CENVAT credit on fuel for exempt manufacture is barred under Rule 6; earlier MODVAT rulings do not control

Rule 6 of the CENVAT Credit Rules, 2002 barred credit on duty-paid LSHS used as fuel to generate steam and electricity for manufacturing exempt fertilizer, because sub-rule (1) controlled input credit for exempt goods and the sub-rule (2) exception applied only to non-fuel inputs used commonly for dutiable and exempt goods. The Supreme Court held that fuel inputs remained outside the exception and that the assessee could not claim CENVAT credit on LSHS in relation to exempt manufacture. Earlier MODVAT and CENVAT authorities were distinguished as they arose under different rules and factual settings, so they did not govern the interpretation of Rule 6. The appeals were allowed and the Tribunal's order was set aside.

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Issues: (i) Whether CENVAT credit was admissible on duty-paid LSHS used as fuel for generating steam and electricity employed in the manufacture of exempt fertilizer under Rule 6 of the CENVAT Credit Rules, 2002; (ii) Whether the earlier MODVAT and CENVAT decisions relied upon by the assessee governed the interpretation of Rule 6 in the present case.

Issue (i): Whether CENVAT credit was admissible on duty-paid LSHS used as fuel for generating steam and electricity employed in the manufacture of exempt fertilizer under Rule 6 of the CENVAT Credit Rules, 2002.

Analysis: Rule 6(1) was treated as the governing and plenary provision, laying down that credit is not available on inputs used in the manufacture of exempted goods. The exception in Rule 6(2) was held to apply only to non-fuel inputs used for both dutiable and exempted goods, and fuel inputs were specifically outside that exception. Accordingly, once LSHS was used as fuel in relation to exempt fertilizer, the credit restriction under Rule 6(1) continued to operate.

Conclusion: CENVAT credit on LSHS used as fuel for the manufacture of exempt fertilizer was not admissible, and the issue was decided against the assessee.

Issue (ii): Whether the earlier MODVAT and CENVAT decisions relied upon by the assessee governed the interpretation of Rule 6 in the present case.

Analysis: The earlier authorities were distinguished on the ground that they construed different rules and different factual settings, including provisions governing MODVAT credit and expressions such as use in relation to manufacture. Those decisions did not control the meaning of Rule 6 of the CENVAT Credit Rules, 2002, and no true conflict existed between them and the later decision holding fuel inputs used for exempt goods to be outside permissible credit.

Conclusion: The earlier decisions did not assist the assessee, and the interpretation adopted against the assessee was upheld.

Final Conclusion: The appeals were allowed, the Tribunal's order was set aside, and the legal position was reaffirmed that fuel inputs used in the manufacture of exempt goods do not qualify for CENVAT credit under Rule 6.

Ratio Decidendi: Under Rule 6 of the CENVAT Credit Rules, 2002, CENVAT credit is unavailable on inputs used in the manufacture of exempt goods, and the fuel-input exclusion in sub-rule (2) does not carve fuel out of the operation of sub-rule (1).

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