2007 (7) TMI 513 - AT - Central Excise

Tribunal rules on Cenvat Credit: Options under Rule 6 upheld

The Tribunal upheld the appellants' case, ruling that Rule 6 of the Cenvat Credit Rules, 2002 provides two options: maintaining separate accounts or ... Cenvat/Modvat - Common inputs used for both exempted and dutiable final products 1. ISSUES PRESENTED AND CONSIDERED Whether a manufacturer who produces both dutiable and exempted final products using common inputs must maintain separate accounts for inputs under Rule 6(2) of the Cenvat Credit Rules, 2002, or may instead opt under Rule 6(3)(b) to pay 8% of the price of exempted final products after availing Cenvat credit on the entire quantity of inputs. Whether supply of manufactured goods to contractors of a public water supply project (clearance without payment of duty under an exemption notification) constitutes a transaction to which Rule 6(3)(b) is inapplicable because no 'sale' is involved. Whether Revenue can compel a manufacturer to adopt the separate-accounts route under Rule 6(2) when the statutory scheme provides an option to comply under Rule 6(3)(b). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Rule 6(2) versus Rule 6(3)(b): legal framework Rule 6(1) prohibits availment of input duty credit where inputs are used in or in relation to manufacture of exempted final products except as provided by subsequent sub-rules. Rule 6(2) requires maintenance of separate accounts for receipt, consumption and inventory of common inputs where such inputs are used for both dutiable and exempted products, permitting Cenvat credit only on the quantity intended for dutiable goods. Rule 6(3) furnishes alternative compliance where separate accounts are not maintained: (a) payment of Cenvat attributable to certain exempted categories at clearance; (b) for other exempted final products, payment of an amount equal to 8% of the total price (excluding certain taxes) of the exempted goods at the time of clearance. Issue 1 - Precedent treatment The Tribunal has previously interpreted Rule 6 as providing an option to the manufacturer: maintain separate accounts under Rule 6(2) and take credit only for inputs used for dutiable goods, or elect not to maintain separate accounts and pay 8% of the sale price of exempted goods under Rule 6(3)(b). That decision treated Rule 6(3)(b) as a permissive, alternative route rather than a remedial provision limited to cases where account-keeping is impossible. Issue 1 - Interpretation and reasoning The Court examined the text and scheme of Rule 6 and found two distinct, applicable options: (a) maintain separate accounts and restrict credit to inputs for dutiable goods; or (b) forego separate accounts and pay the 8% levy at clearance of exempted goods. The language of Rule 6(3) does not condition option (b) upon incapacity to maintain accounts. Revenue's contention that Rule 6(3)(b) applies only where account maintenance is impossible is inconsistent with the statutory scheme which expressly provides the option. The factual parity with an earlier Tribunal decision (where a manufacturer in similar circumstances had availed Rule 6(3)(b)) reinforces the interpretation that the option is available regardless of practical ability to maintain separate accounts. Issue 1 - Ratio vs. Obiter The holding that a manufacturer may choose between Rule 6(2) and Rule 6(3)(b) (i.e., that Rule 6(3)(b) is a valid elective route even where account maintenance is possible) is ratio decidendi for disputes on interpretation and application of Rule 6. Issue 1 - Conclusion The Court concluded that the manufacturer was entitled to opt for Rule 6(3)(b) and pay 8% of the price of exempted final products after availing Cenvat credit on the entire quantity of inputs, and that doing so complies with the Cenvat Credit Rules; therefore Revenue could not require maintenance of separate accounts under Rule 6(2) in such circumstances. Issue 2 - Whether clearance to Water Supply Project contractors without duty is outside Rule 6(3)(b) because there is no 'sale' Legal framework Rule 6(3)(b) applies to 'exempted final products' and prescribes payment of 8% of the total price of such exempted products at the time of clearance. The definition of 'sale' under the Central Excise Act is relevant to determine whether the transactional form falls within 'price' and 'clearance' concepts for the Rule. Precedent treatment The Tribunal's prior decision dealt with identical commercial arrangements (manufacture on raw material supplied by contractors, clearance without payment of duty to those contractors, and manufacture for others on payment of duty), and accepted the applicability of Rule 6(3)(b) to such clearances. Interpretation and reasoning The Court observed factual similarity to the earlier case where supplies to project contractors were treated as eligible for the 8% option. It rejected Revenue's argument that no sale occurred and that Rule 6(3)(b) therefore could not apply, noting that the statutory scheme addresses 'clearance' and 'price' of exempted goods and that the elements of 'sale' as per the statutory definition were satisfied in the transactions under consideration. The reasoning emphasizes substance of transactions and the explicit availability of the Rule 6(3)(b) option for exempted final products cleared without duty. Ratio vs. Obiter The conclusion that clearances of manufactured goods to project contractors (under an exemption) fall within the ambit of Rule 6(3)(b) where the manufacturer avails credit and elects the 8% payment is part of the ratio addressing applicability of Rule 6(3)(b) to such factual matrices. Conclusion The Court held that the appellants' supplies of pipes to the Water Supply Project contractors, cleared without payment of duty under the exemption, were transactions to which Rule 6(3)(b) could apply and that payment of 8% of the price at clearance was a permissible method of compliance. Issue 3 - Whether Revenue can compel a particular compliance route under Rule 6 Legal framework The rules furnish alternative compliance mechanisms for manufacturers using common inputs for dutiable and exempted products; the discretionary element vested in the manufacturer arises from the textual option in Rule 6(2) and Rule 6(3). Precedent treatment The Tribunal's decision recognized that Revenue cannot force a manufacturer to adopt the separate-accounts route where the manufacturer has chosen the Rule 6(3)(b) option; the Court followed that approach. Interpretation and reasoning The Court emphasized that an option provided by statute cannot be frustrated by Revenue insisting on a particular statutory route. The statutory mechanics of Rule 6 permit a manufacturer to elect compliance under Rule 6(3)(b); therefore Revenue's seizure of documents and insistence on Rule 6(2) was improper in circumstances where the manufacturer had legitimately availed the 8% route. Ratio vs. Obiter The proposition that Revenue cannot compel a manufacturer to maintain separate accounts when the manufacturer elects to comply under Rule 6(3)(b) is ratio decidendi applicable to enforcement of the Cenvat Credit Rules. Conclusion The Court held that Revenue's action in treating the manufacturer as bound to Rule 6(2) and in seizing documents to enforce that view was incorrect; the manufacturer's election to comply under Rule 6(3)(b) was permissible and the impugned demand/order was set aside. Cross-references The Court explicitly relied on the Tribunal's earlier decision in a factually identical context to confirm that Rule 6(3)(b) is an elective, permissible mode of compliance and that Revenue cannot insist on the separate-accounting method of Rule 6(2); the present decision follows and applies that precedent to the facts before it.