R. Jayaraman, Member (T)

1. This is an appeal directed against the order of the Collector (Appeals) bearing No. V-2(72) 2521/87 3454, dated 1-3-1988.

2. Facts of the case for the purpose of disposal of this appeal can be stated as below:

3. The appellants are manufacturers of iron and steel products. They had opted for availing of MODVAT benefit in respect of inputs used in or in relation to the manufacture of finished product and accordingly they filed a declaration as required under Rule 57G of the Central Excise Rules. The department objected to the extension of credit in respect of refractory products, namely Bricks, Blocks and other ceramic materials like ramming mass, refractory mortar. Before denial of the MODVAT credit, a show cause notice was issued to the appellant and after observing principles of natural justice, the Assistant Collector passed an order holding that the aforesaid goods, which are claimed as inputs are not covered by the explanation to the term 'in put' given in Rule 57A of the Central Excise Rules and therefore disallowed the appellants for availing of MODVAT credit in respect of duty paid on these goods. The matter was taken up in appeal before the Collector (Appeals), which also came to be rejected. The present appeal is against the aforesaid order of the Collector (Appeals).

4. Shri T.R. Andhyarujina, the learned senior counsel, appearing on behalf of the appellants referred to the provisions of Rule 57A and also to the Notification issued under the MODVAT scheme showing that these inputs are covered by Notification as also their final products, namely iron and steel. He also pointed out that under Rule 57A the main criterion is that the inputs are to be used in or in relation to manufacture of the finished product. He, therefore, contended that the term 'inputs' has got a wider connotation. It is not merely restricted to raw-materials or components. If the material is used even in relation to manufacture of the finished product, it becomes the input as per the provisions of Rule 57A. He pointed out that the department has objected to the extension of MODVAT benefit in respect of refractory goods, only on the ground that these are used as lining material in the furnace and in other equipments and hence is hit by the explanation provided under Rule 57A relating to the term 'inputs'. Elaborating on this point further, he contended that the allegation of the Department is that refractory is a part of the machinery. He emphatically denied that these refractories can ever be called as part of the machinery. The machinery manufacturers do not produce refractory items. Refractory material gets consumed in the process of manufacture of steel. They also participate in the chemical process and also contribute to the quality of steel making unlike in the case of machinery. Hence it cannot be equated with machinery and thus denied the MOD VAT benefit. He also pointed out that refractory material is to be chosen with reference to type and quality of steel to be produced. It is not merely heat resistance job for protecting the furnace which a refractory material is doing but also it is required to provide chemical reaction for influencing the quality of steel. It also facilitate removal of impurities like phosphorus and sulphur. In view of this, when it participates in chemical process and also gets consumed requiring frequent replacement, it cannot be equated with machinery, which is a permanent equipment for production. Merely because these consumable materials are used for lining the furnace, they cannot be sought to be a part of the machine. These refractory materials cannot also be said to be Capital Goods. On the contrary, these are accounted for in the inventory of stores in the Profit and Loss Account. It is not disputed that refractories is a 'must' for manufacture of steel and it is also an undisputed fact that these get consumed in the process and provides improvement to the quality of steel. Hence