M/S Flex Engineering
Limited Vs. Commissioner of Central Excise,
Civil Appeal No. 7152
[Civil Appeal No.429 of
2012 arising out of S.L.P. (C) No. 875 of 2008)]
[Civil Appeal No.430 of
2012 arising out of S.L.P. (C) No. 10759 of 2010)]
[Civil Appeal No.431 of
2012 arising out of S.L.P. (C) No. 6501 of 2011)]
J U D G M E N T
D.K. JAIN, J.:
granted in S.L.P. (C) Nos. 875 of 2008, 10759 of 2010 and 6501 of 2011.
batch of appeals, by grant of leave, arises out of judgments dated 26th August,
2002 in C.E.R. No. 11 of 2001, 11th April, 2007 in C.E.A. No. 10 of 2004, 8th September,
2009 in C.E.A. No. 6 of 2003 and 25th October, 2010 in C.E.R. No. 51 of 2002
passed by the High Court of Judicature at Allahabad. By the impugned judgments,
rendered in the reference applications filed by the assessee, under Section 35H
of the Central Excise Act, 1944 (for short "the Act"), the questions referred
by the Customs, Excise and Gold (Control) Appellate Tribunal, as it then existed,
(for short "the Tribunal") have been answered in favour of the
order to comprehend the controversy at hand, a few material facts may be
noticed. At the outset, it may be noted that these appeals relate to the period
between August 1992 to June 1996.
-assessee, a body corporate, claiming to be pioneers in the concept of flexible
packaging, is engaged in the manufacture of various types of packaging
machines, marketed as Automatic form fill and seal machines (for short "F&S
machines"), classified under chapter heading 8422.00 of the Schedule to the
Central Excise Tariff Act, 1985 (for short "the Tariff Act"). The literature
placed on record shows that the assessee has prototype models of F&S
machines with technical details like web width, Roll diameter, Core diameter, typical
material range, the type of material to be packed, etc.
According to the assessee,
the machines are `made to order', inasmuch as all the dimensions of the packaging/sealing
pouches, for which the F&S machine is required, are provided by the customer.
The purchase order contains the following inspection clause: "Inspection/Trial
will be carried out at your works in the presence of (sic) our Engineer before dispatch
of equipment for the performance of the machine." 3 Flexible
Laminated Plastic Film
in roll form & Poly Paper which are duty paid, falling under chapter
headings 3920.38 and 4811.30 of the Schedule to the Tariff Act, are used for testing,
tuning and adjusting various parts of the F&S machine in terms of the afore-extracted
condition in the purchase order.
As the machine
ordered is customer specific, if after inspection by the customer it is found deficient
in respect of its operations for being used for a particular specified packaging,
it cannot be delivered to the customer, till it is re-adjusted and tuned to
make it match with the required size of the pouches as per the customer's requirement.
On completion of the above process and when the customer is satisfied, an entry
is made in the RG 1 register declaring the machine as manufactured, ready for
assessee filed declarations and availed of the benefit of Modvat credit in respect
of the Flexible Laminated Plastic Film in roll form & Poly Paper used for testing
the F&S machine. On 4th March, 1993, a notice was issued to the assessee to
show cause as to why the benefit of Modvat credit on the above goods be not
denied, on the ground that they have used the said material for the purpose of
testing the final product i.e. the F&S machine which cannot be treated as inputs
as stipulated in Rule 57A of the Central Excise Rules, 1944 (for short
On a similar ground,
a number of show cause notices were issued to the assessee covering the period from
August 1992 to June 1996. The assessees' reply to the show cause notices did
not find favour with the adjudicating authority, who accordingly, denied the benefit
of Modvat credit on the said items. Appeals preferred by the assessee before the
Commissioner (Appeals) and the Tribunal were also dismissed.
thereby, the assessee filed applications seeking reference to the High Court on
the questions proposed. However, having failed to persuade the Tribunal that its
orders gave rise to questions of law, the assessee moved the Allahabad High
Court, praying for a direction to the Tribunal for reference.
High Court partly allowed the application and directed the Tribunal to draw a statement
of the case and refer the following questions of law for its opinion:
"Q1) Whether, in
the circumstances of the present case, facts of which are not in dispute, duties
paid on material, namely, plastic films/poly paper used for testing machines for
forming commercial/technical opinion as to their marketability/ excisability
would be eligible to be taken as credit (sic) under rule 57-A read with relevant
Q2) Whether such use
of material in testing in view of the purposes mentioned above, could be said to
be used (sic) in the manufacture of or use in relation to the manufacture of the
final products viz., Machines as assembled?"
aforesaid, the High Court has answered both the questions in the negative,
opining that testing the performance of a final product is not a process of manufacture
and therefore, materials used for testing the performance of the F&S machine
cannot be termed as `inputs' for the purpose of allowing Modvat credit.
According to the High
Court, anything required to make the goods marketable must form a 6 part of the
manufacture and any raw material or any materials used for the same would be a component
part of the end product.
It has observed that materials
used after manufacture of the final product, viz. the F&S machine, is complete,
is only to detect the deficiency in the final product and therefore, could not
be the goods used in or in relation to the manufacture of the final product within
the meaning of Rule 57A of the Rules. Hence the present appeals by the assessee.
the opinion of the High Court, Mr. Rajesh Kumar, learned counsel appearing on behalf
of the assessee submitted that the expression "in or in relation to" used
in Rule 57A of the Rules is very wide and is used to expand the scope, meaning
and content of the expression `inputs' so as to include all inputs so long as these
are used "in or in relation to the manufacture" of finished excisable
It was argued that since
the machines are tailor made, as per the specifications provided by a customer to
achieve a distinct and different result, it is of no use to any other customer.
Therefore, unless each individual machine is tested by using the flexible plastic
films in the presence of the customer or his representative, as per the terms of
the contract, to satisfy him that it is capable of being used for a particular packing
as specified by him, the process of manufacture of the final product cannot be said
to be complete.
It was contended that
the testing of the machine being an integral process of the manufacture and marketability
of the final product, particularly in terms of the specific condition in the
contract, the claim for Modvat credit was admissible on flexible plastic films consumed
in the testing of the F&S machines. It was stressed that to avail of the Modvat
credit in respect of an input, it is not necessary that such input must be physically
present in the finished product.
support of the proposition that the material used in testing, for the purpose
of verification of certain characteristics of the final product, is an input in
or in relation to the manufacture, learned counsel placed reliance on the decisions
of this 8 Court in Commissioner of Income Tax, Kerala, Vs. Tara Agencies1,
Maruti Suzuki Ltd. Vs. Commissioner of Central Excise, Delhi-III2, National Leather
Cloth Manufacturing Company Vs. Union of India & Anr.3 and a decision of
the Bombay High Court in Tata Engineering & Locomotive Co. Ltd. Vs. Commr.
Of C. Ex., Pune.
contra, Mr. Mukul Gupta, learned senior counsel appearing for the revenue, supporting
the decision of the High Court, contended that Modvat credit is available only
on the inputs which are actually used in the manufacture of the final product.
According to the
learned counsel, testing of a machine can take place only after the manufacture
of the machine is complete and therefore, any goods used in a process subsequent
to the completion of the process of manufacture cannot be termed as inputs
within the meaning of Rule 57A of the Rules.1 (2007) 6 SCC 4292 (2009) 9 SCC
193 : 2009 (240) E.L.T. 641 (S.C.)3 (2010) 12 SCC 218 : 2010 (256) E.L.T. 321
(S.C.)4 2010 (256) E.L.T. 56 (Bom.)
analysing the rival submissions, it would be appropriate to refer to the
relevant statutory provisions.
Modvat scheme, introduced with effect from 1st March 1986, was aimed at allowing
credit to the manufacturers for the excise duty paid by them in respect of the
inputs used in the manufacture of the finished product. Rules 57A and 57C of
the Rules, which make a manufacturer eligible to avail of the credit for the
duty paid on the inputs read as follows:
"RULE 57A :
(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 in the said notification
(hereinafter referred to as the "specified duty") paid on the 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 utilising 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 purposes of this rule, "inputs"
(a) inputs which are manufactured
and used within the factory of production, in or in relation to, the manufacture
of final products,
(b) paints and
(c) inputs used as
(d) inputs used for generation
of electricity, used within the factory of production for manufacture of final
products or for any other purpose, and
(e) accessories of
the final product cleared along with such final product, the value of which is
included in the assessable value of the final product, but does not include-
(i) machines, machinery,
plant, equipment, apparatus, tools, appliances or capital goods as defined in rule
57Q 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;(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;
(iii) packaging materials
or containers, the cost of which is not included in the assessable value of the
final products under section 4 of the Act; and
(iv) crates and glass
bottles used for aerated waters.
(2) Notwithstanding anything
contained in sub-rule (1), the Central Government may, by notification in the
official Gazette, declare the inputs on which declared duties of excise or
additional duty (hereinafter referred to as `declared duty') paid shall be deemed
to have been paid at such rate or equivalent to such amount as may be specified
in the said notification and allow the credit of such declared duty deemed to
have been paid in such manner and subject to such condition as may be specified
in the said notification even if the declared inputs are not used directly by
the manufacturer of final products declared in the said notification, but are
contained in the said final products.
Explanation. - For
the purposes of this sub-rule, it is clarified that even if the declared inputs
are used directly by a manufacturer of final products, the credit of the declared
duty shall, notwithstanding the actual amount of duty paid on such declared inputs,
be deemed to be equivalent to the amount specified in the said notification and
the credit of the declared duty shall be allowed to such manufacturer.
Rule 57C. Credit of duty
not to be allowed if final products are exempt.-
No credit of the
specified duty paid on the inputs used in the manufacture of a final product (other
than those cleared either to a unit in a Free Trade Zone or to a hundred per cent
Export-Oriented Unit) or to a unit in an Electronic Hardware Technology Park or
to a unit in Software Technology Parks or supplied to the United Nations or an
international organisation for their official use or supplied to projects funded
by them, on which exemption of duty is available under notification of the
Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central
Excises, dated the 28th August, 1995 shall be allowed if the final 1 product is
exempt from the whole of the duty of excise leviable thereon or is chargeable
to nil rate of duty."
is manifest that Rule 57A of the Rules entitled a manufacturer to take credit
of the Central Excise duty paid on the inputs used in or in relation to the
manufacture of the final product provided that the input and the finished
product are excisable goods and fall under any of the specified chapters in the
tariff schedule. It is pertinent to note that vide Notification No.28/95-C.E. (N.T.),
dated 29th June 1995, the said Rule was amended and the phrase
directly or indirectly and whether contained in the final product or not" was
inserted. There is no dispute that in the instant case, both the F&S
machines and the flexible laminated plastic film and poly paper are excisable.
Therefore, the short
question for consideration is whether the said material on which Modavt credit
is claimed by the assessee, not physically used in the manufacture of the said machine
but used for testing the F&S machines would be covered within the sweep of
the expression "in or in relation to the manufacture of the final 1 products",
as appearing in Rule 57A of the Rules. In short, the bone of contention is as
to what meaning is to be assigned to the expression "in relation to the manufacture
of final products."
our opinion, apart from the fact that the amended Rule itself contemplates that
physical presence of the input, in respect of which Modvat credit is claimed, in
the final product is not a pre-requisite for such a claim, even otherwise this
issue is no longer res-integra. In Collector of Central Excise & Ors. Vs. Solaris
Chemtech Ltd. & Ors.5, this Court while examining the scope and purport of the
expression "in or in relation to the manufacture of the final products"
observed that these words have been used to widen and expand the scope, meaning
and content of the expression "inputs" so as to attract goods which
do not enter into finished goods. Speaking for the Bench, S.H. Kapadia, J. (as
his Lordship then was) held as follows:
"11. Lastly, we may
point out that in order to appreciate the arguments advanced on behalf of
(2007) 7 SCC 347 : 2007 (214) E.L.T. 481 (S.C.) the Department one needs to interpret
the expression "in or in relation to the manufacture of final products".
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 raw 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 Excises 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.12. The Explanation to Rule 57-A
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 57-A. The Department would have
been right in saying that the input must be raw material consumed in the manufacture
of final product, however, in the present case, as stated above, the expression
"used" in Rule 57-A uses the words "in relation to the
manufacture of final products".
words "in relation to" which find place in Section 2(f) of the said Act
have 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 1 final product.
Therefore, the words "in
relation to the manufacture" have been used to widen and expand the scope,
meaning and content of the expression "inputs" so as to attract goods
which do not enter into finished goods.
J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO6 this Court has held that Rule
57-A refers to inputs which are not only goods used in the manufacture of final
products but also goods used in relation to the manufacture of final products. Where
raw material is used in the manufacture of final product it is an input used in
the manufacture of final product.
However, the doubt may
arise only in regard to use of some articles not in the mainstream of manufacturing
process but something which is used for rendering final product marketable or something
used otherwise in assisting the process of manufacture. This doubt is set at
rest by use of the words "used in relation to manufacture". (Emphasis
supplied by us)
Collector of Central Excise, Jaipur Vs. Rajasthan State Chemical Works, Deedwana,
Rajasthan7, to which a reference was made in Solaris Chemtech Limited (supra), this
Court had held that any operation which results in the emergence of the manufactured
goods would come within the ambit of the term manufacture. This is because of the
6 AIR 1965 SC 13107 (1991) 4 SCC 473 : 1991 (55) E.L.T. 444 (S.C.) 1 words used
in Rule 57A, namely, goods used in or in relation to the manufacture of final
this juncture, it would also be apposite to refer to Circular No.33/33/94/CX.8,
dated 4th May 1994, issued by the Central Board of Excise and Customs, relating
to the Modvat scheme. The relevant part of the Circular reads as under: "Subject:
Instruction regarding Modvat Scheme. 1..... 2. With a view to consolidate the instructions
and streamline of procedures, the following instructions are issued in
supersession of all the instructions issued on or before 31st December, 1993,
in relation to Modvat –
(i) Modvat credit is
available for all excisable goods used as inputs in or in relation to the manufacture
of finished goods. It is, therefore, clarified that the input credit is admissible
whether such input is physically present in the finished excisable goods or not
so long such inputs are used in or in relation to the manufacture of finished excisable
goods. In this connection definition of the term manufacture as propounded by the
Supreme Court in the Empire Industry's case-1985 (20) E.L.T. 179 and C.C.E. v. Rajasthan
State Chemical case - 1991 (55) E.L.T. 444, 448 (S.C.) are quite relevant. (Emphasis
is trite to state that "manufacture" takes place when the raw materials
undergo a series of changes and transformation that result in the formation of
a commercially distinct commodity having a different name, character and use. It
is equally well settled that physical presence of an input in the final
finished excisable goods is not a pre-requisite for claiming Modvat credit under
Rule 57A of the Rules.
It may very well be indirectly
related to manufacture and still be necessary for the completion of the manufacture
of the final product. It needs little emphasis that the process of manufacture is
complete only when the product is rendered marketable. Thus, manufacture is intrinsically
integrated with marketability. In this regard it would be profitable to refer
to the following observations of this Court in Union of India & Ors. Vs.
Sonic Electrochem (P) Ltd. & Anr.8:
"8. We do not consider
it necessary to discuss the cases on the question of marketability, as this
Court has dealt with all relevant cases in A.P. SEB case9. In that case, the question
was whether electric poles manufactured with cement and steel for the appellant
Board were marketable. After considering 8 (2002) 7 SCC 4359 (1994) 2 SCC 428 1
various cases on the question of marketability of goods, Jeevan Reddy, J., speaking
for the Court, summed up the position thus: (SCC p. 434, para 10)
"10. It would be
evident from the facts and ratio of the above decisions that the goods in each
case were found to be not marketable. Whether it is refined oil (non-deodorised)
concerned in Union of India v. Delhi Cloth and General Mills Co. Ltd.10 or kiln
gas in South Bihar Sugar Mills Ltd. v. Union of India11 or aluminium cans with rough
uneven surface in Union Carbide India Ltd. v. Union of India12 or PVC films in Bhor
Industries Ltd. v. CCE13 or hydrolysate in CCE v. Ambalal Sarabhai Enterprises (P)
Ltd.14 the finding in each case on the basis of the material before the Court was
that the articles in question were not marketable and were not known to the market
The `marketability' is
thus essentially a question of fact to be decided on the facts of each case. There
can be no generalisation. The fact that the goods are not in fact marketed is of
no relevance." 9. It may be noticed that in the cases referred to in the
passage, quoted above, the reasons for holding the articles "not
marketable" are different, however, they are not exhaustive. It is difficult
to lay down a precise test to determine marketability of articles. Marketability
of goods has certain attributes.
The 10 AIR 1963 SC
79111 AIR 1968 SC 92212 (1986) 2 SCC 54713 (1989) 1 SCC 60214 (1989) 4 SCC 112 1
essence of marketability is neither in the form nor in the shape or condition in
which the manufactured articles are to be found, it is the commercial identity of
the articles known to the market for being bought and sold. T he fact that the
product in question is generally not being bought and sold or has no demand in the
market would be irrelevant.
The plastic body of EMR
does not satisfy the aforementioned criteria. There are some competing manufacturers
of EMR. Each is having a different plastic body to suit its design and requirement.
If one goes to the market to purchase the plastic body of EMR of the
respondents either for replacement or otherwise one cannot get it in the market
because at present it is not a commercially known product. For these reasons, the
plastic body, which is a part of EMR of the respondents, is not
"goods" so as to be liable to duty as parts of EMR under para 5(f) of
the said exemption notification." (Emphasis supplied by us)
Collector of Central Excise, Calcutta-II Vs. M/s Eastend Paper Industries Ltd.15,
the assessee was manufacturing different kinds of paper. A question arose whether
the wrapping paper manufactured and used for wrapping the finished product is a
part of manufacture. It was held that wrapping of finished product by wrapping
paper is process incidental and ancillary to completion of the manufactured product
under Section 2 (f) of Act.
Thus, the Court held
that, 15 (1989) 4 SCC 244 anything required to make goods marketable, must form
a part of manufacture and any raw material or any material used for same would be
a component part of the final product.
Dharampal Satyapal Vs. Commissioner of Central Excise, Delhi-I, New Delhi16, the
term marketable has been held to mean saleable, as under: "18......Marketability
is an attribute of manufacture. It is an essential criteria for charging duty.
Identity of the product and marketability are the twin aspects to decide chargeability.
Dutiability of the product depends on whether the product is known to the market.
The test of marketability
is that the product which is made liable to duty must be marketable in the condition
in which it emerges. Marketable means saleable. The test of classification is, how
are the goods known in the market. These tests have been laid down by this Court
in a number of judgments including Moti Laminates (P). Ltd. v. CCE17, Union of India
v. Delhi Cloth & General Mills Co. Ltd.18 and Cadila Laboratories (P) Ltd.
if a product is not saleable, it will not be marketable and consequently the process
of manufacture would not be 16 (2005) 4 SCC 337.17 (1995) 3 SCC 2318 (1997) 5
SCC 76719 (2003) 4 SCC 12 2 held to be complete and duty of excise would not be
leviable on it. The corollary to the above is that till the time the step of manufacture
continues, all the goods used in relation to it will be considered as inputs and
thus, entitled to Modvat credit under Rule 57A of the Rules.
In the present case, as
aforesaid, each machine is tailor made according to the requirements of
individual customers. If the results are not in conformity with the order, then
the machine loses its marketability and is of no use to any other customer. Thus,
the process of manufacture will not be said to be complete till the time the
machines meet the contractual specifications and that will not be possible unless
the machines are subjected to individual testing.
Even though the
revenue has alleged that the process of manufacture is complete as soon as the machine
is assembled, yet it has not discharged the onus of proving the marketability of
the machines thus assembled, prior to the stage of testing. Moreover, as has
been held in the case of Hindustan Zinc Ltd. Vs. Commissioner of Central Excise,
Jaipur, the burden of proving whether a 20 (2005) 2 SCC 662; particular product
is marketable or not is on the department and in the absence of such proof it
cannot be presumed to be marketable.
In the absence of the
revenue having adduced any such evidence or contorted the assessee's claim that
the machines cannot be sold unless testing is done with some alternative
evidence as to their marketability, the stand of the revenue cannot be
in our opinion the process of testing the customised F&S machines is inextricably
connected with the manufacturing process, in as much as, until this process is carried
out in terms of the afore-extracted covenant in the purchase order, the
manufacturing process is not complete; the machines are not fit for sale and
hence not marketable at the factory gate.
We are, therefore, of
the opinion that the manufacturing process in the present case gets completed
on testing of the said machines and hence, the afore-stated goods viz. the flexible
plastic films used for testing the F&S machines are inputs used in relation
to the manufacture of the final product and would be eligible for Modvat credit
under Rule 57A of the Rules.
view of the aforegoing discussion, the opinion rendered by the High Court on
the questions referred by the Tribunal cannot be sustained. We hold that the
process of testing the customised machines is integrally connected with the ultimate
production of the final product viz. the F&S machines and therefore, that process
is one in relation to the manufacture, falling within the sweep of Rule 57A of the
Rules. Consequently, the appeals are allowed and the impugned orders are set aside,
leaving the parties to bear their own costs.
(ASOK KUMAR GANGULY)