2009 (8) TMI 15 - SC - Central Excise

Supreme Court clarifies CENVAT credit rules on fuel for exempted goods

Commnr. of Central Excise Versus M/s. Gujarat Narmada Fertilizers Co. Ltd.

The Supreme Court held that CENVAT credit is not permissible on the quantity of fuel used in the manufacture of exempted goods, including fertilizers, ... Cenvat Credit on inputs used in manufacture of exempted final products - CENVAT credit for duty paid on inputs used in the manufacture of exempted final products is not allowable - Sub-rule (1) 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 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) - 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 Issues Involved:1. Whether the assessee was required to reverse the CENVAT credit in terms of Rule 6(1) of Cenvat Credit Rules, 2002 on the quantity of LSHS used as fuel for producing steam and electricity, which was used in the manufacture of exempted goods (fertilizers).2. Interpretation of Rule 6(1) and Rule 6(2) of the CENVAT Credit Rules, 2002.3. Reversal of proportionate CENVAT credit for electricity wheeled out/cleared to the Grid and the Township.Issue-wise Detailed Analysis:1. Reversal of CENVAT Credit on LSHS Used as Fuel:The primary issue was whether the assessee was required to reverse the CENVAT credit on LSHS used as fuel for producing steam and electricity, which was used in the manufacture of exempted goods (fertilizers). The Commissioner had disallowed the credit based on the interpretation of Rule 6 of the 2002 Rules, stating that since fertilizers were exempted goods, credit on LSHS, even though used as fuel, was not allowable. The CESTAT, however, held that credit was admissible on LSHS used as fuel, following the Gujarat High Court's judgment in Commnr. of Central Excise and Customs v. M/s. Gujarat Narmada Valley, which stated that inputs intended to be used as fuel were an exception in Rule 6(2), and thus, the necessity of maintaining separate accounts or denial of credit could not be insisted upon.2. Interpretation of Rule 6(1) and Rule 6(2):The Supreme Court analyzed Rule 6(1) and Rule 6(2) of the CENVAT Credit Rules, 2002. Rule 6(1) is a general rule stating that CENVAT credit is not allowed on inputs used in the manufacture of exempted goods. Rule 6(2) imposes an obligation on the manufacturer to maintain separate accounts for inputs used in dutiable and exempted goods but excludes inputs intended to be used as fuel. The Court clarified that sub-rule (1) is plenary and covers all inputs, including fuel. Sub-rule (2) refers to non-fuel inputs, and the exclusion of fuel-inputs from sub-rule (2) does not imply that sub-rule (1) is inapplicable to fuel-inputs. Thus, the legal effect of sub-rule (1) applies to all inputs, including fuel, meaning credit is not permissible on such quantity of fuel used in the manufacture of exempted goods.3. Reversal of Proportionate CENVAT Credit for Electricity Wheeled Out/Cleared to the Grid and Township:In Civil Appeal No.1862 of 2006, apart from the interpretation of Rule 6(1) and Rule 6(2), the issue was whether the Department was right in reversing proportionate CENVAT credit for electricity wheeled out/cleared to the Grid and the Township. The Court referred to its judgment in M/s. Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi-III, which would apply to this issue.Findings:The Supreme Court found merit in the Department's appeals, stating that sub-rule (1) is plenary and applies to all inputs, including fuel. Therefore, CENVAT credit is not permissible on such quantity of fuel used in the manufacture of exempted goods. The Court noted that conflicting decisions by various CESTAT Benches arose due to poorly drafted rules. Consequently, no penalty was levied, and the matters were remitted to the Adjudicating Authority to determine the amount of duty payable without penalty based on the reversal of credit for inputs used in exempted final products and excess electricity wheeled out to the Grid and Township.Conclusion:The civil appeals filed by the Department were allowed, and the matters were remitted to the Adjudicating Authority to decide the amount of duty payable without penalty.