The Hindu Business Line : Explosive fizzled out as the fuse was too long

AN `EARTH-SHATTERING' case that travelled right up to the Supreme Court recently was Commissioner of Central Excise, Jaipur vs J. K. Udaipur Udyog Ltd.

The company had a mining lease granted by the Rajasthan Government, and it excavated limestone from the mines to manufacture cement, in a factory located a few kilometres away. It used explosives for blasting purpose in the mines, and claimed excise credit available for `inputs'.

The Department looked at these bombs all round and said, "Hey, wait. You're not using the explosives in the factory premises for the manufacture of your final product, that is, cement. So no credit for CENVAT purpose under Rule 57AB of Central Excise Rules!"

The company replied: "Sir, mining area and our cement factory are not only interdependent, but also have a direct nexus with each other. It's like this: Mining and manufacturing cannot be considered as isolated events. Why? Because, without mining limestone, our cement plant cannot be run. So, for all practical purposes, mining area is an extension of the factory area." You know that story of how a war was lost because of a loose nail on a horseshoe?

Thus, when the case was taken up in the apex court, Justices Mr S. N. Variava and Mr G. P. Mathur stated that the main question to be considered was whether explosives used in the mines for blasting purpose could be held to be `inputs'. The counsels were Mr T. L. V. Iyer, for the Department, and Mr V. Lakshmikumaran for the company.

The definition of `input' came under scrutiny: It means "all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production, and also includes lubricating oils, greases, cutting oils and coolants."

The court pointed out that the expression `used for manufacture of final products or for any other purpose, within the factory of production' in the definition of `input' is important. Obviously, explosives were used for blasting purpose in the mines and not in the factory where cement was produced.

The company tried to rely on an earlier case — of Jaypee Rewa Cement where Rule 57J of the earlier Modvat scheme that allowed credit for inputs used in an intermediate product too — but the court observed, "Under the CENVAT scheme there is no provision similar to Rule 57J." And so, the ratio of Jaypee Rewa Cement could not have any application in the current case.

The company's counsel argued: "Limestone is brought from the mines to the factory by a ropeway and, therefore, the mining area is an extension of the factory area." Court said: "It is difficult to accept the submission made." Reason: "Ropeway is merely a device or mechanism for transporting limestone."

Further, "Merely because a ropeway connects the factory with the mines, the mine itself will not become a part of the factory where cement is produced."

And, to extrapolate: "On that logic, even if the mine is situated hundreds of miles away but is connected with the factory by a railway line for transporting mineral or raw material, the said mine will become a part of the factory of production."

The court looked at the definition of `factory' in Section 2(e) of the Central Excise Act, 1944: Factory means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on.

"In view of this definition," said the court, "a mine from where the raw material is extracted and is situated at some distance, but no manufacturing process is carried on, cannot qualify to be a factory." Thus, explosives used in blasting in the mines were not inputs in the manufacture of cement. An explosive that fizzled out, shall we say, because the fuse was simply too long?

Tailpiece

"I'm thinking of a word that starts with `re'. Guess what?"

"Relief?"

"No, recall!"

Detaxification@TheHindu.co.in

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