CENVAT credit on furnace oil used as fuel for steam generation was allowed; 8% demand on exempted goods value failed.

CENVAT credit on residual furnace oil used as fuel to generate steam for manufacturing both dutiable and exempted goods was held allowable. Rule 6 of the Cenvat Credit Rules, 2001 bars credit only for inputs used in exempted goods, and the Board circulars invoked by the Revenue were confined by later clarification to the pre-2002 regime. The 8% payment mechanism under Rule 57AD(2)(b) applied to modvatable inputs used in both dutiable and exempted final products, but not to inputs used as fuel. The demand was therefore unsustainable and the assessee could retain the credit.

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Issues: Whether CENVAT credit was disallowable, or an amount equal to 8% of the value of exempted goods became payable, in respect of residual furnace oil used as fuel for generation of steam used in the manufacture of dutiable and exempted goods.

Analysis: Rule 6 of the Cenvat Credit Rules, 2001 bars credit only in respect of the quantity of inputs used in the manufacture of exempted goods. The Board circulars relied upon by the Revenue dealt with situations where separate accounts were not maintained, but the later clarification limited the earlier circular to the period prior to the Cenvat Credit Rules, 2002. Rule 57AD(2)(b) contemplated payment of 8% where modvatable inputs were used for both dutiable and exempted final products, but its scope excluded inputs used as fuel. Since residual furnace oil was used as fuel for generating steam, the demand based on 8% of exempted value was not sustainable.

Conclusion: The demand was not sustainable and the assessee was entitled to retain the credit. The appeals were rejected.

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