2019 (12) TMI 430 - SC - Central Excise

Supreme Court clarifies CENVAT credit rules on exempted final products.

The Supreme Court concluded that there was no conflict between previous judgments regarding entitlement to CENVAT credit on duty-paid Low Sulphur Heavy ... CENVAT Credit - input - fuel - Restriction / Reversal of credit under rule 6 - Scope and interpretation of rule 6(1) and rule 6(2) - Low Sulphur Heavy Stock - case of assessee is that they are entitled to claim CENVAT credit on the input, that is, LSHS even though fertilizer is exempt from excise duty - HELD THAT:- When Rule 6(1) says that the CENVAT Credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, it relies upon the definition of “inputs” contained in these Rules which certainly include LSHS and steam and electricity that are produced in the manufacturing process utilizing LSHS. The exception that is contained in sub-rule (2) refers to all inputs except inputs intended to be used as fuel which then results in the manufacture of final products which are both chargeable to duty as well as exempted goods. What is clear is that the exception to sub-rule (1) which is contained in sub-rule (2) itself contains an exception, namely, inputs intended to be used as fuel. This being the case, the moment it is found that inputs are intended to be used as fuel, such inputs go outside the ken of sub-rule (2) of Rule 6. When this happens, the exception contained in sub-rule (2) does not come into effect at all as a result of which sub-rule (1) must be applied on its own terms. Even after independently applying our minds to Rule 6 as it stood, the interpretation of this Court contained in CCE v. Gujarat Narmada Fertilizers Co. Ltd., [2009 (8) TMI 15 - SUPREME COURT] is correct. Appeal allowed - decided in favor of revenue. Issues Involved:1. Entitlement to CENVAT credit on duty-paid Low Sulphur Heavy Stock (LSHS) used as an input in the manufacture of exempted fertilizer.2. Conflict between the decisions in GSFCL and Gujarat Narmada regarding MODVAT and CENVAT credit rules.3. Interpretation of Rule 6(1) and (2) of the CENVAT Credit Rules, 2002.4. Applicability of MODVAT Rules versus CENVAT Credit Rules.Issue-Wise Detailed Analysis:1. Entitlement to CENVAT Credit on Duty-Paid LSHS:The core issue was whether an assessee is entitled to claim CENVAT credit on duty-paid LSHS used as fuel input for generating steam, which in turn generates electricity for manufacturing fertilizer exempt from excise duty. The Revenue disputed this entitlement, leading to show-cause notices and adverse orders from the Commissioner of Central Excise & Customs, Vadodara-II, demanding recovery of wrongly availed CENVAT credit, interest, and penalties.2. Conflict Between GSFCL and Gujarat Narmada:The Division Bench identified an apparent conflict between the decisions in GSFCL and Gujarat Narmada. GSFCL allowed MODVAT credit on LSHS used in the manufacture of exempt fertilizer under the Central Excise Rules, 1944. In contrast, Gujarat Narmada, under the CENVAT Credit Rules, 2002, was more apposite but conflicted with the general principle laid down in GSFCL. Consequently, the matter was referred to a larger Bench to resolve this conflict.3. Interpretation of Rule 6(1) and (2) of the CENVAT Credit Rules, 2002:The Supreme Court analyzed Rule 6(1) and (2) of the CENVAT Credit Rules, 2002. Rule 6(1) states that CENVAT credit shall not be allowed on inputs used in the manufacture of exempted goods. Rule 6(2) provides an exception for inputs intended to be used as fuel, which are excluded from maintaining separate accounts for dutiable and exempted goods. The Court held that sub-rule (1) is plenary and applies to all inputs, including fuel, whereas sub-rule (2) covers non-fuel inputs. Therefore, the exclusion of fuel inputs from sub-rule (2) does not imply automatic entitlement to CENVAT credit under sub-rule (1).4. Applicability of MODVAT Rules versus CENVAT Credit Rules:The Court distinguished between the MODVAT Rules and the CENVAT Credit Rules. The MODVAT Rules, as interpreted in earlier cases like Ballarpur Industries Ltd. and Raymond Ltd., were different from the CENVAT Credit Rules. The Court emphasized that the principle under the CENVAT scheme is that CENVAT credit for duty paid on inputs used in the manufacture of exempted final products is not allowable. This principle is reflected in Rule 6, and inputs intended to be used as fuel fall outside the exception in sub-rule (2), thus applying sub-rule (1) on its own terms.Judgment:The Supreme Court concluded that there was no conflict between the earlier judgment in Commissioner of Central Excise, Vadodara vs. Gujarat State Fertilizers and Chemicals Ltd. and the judgment in Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd. The interpretation of Rule 6 in the latter judgment was deemed correct. Consequently, the appeals were allowed, setting aside the order dated 10.04.2008, except for specific remanded matters. Special Leave Petition (C) No. 9101 of 2014 was disposed of in light of this judgment.