2018 (12) TMI 497 - AT - Central Excise

Tribunal allows appeal, interpreting electricity as excisable goods, and exempts by-products from liability.

The Tribunal set aside the order under challenge, allowing the appellant's appeal. The judgment emphasized compliance with Rule 6(3A) of the Cenvat Credit ... CENVAT Credit - input/input services used in dutiable and exempted excisable goods - non-maintenance of separate records - Rule 6 (3A) of CCR, 2004 - Held that:- The appellants have exercised the option of applicability of Rule 6 (3A) of CCR, 2004 and due intimation of the same was given to the Department vide a letter dated 01.04.2014. This option was exercised because the appellant admittedly was not maintaining a separate accounts for the receipt, consumption and inventory of inputs used - it is apparent that sub-clause (a) of sub-rule (3A) has been complied with by the appellant and that the appellant had been making the payment in accordance of sub-rule 3A (b) (iii). CENVAT Credit - sale of electricity generated by the appellant to the other customers against monetary consideration - demand of reversal of credit on the ground that electricity is an exempted commodity - Held that:- That is the electricity is held to be an excisable goods. Once it is held as excisable, denial of cenvat credit there upon is contradictory to the legislative intent. The findings are therefore, liable to be set aside - credit allowed. CENVAT Credit - quantity of input as is used in or in relation to the manufacture of exempted goods - waste/by-product - Held that:- Iron fills as are emerging as a by-product but an inevitable waste due to being segregated during the manufacture of the final product, the appellant is not liable to be vested with any liability on account of Rules 6 (3) (b) of CCR, 2004 - demand set aside. Appeal allowed - decided in favor of appellant. ISSUES PRESENTED AND CONSIDERED 1. Whether the manufacturer was entitled to avail and utilise CENVAT credit on inputs and input services used for generation of electricity which was partly sold outside the factory gate for monetary consideration, having exercised the option under Rule 6(3A) of the Cenvat Credit Rules, 2004 and having given the requisite intimation. 2. Whether electricity generated within the factory premises, under the same title and during the process of manufacture of excisable goods, is an excisable good for purposes of CENVAT credit, thereby precluding denial of credit on that ground. 3. Whether iron fines (or similar material) emerging as an inevitable waste/by-product during manufacture are liable to attract reversal/payment obligations under Rule 6(2)/6(3)(b) of the Cenvat Credit Rules, 2004 when common inputs/input services are used for dutiable and exempted products. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to exercise option under Rule 6(3A) and compliance with provisional payment procedure Legal framework: Rule 6(2) requires maintenance of separate accounts/inventory where common inputs/input services are used for both dutiable and exempted goods/services; Rule 6(3) provides alternative options where separate accounts are not maintained; Rule 6(3A) prescribes the procedure and monthly provisional payment formulas when option under Rule 6(3)(ii) is exercised, including written intimation particulars and monthly provisional calculations (sub-clauses (b)(i)-(iii)). Precedent Treatment: The Tribunal accepted applicability of Rule 6(3A) procedure where separate accounts are not maintained; no contrary higher court precedent was applied to displace the statutory option. Interpretation and reasoning: The Court found that the admitted facts showed non-maintenance of separate accounts, that the appellant had given intimation in the prescribed format (compliance with sub-rule (3A)(a)), and that provisional payments were being made in accordance with sub-rule (3A)(b)(iii). The Court therefore treated the statutory option and its procedure as properly invoked and complied with. Ratio vs. Obiter: Ratio - Where a manufacturer does not maintain separate accounts as required by Rule 6(2), exercise of the option under Rule 6(3)(ii) and compliance with Rule 6(3A) (including intimation and provisional payments) entitle the manufacturer to follow the statutory provisional payment mechanism instead of being placed in breach for non-maintenance. Conclusion: The appellant validly exercised the Rule 6(3A) option and complied with its procedural requirements; denial of credit on that basis was not sustainable. Issue 2 - Classification of electricity generated on premises as excisable good and effect on CENVAT credit Legal framework: Central Excise/Customs tariff and CENVAT regime treat certain goods as excisable; availability of CENVAT credit depends on whether the output is dutiable/excisable or exempt (and on applicable Rules 6(2)/6(3)/6(3A) where mixed use occurs). Precedent Treatment: The Commissioner (Appeals) and this Tribunal treated electricity generated within the factory premises and under the same title as falling within the relevant tariff heading for 'electricity' and therefore as excisable goods; the departmental contention that electricity was an exempt commodity was rejected on that basis. Interpretation and reasoning: The Tribunal held that electricity generated within the same premises and under the same title as other manufactured excisable goods is itself excisable. Once electricity is held to be excisable, denial of CENVAT credit on inputs/input services attributable to its generation is inconsistent with the statutory scheme and legislative intent behind CENVAT. Ratio vs. Obiter: Ratio - Electricity generated within factory premises under same title as manufactured excisable goods is an excisable good; consequently, CENVAT credit relating to inputs/input services used for such electricity cannot be denied on the ground that electricity is an exempted commodity. Conclusion: The departmental denial of CENVAT credit on the ground that electricity was an exempted commodity was unsustainable because the electricity in question was excisable; the finding to the contrary was set aside. Issue 3 - Treatment of iron fines/by-product as inevitable waste and applicability of Rule 6(2)/6(3)(b) Legal framework: Rule 6(2) and Rule 6(3)(b) apply when a manufacturer consciously manufactures both dutiable and exempted final products using common inputs/input services and either maintains separate accounts or, failing that, pays a prescribed proportion of value of exempted goods; the Rules aim to prevent inappropriate credit passthrough where mixed supplies exist. Precedent Treatment: The Tribunal relied on the Apex Court decision holding that unavoidable waste/by-products which emerge incidentally in the manufacturing process cannot be equated with consciously manufactured exempted products for the purpose of Rule 6(2)/6(3)(b). The Tribunal also relied on its own earlier decision recognizing iron ore fines as unavoidable waste where compliance with Rule 6(2) is impossible. Interpretation and reasoning: The Court distinguished situations where a manufacturer consciously manufactures two products (one exempt) from situations where an exempted product or material merely emerges as an inevitable waste or by-product in the manufacturing process. For the latter, the statutory machinery of Rule 6(2) (separate accounting) and the reversal/payment requirement of Rule 6(3)(b) are inapplicable because the conditions to trigger those provisions (conscious manufacture of an exempt final product using common inputs) are absent and compliance with Rule 6(2) would be impossible. Ratio vs. Obiter: Ratio - Inevitable waste or by-product that emerges incidentally from manufacture (and is not a consciously manufactured exempt final product) does not attract liabilities under Rule 6(2) or Rule 6(3)(b); CENVAT credit need not be reversed on that account. This principle was applied to iron fines in the facts before the Court. Conclusion: Iron fines/inevitable waste arising during manufacture are not subject to liability under Rule 6(3)(b); the Commissioner (Appeals) findings to the contrary were set aside. Cross-References and Overall Conclusion All issues were considered together: the Court treated the exercise and compliance with Rule 6(3A) as effective, held the electricity to be excisable (nullifying the Department's ground for denial of credit), and held that inevitable by-products (iron fines) do not invoke Rule 6(2)/6(3)(b) obligations. On these bases the impugned order denying credit and confirming demand was set aside and the appeal allowed.