2009 (8) TMI 15 - SC - Central Excise

Rule 6(1) covers all inputs including fuel while Rule 6(2) applies only to non-fuel inputs; fuel credit reversed

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

SC held that sub-rule (1) of Rule 6 applies to all inputs including fuel, while sub-rule (2) pertains only to non-fuel inputs and does not negate sub-rule ... Exclusion of fuel-inputs from the purview of sub- rule (2) of Rule 6 - 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 Low Sulphur Heavy Stock (LSHS) which was used as 'fuel' for producing steam and electricity, which, in turn, was used in or in relation to the manufacture of exempted goods, namely, fertilizers, during the disputed period(s) - HELD THAT:- 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). As stated, 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 view, the aspect has not been properly appreciated by the Gujarat High Court in the above case of M/s. Gujarat Narmada Valley [2006 (12) TMI 9 - CESTAT MUMBAI-LB]. Thus, 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. The civil appeals filed by the Department are allowed. 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.