Commissioner Of Central Excise vs M/S.Gujrat Narmada V.Fertilizers ...

Commnr. of Central Excise ... Appellant (s)

Versus

M/s. Gujarat Narmada Fertilizers Co. Ltd. ... Respondent(s)

WITH

Civil Appeal No.1862 of 2006

Civil Appeal Nos. 5553 of 2009 - (Arising out of S.L.P. (C) No.4663 of 2009)

Civil Appeal No.4169 of 2008

JUDGMENT

S. H. KAPADIA, J.

1. Leave granted.

2. The short question which arises for determination in this

batch of civil appeals is : whether the assessee(s) was required to

reverse the CENVAT credit in terms of Rule 6(1) of Cenvat Credit

Rules, 2002 on the quantity of LSHS which was used as "fuel" for

producing steam and electricity, which, in turn, was used in or in 2

relation to the manufacture of exempted goods, namely, fertilizers,

during the disputed period(s).

3. For the sake of convenience we may refer to the facts in Civil

Appeal No.1308 of 2008 - Commnr. of Central Excise v. M/s.

Gujarat Narmada Fertilisers Co. Ltd.

FACTS

4. The assessee is a manufacturer of excisable goods such as

fertilizers, methanol, formic acid, nitric acid, aceptic acid, etc. out

of which fertilizers were exempt from central excise duty under

Notification No.6/2000-CE, dated 1.3.2002. The respondent

functioned under CENVAT Credit Rules, 2002 ("2002 Rules", for

short) during the relevant period. There is no dispute that the

entire quantity of Low Sulphur Heavy Stock (LSHS) was used as

"fuel" within the respondent's factory for burning in the boiler plant

for producing steam. There is no dispute that the entire steam was

used within the factory directly in or in relation to manufacture of

final products or for production of electricity which was captively

used in the manufacture of final products. The credit, however,

was disallowed due to interpretation of Rule 6 of the 2002 Rules by 3

the Commissioner who took the view that since fertilizers were

exempted goods, credit on LSHS, even though used as "fuel" within

the factory, was not allowable. Accordingly, one show cause notice

was issued on 8.3.04 seeking to disallow CENVAT credit of

Rs.2,17,61,795/- for the period March 2003 to September 2003.

Vide Order dated 13.7.04, the said show cause notice stood

confirmed by the Commissioner. The second show cause notice

dated 28.7.04 was issued for a different period, namely, October

2003 to March 2004 which was also confirmed by the

Commissioner who disallowed CENVAT credit vide his Order dated

30.8.04. Against the Commissioners' Orders, dated 13.7.04 and

30.8.04, disallowing the said CENVAT credit, the respondent

preferred appeals before CESTAT. The said appeals were referred

to a larger Bench who by the impugned decision dated 27.12.06

held that credit was admissible on LSHS used as "fuel". In passing

the said Order the CESTAT followed the judgment of the Gujarat

High Court in the case of Commnr. of Central Excise and Customs

v. M/s. Gujarat Narmada Valley reported in (2006) 193 ELT 136, in

which it was held that in sub-rule (2) of Rule 6 of the 2002 Rules

an exception stood carved out in case of inputs "intended to be

used as fuel" and in such cases the necessity of maintenance of a 4

separate account or denial of credit cannot be insisted upon.

RELEVANT RULES

5. We hereinbelow reproduce relevant rules of the Central Excise

Rules, 1944 and CENVAT Credit Rules, 2002 which read as follow:

"The Central Excise Rules, 1944 (as it stood on 29.8.2000) "AA. CREDIT OF DUTY PAID ON EXCISABLE GOODS USED AS INPUTS OR CAPITAL GOODS

RULE 57AD. Obligation of manufacturer of dutiable and exempted goods.-

(1) CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

(2)Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:-

(a) if the exempted goods are,-

(i) final products falling under Chapters 50 to 63 of the Schedule to the Central Excise Tariff Act, 1985 ;

(ii) tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40;

(iii) black and white television sets, falling within Chapter 85;

(iv) newsprint, in rolls or sheets, falling within Chapter heading No.48.01,

the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in or in relation to the manufacture of such final products at the time of their clearance from the factory, or

(b) if the exempted goods are other than those described in clause (a) above, the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted 5

final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation.- The amount mentioned in (a) and (b) above shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

(3) No credit of the specified duty shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods (other than final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year).

(4) The provisions of sub- rule (1), sub-rule (2) and sub-rule (3) shall not be applicable in case the exempted goods are either,-

(i) cleared to a unit in a free trade zone; or

(ii) cleared to a hundred per cent. Export-oriented undertaking; or

(iii) cleared to a unit in an Electronic Hardware Technology Park or Software Technology Parks; or

(iv) supplied to the United Nations or an international organization 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 28th August, 1995; or

(v) cleared for export under bond in terms of the provisions of rule 13."

CENVAT Credit Rules, 2002

RULE 6. Obligation of manufacturer of dutiable and exempted goods.-

1. The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

Provided the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12B of the Central Excise Rules, 2002 on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

2. Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in 6

the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

3. The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:-

a. if the exempted goods are-

i. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act;

ii. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;

iii. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer; iv. Omitted.

v. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule; vi. final products falling within Chapters 50 to 63 of the said First Schedule, vii. Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity; viii. Goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the erstwhile Ministry of Finance (Department of Revenue), namely:-

(1) No.70/92-Central Excise, dated the 17th June, 1992, G.S.R.595 (E), dated the 17th June, 1992;

(2) No.62/95-Central Excise, dated the 16th March, 1995, G.S.R.254 (E), dated the 16th March, 1995;

(3) No.63/95-Central Excise, dated the 16th March, 1995, G.S.R.255 (E), dated the 16th March, 1995;

(4) No.64/95-Central Excise, dated the 16th March, 1995, G.S.R.256(E), dated the 16th March, 1995;

the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or 7

b. if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

Explanation II.- If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken. "

6. It may be noted that sub-rules (1) and (2) of Rule 57AD of the

Central Excise Rules, 1944 is pari materia with sub-rules (1) and

(2) of Rule 6 of the CENVAT Credit Rules, 2002.

SUBMISSIONS

7. According to Shri Gourab Banerji, learned Addl. Solicitor

General appearing for the Department, Rule 57AD(1)/Rule 6(1) is a

general bar that CENVAT credit is not admissible on such quantity

of inputs which are used in the manufacture of exempted goods.

According to learned counsel, this bar is consistent with the basic

idea of CENVAT scheme. Learned counsel submitted that on a

bare reading of sub-rule (2) of Rule 6 of the 2002 Rules, it is clear 8

that the said sub-rule imposes an obligation on the manufacturer

when he is manufacturing dutiable and exempted goods to either

maintain separate accounts qua inputs on dutiable and exempted

goods or if he does not choose to do so he has to pay certain

specified amount. In the alternative, learned counsel submitted

that since LSHS was used for generation of electricity or steam it

did not fall in the category of "inputs used as fuel" and

consequently the assessee herein was required to maintain

separate account or pay a certain specified amount under sub-

rules (2) and (3) of Rule 6 of the 2002 Rules.

8. Shri S.K. Bagaria, learned senior counsel appearing on behalf

of the assessee(s), submitted that inputs "intended to be used as

fuel" have been specifically excluded from the obligations under

Rule 6 of the CENVAT Credit Rules, 2002. According to learned

counsel, inputs "intended to be used as fuel" have been specifically

excluded from the requirement of sub-rule (2) by using the

expression "except inputs intended to be used as fuel" and

consequently the obligation of maintaining separate accounts and

taking credit only on inputs intended for use in the manufacture of

dutiable goods is not applicable in respect of inputs "intended to be 9

used as fuel". According to learned counsel, under sub-rule (3) of

Rule 6, a manufacturer opting not to maintain separate accounts

has to follow either of the two conditions mentioned in clauses (a)

and (b) of sub-rule (3) of Rule 6. Clause (a) applies to specified

exempted goods whereas clause (b) applies to exempted goods other

than those mentioned in clause (a). In respect of exempted goods

covered by clause (b), the manufacturer shall pay an amount equal

to 8%/10%, as the case may be, of the total price, excluding taxes,

if any, charged by the manufacturer for sale of such goods.

Therefore, according to learned counsel, sub-rule (3) makes it clear

that it applies only to cases where a manufacturer is required to

maintain separate accounts under sub-rule (2) but opted not to do

so and since in the present case LSHS is used as "fuel", sub-rule

(2), which carves out an exception to goods used as "fuel", is not

applicable, and therefore the assessee(s) was not required to

maintain separate accounts. In other words, according to learned

counsel, inputs "intended to be used as fuel" have been specifically

excluded from the obligation of maintaining separate accounts

under sub-rule (2) and, therefore, in respect of these inputs there is

no question of opting or not opting to maintain separate accounts

under sub-rule (2) and consequently the present case cannot be 1 0 covered by sub-rule (3) which applies only to a manufacturer opting

not to maintain separate account(s).

FINDINGS

9. As can be seen from the submissions, the contention of the

assessee is that exclusion of fuel-inputs from the purview of sub-

rule (2) of Rule 6 would mean that such inputs are also

automatically excluded from sub-rule (1) whereas according to the

Department sub-rule (1) is a general rule which provides, that

except for the circumstances mentioned in sub-rule (2), CENVAT

credit shall not be allowed on such quantity of inputs used in the

manufacture of exempted goods and even though fuel-inputs are

excluded from sub-rule (2), such inputs would still fall under sub-

rule (1).

10. In our view, sub-rule (1) is plenary. It restates a principle,

namely, that CENVAT credit for duty paid on inputs used in the

manufacture of exempted final products is not allowable. This

principle is in-built in the very structure of the CENVAT scheme.

Sub-rule (1), therefore, merely highlights that principle. Sub-rule

(1) covers all inputs, including fuel, whereas sub-rule (2) refers to

non-fuel-inputs. Sub-rule (2) covers a situation where common 1 1 cenvatted inputs are used in or in relation to manufacture of

dutiable final product and exempted final product but the fuel-

input is excluded from that sub-rule. However, exclusion of fuel-

input vis-`-vis non-fuel-input would still fall in sub-rule (1). As

stated above, sub-rule (1) is plenary, hence, it cannot be said that

because sub-rule (2) is inapplicable to fuel-input(s), CENVAT credit

is automatically available to such inputs even if they are used in

the manufacture of exempted goods. The cumulative reading of

sub-rules (1) and (2) makes it abundantly clear that the

circumstances specified in sub-rule (2), which inter alia requires

separate accounting of inputs, are not applicable to the fuel-

input(s). However, the said sub-rule (2) nowhere says that the legal

effect of sub-rule (1) will stand terminated in respect of fuel-inputs

which do not fall in sub-rule (2). In other words, the legal effect of

sub-rule (1) has to be applied to all inputs including fuel-inputs,

only exception being non-fuel-inputs, for which one has to

maintain separate accounts or in its absence pay 8% /10% of the

total price of the exempted final products. Therefore, sub-rule (1)

shall apply in respect of goods used as "fuel" and on such

application, the credit will not be permissible on such quantity of

fuel which is used in the manufacture of exempted goods. In our 1 2 view, the above aspect has not been properly appreciated by the

Gujarat High Court in the above case of M/s. Gujarat Narmada

Valley reported in (2006) 193 ELT 136 (supra).

11. For the above reasons, we find merit in the Department's civil

appeals.

12. Before concluding, one point needs to be noted. In this batch

of cases there is a civil appeal bearing Civil Appeal No.1862 of

2006 - CCEC, Vadodara v. M/s. Gujarat Narmada Valley which

concerns the period November 2000 to February 2001. In that

matter, apart from interpretation of Rule 6(1) and Rule 6(2), the

question which arises for determination is : whether the

Department was right in reversing proportionate CENVAT credit to

the extent of electricity wheeled out/cleared to the Grid and to the

Township. Therefore, on the question of interpretation of Rule 6(1)

and Rule 6(2), the above reasoning squarely covers the case. On

the question of reversal of CENVAT credit, to the extent of the

electricity wheeled out/cleared to the Grid and to the Township,

our Judgment delivered today in the case of M/s. Maruti Suzuki 1 3 Ltd. v. Commissioner of Central Excise, Delhi-III [Civil Appeal No.

of 2009 -(arising out of S.L.P. (C) No.3826 of 2009)], would apply.

13. It may be noted that litigation on interpretation of CENVAT

Credit Rules has arisen on account of various conflicting decisions

given by the various Benches of CESTAT, the reason being that the

Rules have not been properly drafted. In the circumstances, we are

of the view that in this batch of cases no penalty is leviable,

however, in order to decide the amount of duty payable by each of

the assessees, the matters are remitted to the Adjudicating

Authority to decide the amount of duty payable without penalty on

reversal of credit to the extent of the input being used in the

manufacture of exempted final products/to the extent of the excess

electricity being wheeled out to the Grid and to the Township.

14. Subject to what is stated above, the civil appeals filed by the

Department are allowed with no order as to costs.

.................................J. (S.H. KAPADIA) 1 4

................................J. (AFTAB ALAM)

New Delhi;

August 17, 2009.