quality of steel to be produced. It is not merely heat resistance job for protecting the furnace which a refractory material is doing but also it is required to provide chemical reaction for influencing the quality of steel. It also facilitate removal of impurities like phosphorus and sulphur. In view of this, when it participates in chemical process and also gets consumed requiring frequent replacement, it cannot be equated with machinery, which is a permanent equipment for production. Merely because these consumable materials are used for lining the furnace, they cannot be sought to be a part of the machine. These refractory materials cannot also be said to be Capital Goods. On the contrary, these are accounted for in the inventory of stores in the Profit and Loss Account. It is not disputed that refractories is a 'must' for manufacture of steel and it is also an undisputed fact that these get consumed in the process and provides improvement to the quality of steel. Hence it is a necessary input and cannot be equated with machinery or equipment, which only are sought to be excluded. In this context, he also cited the judgment of this Bench reported in Gujarat Alkalies & Chemicals Ltd. v. Collector - MANU/CM/0039/1989 : 1989 (41) E.L.T. 424 (Tribunal), wherein the Tribunal has held that Titanium Metal Anodes used in the electrolysis process have been held to be not machinery, plant or apparatus and allowed input benefit under MOD VAT scheme. On the same analogy, refractory materials which cannot be equated with the machinery, plant or apparatus should be extended the MOD VAT benefit. He also referred to the Board's Tariff Advice given in F.No. B-22/51/86 TRU, dated 21-10-1986, wherein Graphite Electrodes which are parts of furnace are given the MOD VAT benefit on the ground that it is a consumable item and it is essential for manufacture of steel. The same criteria should be adopted in this case for extending the benefit. He also referred to the Trade Notice in regard to pyrometer tips, wherein pyrometer tips, which are part of an instrument for measuring the temperature have been extended the MOD VAT benefit on the ground that they get consumed. In this context he referred to the Trade Notice No 209/M, dated 7-8-1987 issued by the Collectorate of Central Excise, Calcutta-II. He also argued that the term 'inputs' under Rule 57A has wider implication and cannot be given a restricted meaning. He sought to draw the analogy on the Supreme Court judgment reported in AIR 1965 SC (563) and also another Sales Tax judgment reported in 1972 (Vol. 12) Sales Tax Cases, Page 109. He also took us through the technical literatures of refractory materials for steel making. He emphasised the point that the refractory consumption has a direct effect on the cost of steel and it participates in chemical process and it is distinct from the structure of the machinery. He also contended that the Board's Tariff Advice denying the benefit in respect of refractories for steel industry is based on their consideration of the issue with reference to cement industry, which cannot be applied in the case of refractories for steel industry.

5. Heard Shri K.M. Mondal, the learned SDR. He briefly stated the background of the MOD VAT scheme. He contended that the recommendation of the Expert Committees was to eliminate the cascading effect of taxation of inputs used as raw materials and components and it was never their intention to give input relief in respect of machinery/equipment and tools used for production, though they may be very essential in the manufacture of those finished products. The scheme was essentially intended for giving benefit in respect of raw material, components, consumables and packing materials. The scheme of MOD VAT is to be read as a whole and one rule cannot be read in isolation. On going through the various rules contained in the Chapter relating to MOD VAT, it is clearly discernable that input relief is given only in respect of such materials which go into the manufacture and such a relief is not extended to machinery, or equipment used for the production purposes. He vehemently argued that refractory materials are only used as lining material for protection of furnace and other equipments, where molten metal is handled and cannot by any stretch of imagination be construed as materials going into the manufacture or stated to have been used in relation to the manufacture of steel. The application of refractory materials is only in relation to the machinery and equipment. These are inputs required for maintenance of the furnace and are used as lining materials; because of the high temperature these machinery and equipment are required to handle. Hence he contended that these materials can at the most be considered as consumable materials required as part of the machinery or maintenance of the items of machinery and equipments. They cannot be construed as materials used in the manufacture or in relation to manufacture of the steel. They are only required for maintenance of the Capital Goods. He also cited the Board's Tariff Advice contained in Board's letter No. 267/53 88, dated 12-4-1988. He also cited the judgment of the Tribunal in relation to Rule 56A reported in 1985 ECR 1355 SRB.

6. The learned senior counsel, in reply, contended that the Tribunal decision referred to by the learned SDR, Shri Mondal, is in relation to Rule 56A, which extends input relief only in respect of raw material and components and is therefore different from the scheme under Rule 57A. He also contended that the Board's Tariff Advice referred to by the learned SDR is based on their appreciation of facts in relation to cement industry and cannot be made applicable to refractories used in the steel industry. He also submitted that the Tariff Advices are not binding on the Tribunal and the issue is required to be decided on merits.

7. After hearing both sides and perusal of the available records, we observe that the only and the main issue which is required to be decided in this appeal is whether refractory bricks and other refractory materials used in lining the furnace and other equipments like ladles etc. for handling molten metal could be construed as within the framework of Rule 57A of the Central Excise Rules. For proper appreciation, the relevant explanation of Rule 57A are reproduced as below :

"Rule 57A. Applicability.

Explanation. - For the purpose of this rule, "input" includes ...but does not include -

(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."

(Emphasis supplied).

From the aforesaid explanation, it is clear that no comprehensive definition to the term 'input' has been given. From Sub-rule (1) to Rule 57A, it is evident that all the input goods should be used in or in relation to manufacture of final product. By way of explanation, certain items are sought to be included and certain other items are specifically sought to be excluded. Paints and packing materials are sought to be included in the term input but items of machines/machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about change in any substance in or in relation to manufacture of finished products are sought to be excluded. Hence because of this exclusion, it is not as though every item used in or in relation to manufacture of final product could be straightaway extended the MOD VAT benefit. Only such of those inputs which are used in or in relation to manufacture of final products should also be covered by explanation to Rule 57A could be given the MOD VAT benefit. The learned senior counsel's argument is that these refractories are used not merely as lining material in the furnace but also to participate in the chemical process of steel making and provides improvement in the quality of steel making. Hence he emphasised on the need for extension of MOD VAT benefit since it cannot be equated with machinery or capital goods because of these distinctive functions. While this claim is considered later in detail, at this juncture, even admitting that these refractories participate in the chemical process and contribute to improvement in quality of steel making, it cannot be denied that these refractory bricks and other materials are used in the inner surface of these machines and equipments by lining the entire surface and cementing them so as to provide heat resistance and corrosive resistance lining for these machines and equipments. In that sense they could be broadly called a constructional material for lining the machine to effectively perform, by withstanding the heat and chemical reaction. They are more in the nature of constructional material required for lining the machines and equipment, than in the nature of material fed into the furnace for chemical reaction or for improving the quality of steel making. When this point is clear, that they go as a constructional material for lining the machine or equipment, even if they bring about the change in the substance in the final product, they would get excluded because of the explanation of Rule 57A. Hence we are of the view that the prime test to apply is whether the refractory goods are required as material for the effective functioning and maintenance of the machinery or they are needed in or in relation to manufacture of final product, namely steel. Pausing for a moment, items like coke, lime are fed with each batch and they are required for the manufacture of steel and can be said to have been used in or in relation to manufacture of the final product. In the case of refractory, it is not so. They are required only for "cementing" the inner surface of the machine so as to provide a protective lining against high temperature and chemical reaction. We are, therefore of the view that refractory can be said to be used only with machines and equipments and cannot be construed as consumable items used in the process of manufacture of steel. Refractory is needed, wherever a machine or equipment is exposed to high temperature operation. Unless refractory lining is given, these equipments cannot be made operational. It may be that in the case of refractories for steel, they are to be made of specified refractory materials like Dolomite, magnesite, so as to withstand chemical reaction from the molten metal and facilitate removal of impurities. That does not however make the refractory a consumable input in the manufacture of steel, nor can it be said that such refractories in steel industry are used for such chemical process and not for lining the machinery and equipments. Hence we are of the view that the Department is right in holding that refractory is a lining material, which goes with the item of machinery and equipment and hence is excluded from the purview of MOD VAT benefit, because of explanation to Rule 57A.

8. We also observe that the term 'input' by way of an explanation has been given a meaning to include paints and packing materials. Even these materials are required to be used in or in relation to the manufacture of the final product. If the paint is used in coating the inner surface of the machinery to avoid corrosion in chemical process, that paint will not be eligible for MOD VAT benefit. It may be that a particular type of paint would be required for proper upkeep and maintenance of the machinery. On that ground, it cannot be said that such a paint is used in or in relation to manufacture of the finished product. Likewise, in the case of the refractory items, so long as they are identified as items which go with machinery, plant or equipment, they cannot be said to be 'inputs' used in or in relation to the manufacture of the final product. They can only be said to be materials used in or in relation to the functioning and maintenance of the machines and equipments.

9. The learned senior counsel has cited a decision of this Bench reported in Gujarat Alkalies & Chemicals Ltd. v. Collector - MANU/CM/0039/1989 : 1989 (41) E.L.T. 424 (Tribunal). In that case, the disputed item was Titanium Metal Anodes, which is essential in the process of electrolysis. It was held by this Bench that it cannot be called a machine, machinery, plant, equipment, apparatus, tool or appliance. It is an input required for the production of the final product, without which the process of electrolysis is not possible. Hence we are unable to draw support from the aforesaid decision.

10. Our attention has been drawn to the Board's Tariff Advice in regard to Pyrometer tips and Graphite electrodes. While we would not like to express any opinion on those Tariff Advices in the absence of all the data required, we hold the view that merely a part of an apparatus, tool, or machine gets consumed in the process does not make it an eligible input under Rule 57A. We are of the view that so long as an item is identified with machine, equipment, tool or apparatus, they get excluded by way of explanation to Rule 57A.

10A. Now coming to various technical literatures cited by the learned senior counsel, we would like to refer for purpose of record to consider the question whether the refractory material used in steel industry could be construed as participating in production process. In the book Refractory materials for Steel Making by International Iron & Steel Institute 1985, our attention has been drawn to the report that refractory consumption has a direct effect on the cost of steel and in addition refractories influence to a large extent the availability of the production units, the quality of the steel produced, and the overall safety of the steel making operation. This fact is not disputed. Refractory is needed for frequent replacement in the lining of the furnace and other equipments for steel making and accounts for major recurring cost in the maintenance of these machinery. That does not however make it an input participating in production process of steel making.

11. In the other book "Electric Furnace Steel Making" (American Institute of Mining), it is stated that these refractories must be compatible with the chemical reactions of the steel making process and sufficiently stubborn for resisting the variety of destructive influences at the different temperatures encountered during the melting of the scrap, the refining of the molten bath, and the pouring of the finished heat of closely controlled composition. All these qualities described in this book only indicate that the refractories should be compatible with chemical reactions of steel making process and should be able to withstand the destruction influences arising out of different temperatures and chemical reactions. Only if they are able to withstand these influences, the machinery and equipment could perform without a breakdown. As regards their contention that it participate in chemical process, they are relying on the same book referred to above. The relevant portion is reproduced below:

"Early in this chapter, refractories were classed as either chemically acid or basic. This popular convention in the classification of steel plant refractories is derived from the effect of refractories on slag-metal reactions. It is well-known that much of steel making and refining is concerned not only with the removal of carbon to steel chemistry ranges but also with the removal of phosphorus and sulfur to appropriately low values. Since phosphorus and sulfur are chemically acidic materials their removal from the melt is effected by combining them in the slag. However, for the lime to function in this role it must be allowed to react with the sulfur or phosphorus in the melt and not with the silica from the refractories more acidic material than phosphorous or sulfur. Accordingly, basic refractory lined contained (of dolomite or magnesite) is provided to allow the removal of the undesirable phosphorus and sulfur from the melt to the slag without excessive corrosion of the refractory lining."

(Emphasis supplied)

From the above, it is observed that for enabling the lime to function by reacting with the phosphorus and sulfur in the slag, basic refractory line consisting of dolomite or magnesite is to be provided and this is essential mainly for preventing the excessive corrosion of refractory lining. Again the facilitation of removal of impurities is not the main function of the refractory. A particular coating or lining of dolomite or magnesite is advised to prevent the liner from reacting to silica in the refractory and corroding it. Hence we are unable to appreciate the view taken by the learned senior counsel that these refractories actively participate in the chemical process.

12. In another book Electric Arc Furnace Refractories, Chapter 5, by Mr. Bruce H. Baker and M. Michael P. Fedock referred to by the learned senior counsel, it is observed as below:

"As in other iron or steel making process, the lining of the electric arc furnace, as well as the runners and ladles are composed of heat resistant materials called refractories. These refractories must be compatible with the chemical reactions of the steel making process and able to resist the variety of destructive influences at many different temperatures encountered during the melting of the scrap, the refining of the molten bath and the pouring of the heat of closely controlled composition."

From the above, it is clearly evident that refractory is essential heat resistance material, which must also be compatible for withstanding the chemical reaction in the steel making process.

13. In another book "Refractories and Their Use" by Kenneth Shaw, it is mentioned that:

"Hot molten metal and slag are the destroyers of furnace linings in the iron and steel industry. They splash, corrode, erode, wash away, dissolve and eventually cause the destruction of what are apparently dense chemically stable and hard materials. The aim of the refractories maker is to produce a lining material which will not react with nor be penetrated by the slag or metal."

From this also, it is evident that for choosing the right type of refractory material, they should take care to ensure that molten metal and slag do not easily destroy the furnace lining. Thus from the various literatures produced, we are unable to appreciate the stand taken by the learned senior counsel that these refractories actively participate in the production process by emanating certain chemicals required for production of steel. Our view that these are essential lining materials required in the operation and maintenance of the machinery and equipment gets confirmed even by these technical books. Though they may be essential replacement and account for a major part of the cost, this recurring cost is to be incurred only in relation to the upkeep and maintenance of machinery. It is also to be noted that these refractory items not only find use in the furnace but also in other equipment like ladles and moulds, where molten metal is received and handled. Refractory used in such equipments cannot be said to be taking part in the chemical process in steel manufacturing. These refractories only serve as lining material for the protection of machine without which these machinery and equipments could not be put to repeated use because of excessive heat and chemical corrosion.

14. The citations made by the learned senior counsel are with reference to the Sales Tax cases. In one of the judgments Rule 13 of the Sales Tax Rules was the issue under consideration. In that Rule what was required to be considered is whether the registered dealer can purchase goods intended for use as raw materials for machinery, plant, equipment, tools, stores spare parts etc. in the manufacture or processing of goods for sale. In this case, Rule 57A by way of an explanation specifically excludes machinery, apparatus, equipment, etc. even though they are used in the production process. The objection has been raised that these refractory materials are used in the making or maintenance of those excluded category of goods. The other case cited by the learned senior counsel relates to hand gloves which the dealer purchased for use by their workers, while engaged in work in the factory. The Supreme Court held that the gloves put on by the purchasing companies' workmen engaged in hot jobs or in handling corrosive substances in the course of manufacture can be stated to have been used in the manufacture of goods for sale. Here again it is not a disputed fact that refractory material is required in the manufacture of steel. What is disputed is that refractory materials are used for the maintenance of the machines or for making the machine operational. We, therefore, hold that both the citations are not helpful in this case, where a specific explanation is given under Rule 57A to exclude certain items, though are used for purpose of production.

15. In the result, we hold that refractories used in the steel industry are hit by the explanation to Rule 57A, because of the fact that they go in relation to the machinery and form part of the machinery and equipment and therefore the authorities below are justified in disallowing the credit in respect of the duty paid on this item. Appeal is dismissed.