Holding

Railway‑track material that is an integral part of the manufacturing process qualifies as "capital goods" under Rule 570, entitling the appellant to MODVAT credit.

Summary

Jayaswal NECO Ltd., a pig‑iron manufacturer, claimed MODVAT credit under Rule 57Q of the Central Excise Rules for railway‑track material installed inside its plant to transport hot metal and raw materials. The Commissioner rejected the claim, holding that the tracks were not "capital goods" within Rule 570, and the Customs, Excise and Gold (Control) Appellate Tribunal affirmed that decision. The appellant contended that the tracks were integral to the manufacturing process, and the Supreme Court examined the definition of capital goods and the test laid down in Mis. J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer, Kanpur. The Court held that because the railway tracks are essential for moving hot metal between the blast furnace and the pig‑casting machine, their use is inseparably linked to the production of pig iron, satisfying the test that the process is "integrally connected" with the ultimate manufacture of goods. Incidental uses of the tracks for other purposes do not defeat their qualification as capital goods. Consequently, the Supreme Court set aside the orders of the Commissioner and the CEGAT and allowed the appeal, granting the MODVAT credit claimed.

Issues considered

Whether railway‑track material used within a plant for handling raw materials and processed goods qualifies as "capital goods" under Rule 570 of the Central Excise Rules, 1944 for the purpose of claiming MODVAT credit.
Whether incidental or secondary uses of such railway tracks affect their status as capital goods.
Whether the Commissioner and the CEGAT erred in interpreting the definition of capital goods in this context.

Legislation cited

Central Excise Rules, 1944s. Rule 570, s. Rule 57Q
Central Excise Tariff Act, 1985

Subjects

MODVATcapital goodsRule 57Qrailway tracksmanufacturing processexcise creditCentral ExciseSupreme Court

Judgment

[2015]4 S.C.R. 313

MIS. JAYASWAL NECO LTD. A

v.

COMMNR. OF CENTRAL EXCISE, RAIPUR

(Civil Appeal No. 8554 of 2003) B

MARCH 13, 2015

[A.K. SIKRI AND R. F. NARIMAN, JJ.]

Central Excise Rules, 1944: Rule 57Q - Modvat credit C
on capital goods - Railway track material used for handling
raw materials and processed goods - Whether can be
treated as capital goods uls. 57Q - Held: The use of
railway tracks is related to the actual production of goods
0
and without the use of the said railway track, commercial
production would be inexpedient - Assessee entitled to
modvat credit.

Allowing the appeal
E
HELD: 1. A bare reading of rule 57Q of Central
Excise Rules shows that for the purpose of allowing
credit on specified duty paid on the capital goods,
such capital goods are to be used by the manufacturer
in his factory and are to be utilised for the purpose of F
manufacturing of final product. When machines,
machinery, plants, equipment, etc., are used for
producing or processing any good or bringing about
any change !n any substance for the manufacture of
final product, it would qualify as 'capital goods' and G
MODVAT credit thereon would be permissible. Where
any particular process is so integrally connected with

313 H
314 SUPREME COURT REPORTS [2015) 4 S.C.R.

A the ultimate production of goods that but for that
process, manufacture or processing of goods would ·
be impossible or commercially inexpedient, goods
required in that process would fall within the
expression "in the manufacture of goods". In the
B instant case, the manner in which railway track
materials were used by the appellant was explained by
the appellant before the Commissioner and veracity
thereof was accepted by the Commissioner. The
railway tracks used in transporting hot metal in ladle
C placed on ladle car from blast furnace to pig casting
machine through ladle car where hot metal is poured
into pig casting machine for manufacture of pig iron.
Secondly the system also helps in taking hot pigs from
pig casting machine to pigs storage yard by the big
0
wagon where hot pig iron are dumped for cooling and
making ready for dispatchers. This Railway tracks are
also used in handling of raw materials at wagon tippler
to stacker reclaimer where stacking and reclaiming of
E raw material is taken place and required quantity is
conveyed for further processing at stock house. It
reflects that the appellant has installed railway tracks
within the plant which is a handling system for raw
material and processed material. [Paras 5 to 7, 13 to
F 14] [318-D,E,G-H; 319-B,C; 322-H; 323-A-E]

Mis. J.K. Cotton Spinning & Weaving Mills Co. Ltd. v.
Sa/es Tax Officer, Kanpur and Anr. (1965) 1 SCR 900 -
relied on.
G Case Law Reference

(1965) 1 SCR 900 relied on. Para 7

CIVIL APPELLATE JURISDICTION: Civil Appeal No.
H 8554 of 2003.
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 315
EXCISE, RAIPUR

From the Judgment and Order dated 30.04.2003 of the A
Customs, Excise and Gold (Control) Appellate Tribunal, New
Delhi in Appeal No. E/303/2002-NB.

V. Lakshmikumaran, M. P. Devanath, R. Ramachandran,
Ms. L. Charanaya, Aditya Bhattacharya, Prashanth S. B
Shivadass, Vivek Sharma, Advs., for the Appellant.

K. Radhakrishnan, Sr. Adv., Sanjai Kumar Pathak, T. C.
Sharma, Ms. S. Manchanda, B. Krishna Prasad, Advs., with
himfor the Respondent. c
The Judgment of the Court was delivered by

A. K. SIKRI, J.1. This appeal arises out of the
judgment/ final order dated 30.04.2003 passed by Customs,
Excise and Gold (Control) Appellate Tribunal, New Delhi D
(hereinafter referred to as 'CEGAT') whereby the Tribunal
has dismissed the appeal of the appellant thereby confirming
the order of the Commissioner insofar as it denies the
appellant MODVAT credit on some of the capital goods and E
parts which were detailed in the show cause notice issued
under Rule 57Q of the Central Excise Rules, 1944
(hereinafter referred to as 'Rules').

2. The dispute has arisen in the following factual
background. F

The appellant is engaged in the manufacture of pig
iron falling under Chapter 72 of the Schedule to Central
Excise Tariff Act, 1985. The appellant is availing MODVAT
credit on various capital goods and parts thereof under Rule G
57Q of the Rules. The respondent-authority had issued two
show cause notices thereby proposing to deny the appellant
the MODVAT credit availed by them under Rule 57Q on the
following items: -
H
316 SUPREME COURT REPORTS [2015] 4 S.C.R.

A : S. No.• Items on which credit denied Credit amount l
' (Rs.)
'f - · - - I .. . . -
i
{a) i Pipes & fittings used outside the plant for, 15,83, 738
Ibringing water from river Kharoon '.
I -
fR~iiway track material used.for handling raw:16,59:987
~---

(b)
B materials, process goods
r-- ·- I
!
. . .. .
I (c) , HOPE Tarpaulin used to avoid leakage of water 6, 18,943
:from water reservoir ·
(d) Loudspeaker used to pass on instructions to 27,336
' Ioperate various equipment due to distance
I
c I
L ..
Total credit amount. 38,90,004

The Commissioner was of the view that the aforesaid
goods were not covered within the definition of "capital
goods" under Rule 570 of the Rules. After giving opportunity
D to the appellants to file reply to the said· show cause notices
and hearing the appellants, the Commissioner passed the
orders dated 30.10.2001. By the said order, the demand in
respect of certain capital goods was dropped. At the same
time, the MODVAT credit on the aforesaid four items was
E denied by the Commissioner. The appellants filed appeal
against the said order before the CEGAT and the CEGAT
has affirmed the order of the Commissioner thereby
dismissing the appeal of the appellant.
F 3. In the present appeal preferred by the appellants
against the order of the CEGAT, the relief is confined to item
(b) above alone, namely, in respect of railway track material
used for handling raw materials, processed goods for which
credit for sum of Rs. 16,59,987/- was claimed and was
G earlier allowed but reversed by the Commissioner. The
question is as to whether the said item can be treated as
"capital goods" under Rule 570 of the Rules which was
holding the field at the relevant time.

H 4. The relevant extract of the Rule 570, in the form in
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 317
EXCISE, RAIPUR [A. K. SIKRI, J.]

which it existed then, is reproduced as hereinbelow: - A

RULE 570. Applicability.- (1) The provisions of this
section shall apply to finished excisable goods of the
description specified in the Annexure below (hereinafter
referred to as the "final products") for the purpose of B
allowing credit of specified duty paid on the capital
goods used by the manufacturer in his factory and for
utilising the credit so allowed towards payment of duty
of excise leviable on the final products, or as the case
may be, on such capital goods, if such capital goods C
have been permitted to be cleared under rule 57S,
subject to the provisions of this section and the
conditions and restrictions as the Central Government
may specify in this behalf:
D
Provided that credit of specified duty in respect of any
capital goods produced or manufactured -

(a) in a free trade zone and used for the manufacture
of final products in any other place in India; or
E
(b) by a hundred per cent export-oriented undertaking
or by a unit in an Electronic Hardware Technology Park
[or by a unit in Software Technology Parks] and used
for the manufacture of final products in any place in F
India,

shall be restricted to the extent of duty which is equal
to the additional duty leviable on like goods under
section 3 of the Customs Tariff Act, 1975 (51 of 1975)
equivalent to the duty of excise paid on such capital G
goods.

Explanation. -For the purposes of this section, -

(1) "capital goods" means - H
318 SUPREME COURT REPORTS [2015] 4 S.C.R.

A (a) 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 fo[ the manufacture of final products;

s (b) components, spare parts and accessories of the
aforesaid machines, machinery, plant, equipment,
apparatus, tools or appliances used for aforesaid
purpose; and

c (c) moulds and dies, generating sets and weigh
bridges used in the factory of the manufacturer.

D
5. It follows from the bare reading of the aforesaid
provision that for the purpos€ of allowing credit on specified
duty paid on the capital goods, such capital goods are to be
used by the manufacturer in his factory and are to be utilised
E for the purpose of manufacturing of final product. The
explanation gives the meaning of 'capital goods'. As per
clause (a) thereof, machines, machinery, plants, equipment,
apparatus, tools or appliances which are used for producing
or processing goods or in bringing about any change in any
F substance for the manufacture of final product are to be
treated as "capital goods".

6. It is clear from the reading of the definition of capital
goods that when machines, machinery, plants, equipment,
G etc., are used for producing or processing any good or
bringing about any change in any substance for the
manufacture of final product, it would qualify as 'capital
goods' and MODVAT credit thereon would be permissible.
Question that arises for consideration is as to in what
H manner such machines, machinery, plants, equipment, etc.,
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 319
EXCISE, RAIPUR [A. K. SIKRI, J.]

is to be used for the purpose stated therein. A

7. A direct answer to this question is given by this Court
in 'Mis. J. K. Cotton Spinning & Weaving Mills Co. Ltd. v.
Sales Tax Officer, Kanpur and another [1965 (1) SCR 900].
In this case, the test which was enunciated by the Court is: B

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 impossible or commercially c
inexpedient, goods required in that process would fall
within the expression "in the manufacture of goods".
For goods to answer that description, it is not
necessary that they must of necessity be goods which
are used as "ingredient or commodity in the creation of o
goods", or which are "directly and actually needed for
turning out or making of the goods."

8. Though the court was concerned with the construction
of Section 8(3)(b) of the Central Sales Tax Act, 1956, and E
Rule 13 framed under the said Act, the expression "in the
manufacture or processing of goods for sale" appearing in
Section 8(3)(b) came up for interpretation. Section 8(3(b)
authorises the Sales Tax Officer to specify goods intended
for use by the dealer in the manufacture or processing of F
goods for sale or in mining, or in the generation or
distribution of electricity or any other form of power. Rule 13
provides that such goods must be intended for use in the
manufacture or processing of goods for sale or in mining or
generation or distribution of power. G

9. The aforesaid expression interpreted by the Court,
therefore, becomes relevant for our case as well. The test
laid down by the Court and noticed above was explained
and expanded by the Court in the following words: - H
320 SUPREME COURT REPORTS [2015] 4 S.C.R.

A "In our judgment if a process or activity is so integrally
related to the ultimate manufacture of goods so that
without that process or activity manufacture may, even
if theoretically possible, be commercially inexpedient,
goods intended for use in the process or activity as
B specified in Rule 13 will qualify for special treatment.
This is not to say that every category of goods "in
connection with" manufacture of or "in relation to"
manufacture, or which facilitates the conduct of the
business of manufacture will be included within Rule 13.
c Attention in this connection may be invited to a
judgment of this Court in which it was held that vehicles
used by a Company (which mined ore and turned out
copper in carrying on activities as a miner and as a
manufacturer) fell within Rule 13, even if the vehicles
D
were used merely for removing ore from the mine to
the factory, and finished goods from the factory to the
place of storage. Spare parts and accessories
required for the effective operation of those vehicles
E were also held to fall within Rule 13. See Indian
Copper Corporation Ltd. v. Commissioner of
Commercial Taxes, Bihar and Ors."

10. In the process, the court also explained that there is
F no warrant for limiting the meaning of the expression "in the
manufacture of goods" to the process of production cif goods
only. In the opinion of the court, the expression "in the
manufacture" takes within its compass, all processes which
are directly related to the actual production. It noted that
G goods intended as equipment for use in the manufacture of
goods for sale are expressly made admissible for
specification. The court further marked that drawing and
photographic materials falling within the description of goods
intended for use as "equipment" in the process of designing
H
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 321
EXCISE, RAIPUR [A. K. SIKRI, J.]

which is directly related to the actual production of goods and A
without which commercial production would be inexpedient
must be regarded as goods intended for use "in the
manufacture of goods".

11. The said judgment also reflects discussion on certain B
other material goods which are used 'in the manufacture of
goods' and depending upon the manner in which such
materials are used, it may or may not be integrally connected
with the ultimate production of goods. To exemplify the
same, the court noted the use of building materials as well C
as electronics goods, by pointing out the aforenoted
distinction in the following manner:

"Building materials including lime and cement not
required in the manufacture of tiles for sale cannot, o
however, be regarded within the meaning of Rule 13,
as raw materials in the manufacture or processing of
goods or even as "plant". It is true that buildings must
be constructed for housing the factory in which
machinery is installed. Whether a building is a "plant" E
within the meaning of Rule 13, is a difficult question on
which no opinion need be expressed. But to qualify for
specification under s. 8(3)(b) goods must be intended
for use of the nature mentioned in Rule 13, in the
manufacture of goods. Building materials used as raw F
materials for construction of "plant" cannot be said to
be used as plant in the manufacture of goods. The
Legislature has contemplated that the goods to qualify
under s. 8(3)(b) must be intended for use as raw
materials or as plant, or as equipment in the G
manufacture or processing of goods, and it cannot be
said that building materials fall within this description .
The High Court was, therefore, right in rejecting the
claim of the Company in that behalf.
H
322 SUPREME COURT REPORTS [2015] 4 S.C.R.

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

12. Applying the aforesaid test to the facts of this case,
it is apparent that the use of railway tracks is related to the
G actual production of goods and without the use of the said
railway track, commercial production would be inexpedient.

13. In the instant case, the manner in which railway track
materials have been used by the appellant was explained by
H the appellant before the Commissioner and veracity thereof
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 323
EXCISE, RAIPUR [A. K. SIKRI, J.]

was accepted by the Commissioner. Therefore, without any A
fear of contradiction, we may note the exact process that is
involved:

"These railway tracks used in transporting hot metal in
ladle placed on ladle car from blast furnace to pig B
casting machine through ladle car where hot metal is
poured into pig casting machine for manufacture of pig
iron. Secondly the system also helps in taking hot pigs
from pig casting machine to pigs storage yard by the
big wagon where hot pig iron are dumped for cooling C
and making ready for dispatchers. This Railway tracks
are also used in handling of raw materials at wagon
tippler to stacker reclaimer where stacking and
reclaiming of raw material is taken place and required
quantity is conveyed for further processing at stock D
house."

14. It reflects that the appellant has installed railway
tracks within the plant which is a handling system for raw
material and processed material. E

15. The aforesaid process squarely meets the test laid
down by this court in Mis. J. K. Cotton Spinning & Weaving
Mills Co. Ltd. 's case. It is clear that the railway tracks are
installed not only within the plant, but the main objective and F
purpose for which the capital expenditure on laying these
railway tracks is incurred by the appellant is for transporting
hot metal in ladle placed on ladle car from blast furnace to
pig casting machine through ladle car where hot metal is
poured into pig casting machine for manufacture of pig iron. G
It is clear from the above that the use of railway tracks inside
the plant not only form the process of manufacturing, but it is
inseparable and integral part of the said process inasmuch
as without the aforesaid activity for which railway tracks are
used, there cannot be manufacturing of pig iron. H
324 SUPREME COURT REPORTS [2015] 4 S.C.R.

A 16. We find from the order of the Commissioner that in
spite of taking note of the aforesaid use of the railway tracks
and accepting the same as correct, the Commissioner
denied the relief to the appellant on an extraneous ground,
i.e., railway tracks were used for other purposes as well,
B namely, apart from conveying hot metal and hot pigs, it was
used for carrying raw materials and finished goods as well.
This can hardly be a ground to deny the relief inasmuch as
by incidental use of the railway tracks for some other
innocuous purpose, it does not lose the character of being
C an integral part of the manufacturing process. The
Commissioner has further observed in his order that the
railway track is not utilised directly or indirectly for producing
or processing of goods or bringing about any change for
D manufacture of final product. This conclusion, obviously, is
completely erroneous and amounts to misreading of the
process. Such an error has occurred because the
Commissioner did not keep in mind the principle of law laid
down by this Court in Mis. J. K. Cotton Spinning & Weaving
E Mills Co. Ltd.'s case, highlighted above.

17. When we read the order of the CEGAT, we find that
CEGAT has not even adverted to and examined the issue
from the aforesaid angle, which was the only method for
F arriving at a finding as to whether the railway tracks installed
within the plant would come within the definition of capital
goods under Rule 570 of the Rules or not. The order of the
CEGAT is stoically silent. It has affirmed the order of the
Commissioner by simply observing that the Commissioner
G has arrived at the conclusion that these goods are not being
used directly or indirectly for producing or processing the
goods or for bringing about any change for the manufacture
of the final product. We have already pointed out that the
aforesaid conclusion of the Commissioner is not only
H factually incorrect and perverse but legally unsustainable as
JAYASWAL NECO LTD. v. COMMNR. OF CENTRAL 325
EXCISE, RAIPUR [A K. SIKRI, J.]

well. A

18. Resultantly, we set aside the order of the
Commissioner as well as of CEGAT insofar as it pertains to
item "railway track material used for handling raw materials,
process goods" and hold that the appellant has rightfully B
claimed for MODVAT credit in respect of this item which
credit is wrongly reversed by the authorities _below. To that
extent, order of the Commissioner as well CEGAT is set
aside and the present appeal is allowed i.n the aforesaid
terms. No order as to costs. C
Devika Gujral Appeal allowed.