2023 (9) TMI 411 - HC - Central Excise

Court dismisses appeal on Cenvat Credit Rules applicability and LPG classification

THE PRINCIPAL COMMISSIONER, CENTRAL GST AND CENTRAL EXCISE COMMISSIONERATE Versus M/s. RELIANCE INDUSTRIES LTD.

The Court dismissed the appeal as no substantial question of law arose regarding the applicability of Rule 6(1) and 6(2) of the Cenvat Credit Rules, 2002, ... Refund claim - payment of amount equivalent to the CENVATE credit attributable to inputs and input services used in relation to the manufacture of exempted clearance of petroleum product namely Liquefied Petroleum Gas (LPG) - HELD THAT:- The Co-ordinate Bench of this Court in THE PRINCIPAL COMMISSIONER, CENTRAL GST AND CENTRAL EXCISE VERSUS M/S RELIANCE INDUSTRIES LTD. JAMNAGAR [2023 (8) TMI 121 - GUJARAT HIGH COURT] while dismissing the Tax Appeal held that no question of law much less any substantial question of law can be said to be arising. Appeal stands dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether liquefied petroleum gas (LPG) arising during a manufacturing process is a 'by-product' or an inevitable part of the chemical reaction for purposes of attribution of input CENVAT credit under the Cenvat Credit Rules (Rules 6(1) and 6(2)). 2. Whether, where the quantity of an input necessary for producing a dutiable final product cannot be reduced so as to prevent emergence of another product, the entire input must be attributed to the dutiable final product for credit purposes. 3. Whether Rules 6(1) and 6(2) of the Cenvat Credit Rules require maintenance of separate accounts or apportionment of input credit when the emergence of an exempt or non-excisable product is inevitable and not deliberately caused. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of LPG as by-product versus inevitable product of the manufacturing process Legal framework: The Cenvat Credit Rules, particularly Rules 6(1) and 6(2), and relevant exemption notifications and principles governing attribution of inputs where multiple products (dutiable and exempt/non-excisable) arise from the same input. Precedent treatment: The Court relied on the reasoning in higher court authorities which held that where a product (e.g., methanol in the cited precedents) arises necessarily from a chemical reaction and cannot be prevented by using less of the input, that emergent product does not extinguish the entitlement to credit for the input as attributable to the dutiable product. That line of authority has been followed by the Court and applied to analogous situations. Interpretation and reasoning: The Court observed that whether LPG is labelled a 'by-product' is rendered academic where the production technology makes the emergence of LPG inevitable and the dutiable final product could not be manufactured using a lesser quantity of the common input. In such situations the entire input consumed in producing the dutiable product must be treated as having been used for that product; the incidental emergence of another product does not compel separate attribution or denial of credit. Ratio vs. Obiter: The holding that classification of the emergent substance as 'by-product' is academic when emergence is inevitable and input consumption is integral to producing the dutiable product is treated as ratio applicable to claims of input attribution under the Rules in such factual contexts. Conclusions: The Court concluded that the question whether LPG is a by-product need not be decided because, on the accepted legal principle, if the dutiable product could not have been manufactured using a lesser quantity of inputs, the entire input is attributable to the dutiable product and Rules 6(1)/(2) do not operate to deny credit. Issue 2 - Applicability of Rules 6(1) and 6(2) of the Cenvat Credit Rules where an exempt/non-excisable product arises inevitably Legal framework: Rules 6(1) and 6(2) govern admissibility of CENVAT credit on inputs used in manufacture of dutiable goods and the obligation to maintain separate accounts where common inputs are used to manufacture both dutiable and exempt goods. Precedent treatment: The Court examined and followed earlier decisions which held that Rules 6(1) and 6(2) are inapplicable where the manufacturing process makes the emergence of the secondary (exempt/non-excisable) product inevitable and the input could not be reduced without preventing manufacture of the dutiable final product. The Court also relied on authority to the effect that the exemption regime and the interpretation of notifications must account for inputs that inherently give rise to other substances as part of the chemical reaction. Interpretation and reasoning: Applying the principle that a manufacturer cannot be required to maintain separate accounts or apportion credit where no part of the input is specifically used to produce the exempt product, the Court reasoned that Rules 6(1) and 6(2) only come into play where there is deliberate or separable use of input for the exempt product. Where technology dictates that the entire input is necessary for the dutiable product and the exempt product arises incidentally/inevitably, sub-rules do not operate to deny credit or require payment of a proportionate amount. Ratio vs. Obiter: The Court's statement that Rules 6(1) and 6(2) do not apply in circumstances where the exempt product inevitably arises and no input is specifically used for the exempt product is ratio as applied to entitlement to CENVAT credit in such factual matrices. Conclusions: The Court concluded that, on the accepted legal position, the obligation to maintain separate accounts and apportion input credit under Rule 6(2) does not arise where the entire input is necessary for the manufacture of the dutiable product and the exempt product arises inevitably; thus the challenge alleging misapplication of Rules 6(1)/(2) failed. Issue 3 - Preclusive effect of binding decisions and whether any substantial question of law remains Legal framework: Doctrine of stare decisis and the binding effect of coordinate bench and higher court decisions on identical or nearly identical substantial questions of law. Precedent treatment: The Court treated prior Division Bench reasoning and the Supreme Court authorities (on unavoidable emergence of secondary products and attribution of inputs) as authoritative and controlling on the present questions. Interpretation and reasoning: The Court observed that the substantial questions of law framed in the present matter were identical or nearly identical to those already considered and answered by a co-ordinate Division Bench and consistent with the higher court precedents. Given the appellant's inability to distinguish or displace that prior reasoning, no fresh substantial question of law arose necessitating further adjudication. Ratio vs. Obiter: The conclusion that no substantial question of law remains because the point has been considered and decided is a dispositive ratio point as to the scope of further judicial review in present circumstances. Conclusions: The Court held that the proposed substantial questions of law had already been considered, decided and answered; no other question arose. Consequently, the appeal was dismissed summarily as meritless.