Advocates Appeared:
K. Narayanan, Ramakrishna, Namasivayam, Sanjeev Sachdeva

ORDER

Per Justice U.L. Bhat: A common question of law arises in these appeals. They have been heard together and are being disposed of by this common order.

2. The appellant in Appeal E.209/89—M AS is a manufacturer of steel castings and machinery parts under Chapter Nos.73 and 84 of Central Excise Tariff. Appellant sought to avail Modvat credit on inputs in relation to the final product of steel casting. Chemicals and resin are used in making sand mould. Sand moulds are used in the manufacture of steel castings. The Superintendent issued notice stating that the appellant was not eligible to take credit of duty paid on such inputs for making sand mould. The appellant asserted the right to take such credit. The Assistant Collector rejected the claim and on appeal, this order was confirmed by the appellate Collector. The common appellant in appealsE.405 to408/94 is a similarly situated manufacturer who also suffered similar adverse orders.

3. The South Regional Bench which heard Appeal E. 209/89 referred it to a larger Bench. Consequently, the remaining appeals were also referred to a larger Bench. That is how these appeals have come up before this larger Bench.

4. Shri K. Narayanan, Advocate appeared in Appeal E.209/89—MAS, Shri V.P. Namasivayam, Consultant appeared in Appeal Nos.E.405 to 408/94—M AS and Shri Sanjeev Sachdeva, SDR for the Revenue. We have also heard Shri V. Sridharan, Advocate in appeals where similar question has been raised.

5. It is necessary to be clear about the claim of the appellants who manufacture steel castings. For such manufacture, sand moulds are necessary. Sand moulds may be green moulds or dry moulds etc. In these cases, the appellants are using dry sand mould. Shri Sridharan stated that his client uses green sand mould. Shri K. Narayanan and Shri Namasivayam explained the process of manufacture in the following terms:—

Mould is necessary for making steel castings. Wax model of casting is prepared first and that is covered by a mixture of sand, chemicals and resin and the same is heated on the oven as a result of which molten wax evaporates. Thus a cavity surrounded by sand mixture is formed. Through a hole molten metal is poured into the cavity which gets filled up. It is allowed to cool and after the process if complete, the sand mix is broken up and steel casting is available. Shri Sridharan explained the green sand mould procedure in the following terms:—

A pattern of the steel casting is prepared and placed in an empty box and the box is filled with sand mix containing sand, chemicals and resin and the sand is rammed around the pattern. If any hollowness is needed, a core is inserted inside the pattern. Molten metal is poured into the pattern and when the molten metal solidifies the sand is removed and pattern is separated and the steel casting is recovered. This procedure is similar to the one explained in "Principles of Metal Casting" by R.W. Heine & Others, published by Tata McGraw—Hill Publishing Company Limited. To remove the casting the sand mould has to be removed and it ceases to be sand mould.

6. It is necessary to emphasise that what the appellants are claiming is Modvat credit for duty paid on chemicals and resin which are mixed with sand for the purpose of making sand mould, the duty being utilised for payment of excise duty on the final product namely, steel castings. Appellants are not claiming Modvat credit for the duty paid on chemicals and resin for payment of duty on sand moulds. In fact the appellants are not clearing sand moulds for home consumption. It is their contention that sand moulds as such are not excisable goods at all and the chemicals and resin used are only inputs as defined in Rule 57A of the Central Excise Rules, 1944 for the final product, namely steel casting. The answer of the Revenue is that sand moulds are marketable products and excisable goods but exempted under a Notification issued by the Government and hence the question of utilising the credit for payment of duty on sand moulds does not arise. The chemicals and resin cannot be regarded as raw materials for the final product, namely steel castings. Appellants have also an alternative contention that even assumings and moulds are excisable goods, they must be regarded as "intermediate product" and therefore under Rule 57D(2) of the Rules, appellants are entitled to credit on the duty paid on chemicals and resin. Both sides pointed out that there are conflicting judgments of the various Benches of the Tribunal.

7. In Mukund Iron and Steel Works Ltd Vs. Collector of Central Excise 1990 (48) ELT 552 (T) and Shivaji Works Ltd Vs. Collector of Central Excise 1990 (50) ELT 50 (T), the West Regional Bench took a view in favour of Revenue. The question in the first case related to Foundry chemicals or Binders used for preparation of sand moulds. It was noticed that without sand moulds castings cannot be produced. But the only dispute raised was whether sand moulds are excluded under Explanation to Rule 57 A of the Rules being in the category of equipment or apparatus. The Bench took the view that the sand moulds are recognised in Central Excise Tariff as falling within the category of equipment, apparatus and appliances and specific exemption has been given to sand moulds under heading 84.80. Therefore it was held that the sand moulds are to be considered as equipment or apparatus used for the purpose of castings. It was noticed that the appellants had no case that sand moulds go into the product stream and occur at an intermediate stage and admittedly, they are produced independently and used for castings. It was held that since sand moulds are in the nature of equipment or apparatus, they are outside the Modvat scheme under Rule 57A of the Rules and they are not intermediate products coming into existence in the course of manufacture since they are produced independently and used in castings. In the second decision, it was observed that the final product is iron and steel casting, the inputs are chemicals used in the preparation of sand moulds which are made separately and into which molten metal is poured for getting the required shape for casting. It is immaterial to consider whether these sand moulds are stable or marketable or whether they could be construed as finished excisable goods. It was held that by virtue of explanation to Rule 57A, Modvat credit would not be available in respect of such equipment. It was further held that sand moulds could not be regarded as "intermediate product" coming into existence during the course of final product as contemplated in Rule 57D(2) of the Rules.

8. The appellants placed reliance on the decision of the North Regional Bench in Collector of Central Excise Vs., Leader Engineering Works 1993 (63) ELT 687 (T) and of the East Regional Bench in Hindustan Motors Ltd Vs. Collector of Central Excise 1993 (63) ELT 723 (T). In the first case the final products were metal cocks and metal valves in the manufacture of which sand cores and sand moulds were being utilised. It was held that chemicals in question are utilised in the preparation of cores and moulds which are utilised for casting of metal valves and cocks and the coming into existence of the sand core patterns of required specifications merely constitutes a stage in the process of manufacture of valves and cocks and does not alter the basic fact that the chemicals in question essentially act as inputs for process which ultimately results in the manufacture of metal valves and cocks. In this process, the moulding boxes, the pattern plates and core boxes act as equipment but sand cores and moulds do not exactly fall in the same category. The Bench relied on the affidavit of the parties to the effect that sand cores and sand moulds get destroyed during use and are neither sold nor are saleable in the market and no evidence has been produced to the contrary. The Bench was not inclined to accept that the tariff item regarding moulds and the exemption given to the sand mould and the clarifications of the Board would make any difference. In the second ease, the Bench held that sand moulds being unstable and not marketable are not goods or excisable goods. In this view the fact that moulds fall within tariff item and the Government chose to grant exemption for sand moulds would not render the same excisable goods. The Bench also held that and moulds cannot be regarded as goods within the Rule 57 A since they are not excisable goods.

9. One of the controversies raised is whether sand moulds are goods or excisable goods. In Collector of Central Excise Vs. Arobalal Sarabhai Enterprises 1989 (43) ELT 214 (SC), the Supreme Court which considered a similar controversy regarding starch hydrolysate held that there was no evidence to show that starch hydrolysate was ever marketed and in the light of the nature of the goods being highly unstable and quickly fragmented and losing its character in a couple of days, it was highly improbable that it was capable of being marketed and therefore it was not dutiable goods. It was also indicated that the burden was on the Revenue to prove the dutiability of tarch hydrolysate. In Bhor Industries Ltd Vs. Collector of Central Excise 1989 (40) ELT 280 (SC), PVC films which are used in final products such as leather cloth under Section 2(d) of the Act were held to be not goods as they were not marketable. Considering the definition in Section 2(d) of the Act, the Court held it is always necessary to find out whether the articles are goods, that is to say, articles as known in the market as separate, distsnct and identifiable commodities and merely because a certain article falls within the schedule It would not be dutiable under excise leviable he said after is not "goods" known to the market. Marketability is therefore an essential ingredient.

10. We have already indicated what meant by sand mould. When sand is assumed against a pattern, whether the sand is confined within a box or not, and where a hollow is created for pouring molten metal, sand mould is formed. Besides the assertion based on the tariff item relating to moulds (general expression) and the; exemption granted by the Government, in respect of sand mould, Revenue has not reduced any material to show marketability of sand mould The sand mould operation consists merely of temporary use of sand along with chemicals and resin to create case for the purpose of pouring molten metal. 'That being so sand mould is incapable of being marketed and has no marketability and as such is not marketable goods or excisable goods.

11. It is necessary to understand the broad scheme of Section AA of Central Excise Rules, 1944. Rule 57 A enables the Government to specify inputs, final products and duty for the purpose of al1owing credit of duty or additional duty paid on inputs, for utilisation of the credit so allowed towards payment of duty on final products. According to the Rule, credit is to be allowed for duty paid on "goods used in or in relation to the manufacture of the said final products". Such goods, for the purpose of brevity and convenience are referred to as inputs. The expression "inputs" in Rule 57A does not have the traditional meaning of raw materials which requires to be consumed and actually converted into a final product. The word "input" has been used in the sense of goods used in or in relation to manufacture of final product. The question is whether chemicals and resin are such inputs used in or in relation to the manufacture "of steel castings".

12. In J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. the Sales Tax Officer, Kanpur, and Another 1965 (16) STC 563, Supreme Court had occasion to consider the expression "used in the manufacture or processing of goods for sale" in the context of Sales Tax Law. The question was whether items like coal, lime, cement, textile design block could be said to have been used in the manufacture of yarn. The Supreme court held that manufacture of goods should normally encompass the entire process carried on by the dealer of converting raw materials into finished goods, and where any particular process is so integrally connected with the ultimate production of goods that, but for that process, manufacture or processing of goods would be commercially inexpedient, that process would fall within the expression "in the manufacture of goods". In Indian Copper Corporation Ltd Vs. Commissioner of Commercial Taxes, Bihar, and Others 1965 (16) STC 259, the Supreme Court held that locomotives and motor vehicles used to transport ore from the mines to the factory to enable ore being converted into copper products, can be said to be used in the manufacture of copper products.

13. In Collector of Central Excise Vs. Eastend Paper Industries Ltd 1989 (43) ELT 201 (SC) respondent was manufacturing different varieties of printing paper including wrapping paper and using the wrapping paper for packing printing paper. The manufacturer contended that no duty was required to be paid on excisable goods if captively consumed or utilised in the same factory as component part of the finished product falling under the same tariff item and specified inRule56A of the Rules and wrapping paper manufactured was captively consumed and utilised as component part of other varieties of paper. Wrapping, it was contended, of finished product by wrapping paper is a process incidental and ancillary to the completion of manufactured product under Section 2(f) of the Act. Wrapping paper is used as a component part of the printing paper. It was held that anything that enters into and forms part of manufacturing process or is required to make the article marketable must be deemed to be raw material or component part of the end product and must be deemed to have been used in completion or manufacture of the end product.

14. We are here dealing with a case where inputs are not necessarily required to be used in the manufacture of final product, but are used "in relation to the manufacture" of the final product, which is an expression of considerably larger import. The words "in relation to the manufacture" are intended to set at rest all doubts, Where raw material is actually used in the main stream of manufacture of final product, that is, actually used in the physical or chemical process of manufacture, it is certainly an input used in the manufacture of final product. The doubt may arise only in regard to use of some article not in the main stream of the manufacturing process but in another stream of manufacturing something which is to be Used for rendering final product marketable or used otherwise in assisting the process of manufacture. Such doubt is set at rest by use of the words "used in relation to the manufacture". It is true that sand mould is not a raw material actually used in the manufacturing process of final product in the sense that when mixed with some other articles it would produce the final product. Sand mould is also not used in the preparation of some other article which is necessary to render the final product marketable. It is an article which has a significant role to play in the manufacture of the final product without being used in the main stream of the manufacturing process but without the use of which the final product will never come into being. When such is the case, it is reasonable to conclude that sand mould is used in relation to the manufacture of final product, namely steel eastings. It is logical to hold that chemicals or resin which are used in sand mixture for the purpose of producing sand mould are used "in relation to manufacture of final products", namely steel castings. The contrary view taken in Mukund Iron and Steel Works Ltd Vs. Collector of Centra? Excise 1990 (48) ELT 552 (T) and Shivaji Works Ltd Vs. Collector of Central Excise 1990 (50) ELT 50 (T) is not correct.

15. In the light of what we have indicated above, it is unnecessary for us to consider the alternative contention as to whether sand mould is an "intermediate product".

16. In the result the impugned orders are set aside, holding that appellants are entitled to take Modvat credit for the duty paid on chemicals or resin used in the preparation of sand mould in the process of manufacturing final product, namely steel castings and use the credit for payment of duty on the final product.