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

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 ... CENVAT credit - inputs intended to be used as fuel - obligation to maintain separate accounts - inputs used in the manufacture of exempted goods - remission / reversal of CENVAT credit and quantification of dutyCENVAT credit - inputs intended to be used as fuel - inputs used in the manufacture of exempted goods - obligation to maintain separate accounts - Whether CENVAT credit was admissible on quantity of LSHS used as fuel where the steam/electricity produced was used in or in relation to manufacture of exempted goods - HELD THAT: - The Court held that sub-rule (1) of Rule 6 (and its pari materia counterpart Rule 57AD(1)) is a plenary provision restating the foundational principle of the CENVAT scheme that credit on inputs used in the manufacture of exempted final products is not allowable. Sub-rule (2) is a carve-out dealing with non-fuel inputs and prescribes separate accounting (or specified payment) where inputs are common to dutiable and exempted manufacture; sub-rule (2) excludes 'inputs intended to be used as fuel' from its accounting obligations but does not extinguish the operation of sub-rule (1) in respect of fuel-inputs. Consequently, exclusion of fuel-inputs from sub-rule (2) does not result in automatic entitlement to credit when such fuel is used in the manufacture of exempted goods. The Court therefore reversed the view that fuel-inputs (LSHS) used to generate steam/electricity for manufacture of exempted fertilizers attract CENVAT credit, holding that sub-rule (1) applies to fuel-inputs used in manufacture of exempted products and credit is not permissible on that quantity. [Paras 2, 9, 10, 11]CENVAT credit on LSHS used as fuel for producing steam/electricity applied in manufacture of exempted fertilizers is not allowable; the exclusion of fuel from sub-rule (2) does not negate the plenary bar in sub-rule (1).Remission / reversal of CENVAT credit and quantification of duty - generation of electricity and wheeling out to the Grid/Township - Determination of amount of duty payable on reversal of credit and reversal to extent of electricity wheeled out/cleared to the Grid and Township - HELD THAT: - The Court observed that, although the legal interpretation given above governs the entitlement to credit, the precise quantification of duty payable on reversal of credit (including the portion attributable to electricity wheeled out or cleared to the Grid and to the Township) requires adjudication. The matters were therefore remitted to the Adjudicating Authority to determine the amount of duty payable on reversal of credit without levy of penalty. The Court also directed that its contemporaneous judgment in the Maruti Suzuki case governs the treatment of electricity wheeled out/cleared, as applicable. [Paras 12, 13]Matters remitted to the Adjudicating Authority for computation of duty payable on reversal of CENVAT credit (including adjustment for electricity wheeled out/cleared to Grid and Township); no penalty to be imposed.Final Conclusion: The Department's appeals are allowed on the interpretation that sub-rule (1) bars CENVAT credit on fuel-inputs used in manufacture of exempted goods; cases are remitted for quantification of duty payable on reversal of credit (including electricity wheeled out/cleared) and no penalty is to be imposed. 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.