ORDER

Per V.P. Gulati :

This appeal arises out of the order of the C.C.E. (Appeals), Bangalore. Under the impugned order, the appellants have been denied the benefit of modvat credit in respect of certain inputs.

2. The learned Consultant has urged as under in respect of each one of them :

(1) Oxygen in Cylinder/Dissolved Acclytene

The learned Consultant has referred us to the use as stated in the notes submitted. It is clear from the note that both the oxygen and acclytene are being used for maintenance of the equipment. The use therefore cannot be considered in or in relation to the manufacturing process.

Heard the learned DR.

This Tribunal has held in a number of cases that the inputs which are used for the purpose of maintenance of the equipment, the same would not be eligible for the benefit of modvat credit. In view of the above, we hold that the plea of appellants cannot be accepted.

(2) Sulphuric Acid:

The learned Consultant has referred us to the use as stated in the notes submitted. The use of the sulphuric acid is for treatment of water which is used in the cooling system and not as an inprocess material. Cooling system is an equipment and the water used is to make this functional.

Heard the learned DR.

In that view of the matter, the use cannot be held to be in or in relation to the manufacture of the declared product, namely cement. Hence, the plea of the appellants cannot be accepted in this regard.

(3) Hydrochloric Acid/Caustic Soda:

The use is for regeneration of the resins which is a separately activity. The resins by themselves which participate in the process leading to the generation of power to be used in the plant may have a case for being considered as an input as the process of regeneration of the same is for the start of the manufacturing process.

Heard the learned DR.

For the above reason these inputs can be considered to be an use in or in relation to the manufacture of the finished product. Therefore, these inputs are eligible for the benefit of the MODVAT Credit following the ratio of our decisions earlier. This Tribunal in the case of CCE Vs. Seshasayee Paper Boards Ltd. reported in 1992 (61) ELT 304 has observed as under in para 4:

4. We observe that the issue with regard to the use of Hydrochloric Acid and other items which are used in the paper making Unit has been considered by the Tribunal in the case of Andhra Pradesh Paper Mills Ltd. Vs. Collector of Central Excise, reported in 1990 (50) E.L.T. 252 in the light of the judgement of the Hon'ble Supreme Court in the case of J.K. Cotton Spg. and Wvg. Mills Co. Ltd. Vs. Sales Tax Officer, Kanpur (1985) 16 S.T.C. 563 (SC) and also in the case of C.C.E., Calcutta-II Vs. Eastern Paper Industries Limited, reported in 1989 (43) E.L.T. 201 (SC) = 1990 (26) E.C.R. 10 (SC) wherein the Hon'ble Supreme Court held that so long as it can be shown that the material used as inputs have a nexus with the process which is integrally connected with the ultimate production of goods till the same are fit for being put in the marketing stream and such process is so integrally connected with ultimate production of goods that it would be commercially inexpedient to produce the finished goods without that process, all such inputs would get the benefit of credit of duty. In that case the materials used for softening of water were held to be eligible for MODVAT Credit. We have held that Hydrochloric Acid which is used for cleaning of wire mesh would not be eligible for the benefit of MODVAT Credit. At the same time we have held that the process which is in the nature of heat treatment of water can be taken to be process in or in relation to the manufacture of paper and the inputs used therein would be eligible for the benefit of MODVAT Credit even when the treated materials are used in the manufacturing stream of the finished goods either directly or by further process like generation of steam from water. In the present case we find that use of the Hydrochloric Acid is for demineralisation of water which has turned into steam. Specific use of Hydrochloric Acid resulted in the treated water fit for generation of steam after demineralisation of the same. This treatment has been done at a stage anterior to the start of the manufacturing process for generation of steam and its use therefore can be taken to be for treatment of water for making the water ready for use in the process of manufacture of paper. In the case of Andhra Pradesh Paper Mills Ltd. Vs. C.C.E., reported in 1990 (50) E.L.T. 252, this Bench of the Tribunal has held as under :

"It is thus seen that the Hon'ble Supreme Court has held that so long as it can be shown that the materials used as inputs have a nexus with the process which is integrally connected with the ultimate production of goods till the same are fit for being put in the marketing stream and such process is so integrally connected with ultimate production of goods that it would be commercially inexpedient to produce the finished goods without that process, all such inputs would get the benefit of credit of duty. It is observed that the stress is on the process which are integrally connected with the production of the goods. Therefore, for the items to pass the test of eligibility to the benefit of the MODVAT Credit will be such that they participate in the process of manufacture without which the end product cannot be produced. In the present case, in the case of chemicals used, the learned S.D.R. fairly concedes that so far as softening of water is concerned, the same is a process which is for the manufacture of paper and softening of water is a requirement for the manufacture of paper. He has thus conceded that Soda ash used in this process would also be eligible for the benefit of MODVAT Credit. In regard to the other chemicals the position is, however, different. Hydrochloric acid is used for cleaning of the wire mesh as and when the same is found to have been clogged. The question is whether this cleaning operation can be considered to be a process of manufacture. Admittedly it is a process of maintenance of the wire mesh to keep it in the desired condition. Therefore, it cannot be said to have been used in the process of manufacture of paper. However, a point can be made that the same is used in relation to the manufacture of paper. The expression "used in relation to the manufacture" of paper no doubt has a wider meaning than the words "in the manufacture", in the context of the credit scheme and, therefore, it can be pleaded that Hydrochloric acid has been used in relation to the manufacture of paper. The expression "in relation to" has to be read in the context of the manufacturing process of the finished goods covered under the MODVAT Scheme. There may be processes which are preparatory in nature and anterior to the start of the manufacturing stream of the finished product but which have to be essentially carried out before the actual manufacturing process of the goods can start or these may be related to the preparing of material which have ultimately to go into the manufacturing stream or in preparing of certain materials which directly or indirectly participate in the manufacturing process in a manner that these help in the process of manufacture to be carried a step further. The inputs used in these process of manufacture of the products which are in turn used in the manufacturing stream of the finished product can be taken to have been used in the manufacture of the or in relation to the manufacture of finished product. Generation of steam which ultimately participate in the manufacturing is one such item. The other may be pre-treatment of the raw material which go into the manufacturing stream or the materials which may be used for making the end product ready or marketing. The use of the materials has to be such that they carry by their participation, in the manufacturing stream the process of manufacture a step further."

(4) Paints (Anti coating):

Admittedly, the use is for protection of the equipment and the use has to be held to be for maintenance of the equipment. When these inputs at the relevant time were not being considered as an eligible input for the benefit of modvat credit, the question of therefore treating the paints as an input would not arise.

(5) Branding Inks:

The ink is used for marking in the bags and the use is for making the goods ready for marketing. It has been held by the Hon'ble Supreme Court that materials or items used to make the finished product marketable have to be held to used in or in relation to the manufacture of the finished product. We, therefore, hold that MODVAT Credit in respect of this item has to be allowed.

(6) Pentolite Booster. The learned Counsel pleaded that the lower authority has ruled in favour of the assessee and therefore, no order is required to be passed in regard to this item.

(7) Refractory cement, Fire Bricks/Refractory bricks, Carbon brushes/Electrode and similar items, Diodes, transistors, and Wires and Cables. It is seen that the use of some of these items for maintenance of equipment while others constitute parts of equipment. These are therefore required to make the machinery functional. Refractory cement and similar compositions are used to fix the bricks in the kiln. Grinding wheels are used for repairing the retaining rings etc. Refractory bricks are used as part of the kiln as a lining therein. Carbon brushes and electrodes are used as parts of motors etc. and so are diodes. Wires and cables are generally used as part of electrical fittings and other electrical parts are used as part of electrical transmissions. These are in the nature of equipments. In view of the above, we hold that MODVAT Credit in respect of these items will not be available.

Per S.L. Peeran :

3. With due respect to my Learned Brother, my order in the present case is as follows:-

1. Oxygen in Cylinder/Dissolved Acetylene

The note on this item states that:-

"In Raw Mills and Cement Mills where raw material and clinker is ground (ed) respectively have got wear liners installed in them. These liners have to be replaced after certain running hours. For replacing these liners, the combination of oxygen and dissolved acclytene in the ratio of 3:1 is used to cut, remove, heat and fix back the liners. Without these linkers in the Mill, the raw material and clinker cannot be ground to produce cement."

4. I am of the considered opinion that MODVAT Credit in respect of this input is required to be granted as they perform an important function 'in and in relation to the manufacture of the final product'. In similar processes, use of similar products have been held to be eligible for input as in the following cases:

(a) Freon/Mefron gases used in refrigeration plant for keeping the input at particular temperature to enable Chemical reaction for manufacture of final products, have been held to be entitled for MODVAT Credit as in the case of Gujarat Alkalies Vs. Collector of Central Excise, 1996 (81) ELT. 117.

(b) Monoethylene Glycol MED added to water for use as an antifreezing agent in chilling plant so that solution does not get solidified and process of manufacture of final product (caustic soda etc.) does not come to a stand still. Also since it maintains the solution at particular temperature to enable chemical reaction to take place, has been granted the benefit of MODVAT in the case of Gujarat Alkalies and Chemicals Ltd. Vs. Collector of Central Excise (Supra).

(c) Acetylene and Oxygen gases used for cutting scraps before they are fed into furnace for melting, has been considered as eligible inputs for benefit of MODVAT Credit as in the case of Collector of Central Excise Vs. Brindavan Alloys Ltd. as reported in 1994 (69) ELT. 764.

(d) Nitrogen gas used to create inert atmosphere in relation to the manufacture of MMM Monomer has been held to be eligible input for grant of MODVAT Credit, 1994 (69) ELT. 698.

(e) Oxygen gas being used to generate high temperature of process of sealing of electronic gun on to glass shell for transmission of electron to TV screens has been considered as an input and held to be eligible for MODVAT Credit in the case of Samtel India Ltd. Vs. Collector of Central Excise as reported in 1994 (71) ELT. 737.

(f) Hydrofluoric acid used in chemical wash of inert glass shell has been held to be an essential requirement for process of Phosphorous coating of glass shell and held to be eligible for the MODVAT benefit in Samtel India (supra).

2. Sulphuric Acid

The write up states as follows:-

"This acid is used for treatment of water used for cooling system of condenser. This is utmost required to maintain the level of Methyl Alkalinity of cooling water as high alkalinity of the water adversely affects and condenser tubes, which are made up of copper and its condition already affects the generation of power and Captive Thermal Power Plant which in turn will affect production of cement."

5. I agree that the item is used as an essential input for grant of MODVAT Credit, in the light of the products referred to above. I notice that in the case of Indian Explosives Ltd., 1990 (50) ELT. 117, the Tribunal held that chemical used for purification of water for production of steam, being essential in manufacture of explosives, and thus granted the benefit of proforma credit under Rule 56A of the Central Excise Rules. The reasoning given by the Learned Member (T) in the said order has to be respectfully followed in the present case as well. The Learned Member (T) has in that judgement very succintly noted the reasoning of Hon'ble Supreme Court in several judgements. I am inclined to accept the reasoning in that case for the purpose of deciding the question in this appeal as well. This judgement of Indian Explosives Ltd. has again been followed in the case of Straw Products Ltd., 1992 (59) ELT. 572, in respect of Chemicals and resins used for water treatment which in turn used for manufacture of paper. The Tribunal after a detailed discussion held that the benefit of credit is required to be granted.

3. Hydrochloric Acid/Caustic Soda

The party has described in the write up as follows:-

"Both the chemicals are utilised for the purpose of regeneration of resin beds used for demineralisation of water in Power Plain. Since only the demineralised water is recommended for use in the boilers, the process of demineralisation has to be carried out in demineralisation plant which functions on the principle of exchange of Ions on the surface of resin bed. In the course of running the resin bed get exhausted and to be recharged by using the above chemicals. Thus it is not possible to generate power without demineralisation of water and accordingly the process of manufacture of cement will not proceed."

6. I agree for grant of benefit in the light of the judgement cited by my Learned Brother in his order and also in the light of the judgements noted by me supra.

4. Paints (Anti Coating)

The write up states as follows:-

"In all the mills, the draft through the mill is created by induced draft fans. The gases carry alongwith it fine dust, which passes through these fans. Due to moisture content in the raw material being ground, this dust forms a coating on the fans leading to severe vibrations and loss in efficiency. This paint is used as a coating on the fan impeller which does not allow the dust to settle, thus avoids vibration and loss of efficiency.

7. I agree with my Learned Brother for denying the benefit of MODVAT Credit, in the light of the reasoning given by them.

5. Branding Inks

The write up states as follows:-

"The marking on bag used for packing of cement is a statutory requirement as per the format approved by the Bureau of Indian Standards which include the name and full address of the manufacturer, the relevant ISI Specification number, licence No., ISI Logo and week, month, year of manufacture, trade mark and grade of cement etc. without marking on the bags, as per the approved format, no packing operation can be carried out and hence it is necessary requirement for despatch of cement."

8. I agree for grant of benefit in the light of the reasoning given by my Learned Brother.

6. Pentolite Booster

No dispute hence no order.

7. Refractory Cement, Fire Bricks/Refractory Bricks, Carbon Brushes/Electrode and similar items, Diodes, Transistors and Wire & Cables

"Refractory Cement Mortars and Similar composition:

All these materials are refractory items which are used in high temperature zones like kiln preheater system, coolers inside the kiln etc. Mortars are used as binding material for refractory bricks laid in the aforesaid locations. Without this binding material refractory bricks cannot remain fixed inside the kiln and hence no production is possible without these materials.

Grinding Wheels

In Kiln the brick lining is held in position against actual movement by the retainer ring and tip casting blocks. The retainer ring and tip casting blocks are replaced whenever damaged. During replacement, these blocks and rings are ground using grinding wheels to get a matching seating inside the kiln sheel for proper grip a strength to arrest the brick linings from sliding.

Fire Bricks/Refractory Bricks

These are essential parts for protection of the kiln sheel and to prevent heat of the main machine i.e. kiln which produces clinker for manufacturing cement. Hence this is an essential part of machinery (Kiln) for manufacture of cement. These are used as lining for the kiln or furnace where clinker is roasted before the manufacture of cement. Without roasting the clinker, the cement cannot be manufactured.

Carbon brushes/Electrodes and similar items.

Carbon brushes is generally used in slippering induction motors and D.C. motors which are primarily used as prime movers for various cement machineries. Without the help of prime movers, we cannot run the machineries. Thus cement cannot be manufactured without the help of these machineries.

Diodes, transistors, similar conductors and integrated circuits

These are used for converting alternating current to direct current in other control circuitory. The D.C. drives are used in cement machineries for speed variation in order to control the process of cement manufacturing. Thus is it utmost necessary in having this equipment for the manufacture of cement.

Wire & Cables

These are used for carrying current to various machineries from the control room or the load centre. Thus, these are used for controlling the prime movers.

Electrical Insulators

These are used in conjunction with wires, cables and conductors for carrying current and voltages to the desired machinery.

Electrical parts of machinery

The various parts such as :

1) Breakers (2) Transformers (3) Starters

4) MCB's (Moulded Circuit Breakers)

5) Protective relays

These are used for controlling the current and voltage which are feeding to various sub stations and machineries to control the voltages and current as per the requirement of the cement machinery and inturn the process."

i. Refractory Cement Mortors and similar compositions

In the case of Collector of Central Excise Vs. Raipur Alloy Steel Ltd., 1995 (78) ELT. 44, the Tribunal by majority has held Dead burnt magnesite being a chemical used for protecting equipment is not covered by any of the excluded category under Rule 57A and hence granted benefit for the same. While for Refractory bricks it was held as constructional material and essential part of furnace and covered by excluded category under Rule 57A of the Central Excise Rules and hence MODVAT Credit was held as not admissible.

9. In view of this judgement, I hold that this item is not entitled for the benefit of MODVAT.

ii. Grinding Wheels:

In the case of Jhalani Tools (I) Ltd. Vs. Collector of Central Excise as reported in 1994 (70) ELT. 788, the Tribunal has held that MODVAT Credit is not available to Grinding Belts and Grinding Wheels. Following the ratio thereof, I hold that this item is not eligible for the benefit of MODVAT.

iii. Fire Bricks/Refractory Bricks

In terms of the judgement of Collector of Central Excise Vs. Raipur Alloy Steels Ltd., the MODVAT Credit is not available.

iv. Carbon brushes/Electrodes and similar items.

In the case of Murugappa Morganite Ceramic Fibres Ltd. Vs. Collector of Central Excise (1994 (69) ELT. 752), molybdenam plate was used as electrodes for conducting electricity to generate heat; hence the benefit of credit was denied.

Likewise in Wipro Infotech Ltd. Vs. Collector of Central Excise (1994 (69) ELT. 82) Ribbon used in computer printer has been held to be an accessory to denied the benefit. Like Tungsten nozzles used for giving shape to end product was considered as in the nature of a die or tool used for processing material and the benefit was denied, as in the case of Murugappa etc (supra). In the light of these judgements, the benefit to these items are rightly denied.

v. Diodes, transistors, similar conductors and integrated circuits, wire and cables, Electrical Insulators

As they are in the nature of machines, machinery plant, equipment, apparatus, tools and apparatus, the MODVAT Credit is not available. The party has not shown as to how they become an input/raw material used "in or in relation to the manufacture" of final product. In terms of the reasoning given by the Tribunal in the case of Cominco Binani Zinc Ltd. Vs. Collector of Central Excise as reported in 1990 (48) ELT. 283, the MODVAT Credit has been rightly denied.

The appeal is disposed of in the above terms.

DIFFERENCE OF OPINION

10. In view of difference of opinion between the Members, the following questions arises for determination by the Third Member.

i. Whether the appellants are entitled for the MODVAT Credit or not in respect of the following items.

(i) Oxygen in Cylinder/Dissolved Acclytene

(ii) Sulphuric Acid

Per V.K. Ashtana :

11. In this appeal, there has arisen a difference of opinion between Hon. Member Shri V.P. Gulati (since retired) and Hon. Member (J), Shri S.L. Peeran. A reference thereon to the undersigned lies for consideration on the following:-

i. Whether the appellants are entitled for the MODVAT credit or not in respect of the following items.

(i) Oxygen in Cylinder/Dissolved Acclytene

(ii) Sulphuric Acid

12. Heard learned Consultant Shri C. Chidambaram. He cited decisions in his favour as follows:-

i) Union Carbide (I) 1996 (80) ELT 613

ii) Saurashtra Chemicals 1995 (80) ELT 302

iii) Gujarat Alkalies & Chemicals Ltd. 1996 (81) ELT 117

iv) J.K. Cotton Spinning & Weaving Co., wherein Hon'ble Supreme Court had discussed the words and phrases "in relation to manufacture" to mean encompassing the entire process

v) Rajasthan State Chemical Works 1991 (55) ELT 444 (S.C.) - real test is 'essential for manufacturing'.

13. Learned Consultant further stressed that he supported opinion of Hon'ble Member (J) in the subject order since no case laws were considered in Hon'ble Member (T)'s order.

14. Heard learned J.D.R., Shri Rama Rao, who submitted that use of Acetylene/Oxygen is to maintain an equipment and not for manufacture (either directly/indirectly). He submitted that Member (J) had observed similarity with Freon gas. However, that gas was used to maintain temperature continuously and hence had a direct role in manufacturing process. Here the gases were used only for periodic maintenance of an equipment.

15. Learned JDR further argued that Sulphuric Acid was for pre-treatment of water before it was used to cool condensers during electricity generation which was far removed from manufacture of cement. He cited case of Seshasayee Paper Boards reported in 1992 (61) ELT 309 (Tri.) and 1991 (55) ELT 417 (Tri.). He distinguished case of Rajasthan State Chemical cited supra on facts as here there was no direct use in relation to manufacture. Therefore, he supported the view of Hon'ble Member (T).

16. Learned Consultant rebutted by referring to case of Union Carbide (Larger Bench), wherein, items allowed related to equipments.

17. I have considered the arguments on both sides and the orders on record.

18. With respect to Acetylene/Oxygen in cylinder the undisputed use is for welding of plant equipment (repair and maintenance). Hon'ble Member (T) is of the view that such repair of equipment falls beyond the scope of words and phrases "in relation to manufacture" in Rule 57A. I find that Hon'ble Member (J) has discussed the issue at length in his order recorded above. While I agree with his opinion for the same reasons, I would also add that these gases are not used for general welding purposes, but for refurbishing liners in the Raw Mills and Cement Mills. Without such a replacement thereof, the grinding process would become inefficient or even halt. Therefore, I find that this welding activity has a direct nexus with the manufacturing process and hence these gases would be eligible for MODVAT credit.

19. As regards Sulphuric Acid, I again humbly concur with the opinion of Hon'ble Member (J) in view of the case-laws discussed by him. It is further found that if Fuel Oil for Boiler for steam generation (used for heating etc. i.e., energy) is allowable as 'input', then this chemical for treating water which is essential for generation of electricity i.e. energy should also be treated on same footing. I also find that this use is before the emergence of the final product as distinct from use of Sulphuric/Hydrochloric Acid in effluent treatment plants, where for ecological considerations, effluent obtained during/after production of final product, is to be treated, before discharge. In the latter case a view can be taken that since this is an activity undertaken after the final product has already come into existence, therefore, credit is not allowed being not in relation thereto. In the instant case, a wider view is necessary encompassing the entire manufacturing process. Sulphuric Acid is necessary to captively produce electricity. Without electricity cement cannot be produced. Therefore, in cases where electricity is captively produced, all processes directly related thereto would be within the ambit of the manufacturing process and the inputs required, therefore, would qualify. Sulphuric Acid, in this case, therefore, is eligible for MODVAT credit.

20. In view of the aforesaid discussions, I most respectfully differ with the opinions of Hon'ble Member (T) Shri V.P. Gulati and agree most humbly, with the views of Hon'ble Member (J), Shri S.L. Peeran.

MAJORITY DECISION

21. In terms of the majority order, the appellants are entitled for the benefit of Modvat credit in respect of the following items:-

(1) Oxygen in Cylinder/Dissolved Acelytene

(2) Sulphuric Acid

(3) Hydrochloric Acid/Caustic Soda

(4) Branding Inks

22. The appellants are not entitled to the Modvat credit in respect of the following items:-

(1) Paints (Anti Coating)

(2) Refractory Cement, Fire Bricks/Refractory Bricks, Carbon Brushes/Electrode and similar items, Diodes, Transistors and Wire & cables.

23. There is no dispute with regard to Pentolite Booster and hence no order is passed by the Bench.