Welding Electrodes-Issue on Fire Once Again

WELDING ELECTRODES – ISSUE ON FIRE ONCE AGAIN

Prepared by: - CA. Pradeep Jain,

CA. Preeti Parihar and

Sukhvinder Kaur LLB(FYIC)

Introduction: -

Allowability or otherwise of Cenvat Credit on Welding Electrodes has always been under dispute. Being important in repairing the normal wear and tear of machinery, almost all the big factories have been procuring the same. Falling under tariff heading 83111000, these involve a significant amount of Cenvat Credit, and a matter of conflict between the Revenue and the assessees. The dispute seemed settled in favour of assessees by the Rajasthan High Court judgment in the case of Hindustan Zinc Ltd. But the subsequent decisions in case of SAIL v/s CCE, Ranchi has brought U-turn in this story. The article is about the ups & downs of the issue.

Use of Welding Electrodes: -

Welding electrodes are used for soldering, brazing or welding of machinery. It can be used for repair and maintenance of plant & machinery in a factory, or for maintenance & repair of factory structures. The welding electrodes can also be used for cutting large chunks of scrap to small pieces which then can be melted for making ingots. In most of the cases, it is used for repairs and maintenance of plant and machinery.

Welding Electrodes are Input or not: -

The definition of “Input” is given in Rule 2 (k) of the Cenvat Credit Rules, 2004. The said definition is reproduced hereunder for ready reference: -

(k) "input" means-

(i) all goods, except light diesel oil, 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 lubricating oils, greases, cutting oils, coolants, 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 in or in relation to manufacture of final products or for any other purpose, within the factory of production;

(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;

Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.

Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;

The analysis of this definition makes it clear that it is a vast definition covering almost all the material that is used directly or indirectly in the manufacturing process, except LDO, HSD or motor spirit.

As such, whether credit will be allowed on welding electrodes as inputs will depend upon their use in the manufacturing cycle. Let’s recall the use of welding electrodes. In most of the cases, they are used in repairs and maintenance of plant and machinery. In other words, there is no direct use of welding electrodes in the production process.

However, the language in the aforesaid definition reads as “used in or in relation to the manufacture of final products whether directly or indirectly”. In other words, even if the goods are used indirectly in the manufacture of final products, they will be deemed as input for the purpose of taking the Cenvat Credit. Therefore, the question arises whether any goods that are used in the repairs and maintenance of the machinery are considered as used in relation to manufacture of final products? The answer depends on who you are – if you are assessee, your answer will be ‘yes’ and if question is being answered by Department, the answer would be ‘no’. This ‘yes’ and ‘no’ has given rise to conflict between the Revenue and the assessees and as a result, the matter has reached Tribunal, every time the credit is taken.

Judicial Pronouncements:-

There has been no common opinion between the various Tribunals on the dispute and there as a result there are no. of contradictory decisions given by different Tribunals. There are several judgments allowing Cenvat credit on welding electrodes by treating them as inputs and several others are disallowing Cenvat credit on the same. A few are discussed hereunder: -

Favouring Cenvat Credit on Welding Electrodes: -

v The Larger Bench in the case of Jawahar Mills Ltd v/s Commissioner of Central Excise, Coimbatore [1991 (108) ELT 47 (Tribunal)] had held as under: -

Control panels, cables, welding electrodes are to be consider as capital goods and accordingly eligible for Modvat credit under Rule 57Q of Central Excise Rules, 1944. (Para.40)

v In India Sugars & Refineries Ltd v/s Commissioner of Central Excise, Bangalore [2006 (205) ELT 0717 (Tri.-Bang.)] it was held that the inputs viz. welding electrodes, oxygen gas and acetylene gas used for welding the punctured pipes carrying the hot sugar juice should be treated as part of process "of manufacture and hence, they are eligible inputs for the manufacture of the final product.

v The Bangalore Tribunal in the case of Jindal Stainless Limited v/s Commissioner of Central Excise, Visakhapatnam-I [2008 (230) ELT 0125 (Tri.-Bang)] held that Welding Electrodes and Gases used for repairs and maintenance of the Plant and Machinery are eligible for credit.

v In the case of GMR Industries Limited v/s CCE, Visakhapatnam [2009 (92) RLT 157 (CESTAT-Ban.)] it was held that MS plates, MS angles, MS channels, MS beams and Welding Electrodes used for fabrication of storage tank were eligible for Cenvat credit as inputs.

v In CCE & C, Guntur v/s Andhra Cements Ltd [2009 (92) RLT 357 (CESTAT-Ban.)] it was held that Oxygen, Nitrogen and Welding electrodes used for repair and maintenance of plant and machinery were entitled for Cenvat credit.

v The Tribunal in case of Kisan Cooperative Sugar Factory Ltd v/s Commissioner of Central Excise, Meerut-I [2009 (090) RLT 0017 (CESTAT-Del.)] held that Welding Electrodes used for repair and maintenance of plant and machinery is eligible for Cenvat credit.

v In Commissioner of Central Excise, Guntur v/s Andhra Sugars Ltd. [2007 (081) RLT 0017 (CESTAT-Ban.)] it was held that “The items welding electrodes, paints & thinners, plates/ sheets, angles and channels used for repairing/replacement of plant and machinery in the factory are eligible for credit.”

v In the case of ACC Ltd. v/s Commissioner of Central Excise, Nagpur [2008 (089) RLT 0391 (CESTAT-Mum.)] it was held that Cenvat credit eligible on welding electrodes used by appellants both for the purpose of installation and fixing of machinery as well as repairs and maintenance of machinery.

v In Bhushan Steels And Strips Ltd. v/s Commissioner of Central Excise, Raigad [2008 (223) ELT 0517 (Tri. - Mumbai)] it was held that Welding electrodes/welding wires were used in making of Machine, Machinery, Plant, Supporting Structures, EOT Crane Legs Structure etc. The ratio of Tribunal judgment in Triveni Engineering does not apply, as in the present case welding electrodes were used for producing or processing of components of capital goods and not for repairs or maintenance.

v In ACCE, Visakhapatnam-I v/s N.C.S. Sugars Ltd. [2009 (090) RLT 0148 (CESTAT-Ban.)] it was held that M.S. plates/HR plates/Beams/Channels, Steel wire ropes/chains, Pickling preparations, Chemicals, Loose/Rock wool, Welding electrodes, LLDPE Liners, ALFLOC 11 and NALCO 2588 PULV as inputs are eligible for credit. Appeal of the assessee allowed.

Against Welding Electrodes: -

v The Larger Bench of the Tribunal in the case of Jaypee Rewa Plant v/s Commissioner of Central Excise, Raipur [2003 (159) ELT 553 (Tri.-LB)] had held that the welding electrodes and gases used by the appellants for repairs and maintenance of machinery cannot be considered to have been used “in relation to the manufacture of final products” as they were not used co-extensively with the process of manufacture of cement/clinker and hence not integrally connected with the manufacture. We, therefore, hold that the welding electrodes and gases used for repairs and maintenance of machinery in the appellants’ factory during April-September, 2000 were not eligible inputs for Cenvat credit under Rules 57AB and 57AC.

v In the case of Manikgarh Cement Ltd v/s Commissioner of Central Excise, Nagpur [2004 (168) ELT 0331 (Tri.-Mumbai)] it was held that welding electrodes, oxygen and other gases used in repairing and re-conditioning are not capital goods eligible to credit.

v Similarly, the Larger Bench in the case of Triveni Engg & Industries Ltd v/s Commissioner of C. EX., Meerut [2005 (186) ELT 158 (Tri.-LB)] had held as under: -

Welding electrodes are part, component or accessory of which machines. Welding electrodes are used in maintenance of capital goods and under provisions of Rule 57Q of Central Excise Rules, goods used for maintenance are not covered. Appellants are not entitled for benefit of Modvat credit as capital goods during relevant period. Welding electrodes are specified under sub-heading 8311 00 of the CET. Petition of assesses rejected. (Para.7)

v The Tribunal at Ahmedabad in the case of Commissioner of Central Excise, Surat v/s Sterlite Industries India Ltd [2007 (078) RLT 0231 (CESTAT-Mum)] held that Cenvat credit on welding electrodes was not admissible in view of the Larger Bench decision in Triveni Engineering and Industries [2005 (186) ELT 0158 (LB)].

v In the case of Dhampur Sugar Mills Ltd v/s Commissioner of Central Excise, Meerut [2008 (228) ELT 0590 (Tri.-Del)] it was held that denial of credit on welding electrodes and container lock is upheld. It is seen that the denial of credit on welding electrodes was settled by the Larger Bench of the Tribunal in Triveni Engg v. CCE and J.K. Cement v. CCE [2007 (211) ELT 235].

v In Aditya Cement v/s Commissioner of Central Excise, Jaipur [2007 (219) ELT 0629 (Tri. - Del.)] it was held that Welding electrodes used for repairs and maintenance of capital goods. Welding electrodes are not eligible for Modvat credit.

v In Commissioner of Central Excise, Hyderabad-II v/s Sri Vishnu Cements Ltd. [2006 (201) ELT 0607 (Tri. - Bang.)] it was held that No Cenvat credit can be given for welding electrodes used in the maintenance of capital goods.

v In Lloyds Metals & Engineers Ltd. v/s Commissioner of Central Excise, Nagpur [2009 (091) RLT 0822 (CESTAT-Mum.)] it was held that Welding electrodes not used in manufacturing while it used for repair and maintenance of machinery hence not eligible to credit.

v In Vikram Ispat v/s Commissioner of Central Excise, Mumbai [2004 (175) ELT 0146 (Tri. - Mumbai)] it was held that Oxygen gas, dissolved Acetylene gas, welding rods and welding electrodes used for welding, fabrication, repair and maintenance of plant and machinery, Red color used for painting Naphtha Pipe Line cannot be treated as used in manufacture of final goods not entitled for Credit.

As such, there was no clear or uniform decision on the matter. There are a lot of decisions that allow Cenvat Credit on the welding electrodes and also, there are no. of decisions that deny the credit on the same. The contradictory decisions were put to an end by the judgment of Rajasthan High Court in the case of Hindustan Zinc Ltd.

Hindustan Zinc Ltd. v/s Union of India & Ors. [2008 (228) ELT 0517 (Raj)]: -

The question of admissibility of Cenvat credit on welding electrodes came before the High Court of Rajasthan in Hindustan Zinc Ltd v/s Union of India & Ors. [2008 (228) ELT 0517 (Raj)]. The assessee therein had availed modvat/Cenvat credit on welding electrodes by treating them as capital goods. It was alternatively argued by the assessee therein that if credit was not allowable on the welding electrodes as capital goods, then the same may be treated as inputs and Cenvat credit should be allowed on the same. It was contended that the said goods necessarily used for maintenance of their plant for smooth running of the plant by use for affixing the component, namely sheets, plates etc. As such they were being used in or in relation to, the manufacture of final products.

The High Court relied upon the judgment of the Apex Court in JK Cotton SPG & WVG Co. Ltd v/s Sales Tax Officer, Kanpur [1997 (091) ELT 34] in which held that the expression "in the manufacture of goods" should normally encompass entire process carried on by the dealer, of converting raw materials into finished goods, where any particular process, or activity, is so integrally connected with the ultimate production of the goods, but for that process, manufacturing, or processing of the goods would be commercially inexpedient, goods required in that process would, fall within expression " in the manufacturing of goods".

High Court held that the controversy was put to rest by the proposition propounded in the judgment of JK Cotton SPG & WVG Co. Ltd. It was held in favour of the assessee that welding electrodes used for repairs and maintenance of plant & machinery are eligible for Cenvat credit both as capital goods as well as inputs. Thus, the High Court had overruled the decision of the Larger Bench in the case of Jaypee Rewa Plant.

When this decision was given, it was thought that years long dispute on welding electrodes has come to an end. But very soon, a decision came in limelight that gave U-turn to this issue.

New Twist: -

The Tribunal in the case of SAIL v/s CCE, Ranchi [2008 (222) ELT 233 (Tri Kol.)] following the decision of the Larger Bench of the Tribunal in Jaypee Rewa Plant, has held that the credit in respect of welding electrodes used for repairing machines shall not be admissible.

The Special Leave Petition against this decision to the Apex Court was dismissed. The Apex Court had held that in the facts of the case, appeal is dismissed.

The inference drawn from this judgment is that the decision in the SAIL case has been affirmed by the Apex Court and the same will have precedence over the judgment of the High Court of Rajasthan in the case of Hindustan Zinc Ltd.

Therefore, the conclusion derived is that the Cenvat credit will not be available on welding electrodes used for repair and maintenance of machinery. Accordingly, the Tribunals have denied Cenvat credit on welding electrodes like in the case of Lloyds Metals & Engineers Ltd v/s CCE, Nagpur [2009 (91) RLT 822 (CESTAT-Mum.)].

Thereafter: -

The Single Member Bench in the case of M/s U P State Sugar Corporation Ltd v/s CCE, Meerut-I [2009-TIOL-452-CESTAT-DEL] held that dismissal of SLP of M/s SAIL by the Supreme Court was only a summary dismissal and did not amount to affirmation of the judgment/order of the Court/ Tribunal appealed against, on merit. It merely meant that the Supreme Court declined to interfere in the matter. Had the given appeal been dismissed on the basis of the merits of the case, its dismissal would have amounted to affirmation of judgment that credit is not allowed on welding electrodes.

Accordingly, it was held that Cenvat credit was available on welding electrodes used in maintenance and repair of machinery in terms of Hindustan Zinc Ltd and this decision is still effective.

While parting: -

Law is the interpretation of words written in the statute. The battle that seemed to be cooled down by the judgment of the Hindustan Zinc Ltd., took a new turn by dismissal of Special Leave Petition of M/s SAIL by hon’ble Supreme Court. At one point of time, it seemed that this dismissal would end down the scope of taking credit on welding electrodes. But the interpretation taken in the case of M/s U P State Sugar Corporation Ltd v/s CCE, Meerut-I [2009-TIOL-452-CESTAT-DEL] served as ICU for the issue. However, though it is true that the summary dismissal of appeal does not amount to dismissal on the basis of merits; yet it seems a lot of interpretations will arise out of it and the issue will be on fire once again…

*****

S Sivakumar on 02 January, 2010 wrote:

I and my colleagues from my office have been regularly reading your articles and inputs, carried in TIOL as well as in your excellent site. Your website is very well maintained and I am happy to see that, Datey Sir, whom all of us admire, has also responded to your articles.

Rebecca Andrews on 02 January, 2010 wrote:

Excellent step. Let us go a step further by making it more interactive. Post queries by readers and let other readers respond to such queries also. Announce best question of the week / month and similarly best answer. Whosoever wins the contest, display his brief CV on your group for a week.

V.S. Datey on 21 December, 2009 wrote:

Your conclusion is correct that dismissal of SLP without deciding issue on merits is not a binding precedent. DISMISSAL OF SLP AT ADMISSION STAGE IS NOT A BINDING PRECEDENT - Dismissal of SLP in limine at admission stage is not a binding precedent - Sun Export Corpn v. CC 93 ELT 641 = 1997(6) SCC 564 = 1998 AIR SCW 2621 = AIR 1997 SC 2658 = 111 STC 69 (SC 3 member bench) * CC v. Elephanta Oil 2003 (152) ELT 257 = 2003 AIR SCW 792 * Workmen of Cochin Port Trust v. Board of Trustees (1978) 3 SCC 119 (SC 3 member bench) * Y Satyanarayan Reddy v. Mandal Revenue Officer (2009) 9 SCC 447. Rejecting a SLP at threshold without detailed reasons therefor, does not constitute any declaration of law by Supreme Court or constitute a binding precedent – UOI v. Jaipal Singh 2003 AIR SCW 6635. In State of Manipur v. Thingujam Brojen Meetei 1996(9) SCC 29 = AIR 1996 SC 2124, Apex Court, after referring to earlier judgments, held - 'Dismissal of special leave petition by a non-speaking order which does not contain reasons for dismissal does not amount to acceptance of correctness of the decision sought to be appealed against. The effect of such non-speaking order without anything more only means that this Court has decided only that it is not a fit case where the special leave petition should not be granted. Such an order does not constitute law laid down by this Court for the purpose of Article 141 of the Constitution - same view in Supreme Court Employees Welfare Assn v. UOI 1989(4) SCC 187 = AIR 1990 SC 334 * P Nallammal v. State 1999 AIR SCW 2725 = (1999) 6 SCC 559 = AIR 1999 SC 2556 * Kunhyammed v. State of Kerela 2000 AIR SCW 2608 = 129 ELT 11 = 2000(6) SCC 359 = 113 Taxman 470 = AIR 2000 SC 2587 = 119 STC 505 = 245 ITR 360 (SC 3 member bench) * Asst Engineer (Civil) v. CCE (2008) 232 ELT 628 (CESTAT 3 member bench). For a declaration of law, there should be a speech express or necessary implied. – S Shanmugavel Nadar v. State of Tamil Nadu 2002 AIR SCW 4076 = 2002(8) SCC 361 = 132 STC 284 = AIR 2002 SC 3484. In this case, it was held that dismissal of appeal by SC on technical grounds without adjudication on merits is not a binding precedent.

Rishabh Sancheti on 21 December, 2009 wrote:

The article is highly informative, and condenses well the existing law. In this regard, there is already a contrary judgment of the Rajasthan High Court itself on the same issue, which was rendered at the admission stage itself, by Majmudar and Maheshwari, JJ. wherein the appeal of the assessee was dismissed on the same question. Curiously, this previous judgment was not referred in the cited judgment of Hindustan Zinc, which may render it per-incuriam. The cited case of Hindustan Zinc is presently pending before the Hon'ble Supreme Court (CA No. 141 of 2009), wherein the Court has been pleased to grant leave, and a lot of matters on the same issue, filed by both sides, have been clubbed together. (in the main appeal no. 2443 of 2007, viz. Prism Cement Limited v. CCE, Bhopal)

Apurva Sharma on 18 December, 2009 wrote:

Good and educative and useful. As per article ,it seems that the issue is not with reference to Welding Elecrodes per se but any material used for repairs and maintenance of the machinery.Moreover,the twist brought about by sail decision is more on account of interpretaion of procedural aspect of dismissal of rejection of SLP and no fresh ground about the rejection or acceptance of input credit has arisen.The issue involved is larger to all reapairs and mantenance material and not restricted to welding electrodes.awaiting for such articles. Apurva sharma

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Welding Electrodes-Issue on Fire Once Again

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