2010 (7) TMI 144 - HC - Central Excise

Supreme Court: No CENVAT credit for fuel used in manufacturing exempted goods

The Supreme Court clarified that under the CENVAT scheme, credit for duty paid on inputs used in exempted final products is not allowed, including fuel ... Cenvat / Modvat Credit – dutiable and exempted goods - credit on furnace oil - The company was availing credit on the whole of furnace oil irrespective of whether it was used in manufacture of dutiable goods or exempt goods. Show cause notice was issued to the company asking them as to why the credit should not be denied to them because they were availing credit of the full amount irrespective of the fact whether they were manufacturing exempted goods or dutiable goods as prescribed under Rule 57 I of the Central Excise Rules, 1944. – Held that: - the legal effect of Sub-rule (1) has to be applied to all inputs including fuel-inputs, only exception being non-fuel-inputs, for which one has to maintain separate accounts or in its absence pay 8% /10% of the total price of the exempted final products. Therefore, Sub-rule (1) shall apply in respect of goods used as 'fuel' and on such application, the credit will not be permissible on such quantity of fuel which is used in the manufacture of exempted goods – decision of SC in Commissioner of Central Excise Vs. Gujarat Narmada Fertilizers Co. Ltd. [2009 -TMI - 34349 - SUPREME COURT] followed – decided in favor of revenue Issues:1. Availing credit on input used for manufacturing both dutiable and exempt goods.2. Reversal of modvat credit/pay duty proportionate to fuel used in manufacturing.3. Applicability of CENVAT credit for duty paid on inputs used in exempted final products.Issue 1:The case involved a company engaged in manufacturing Dead Burnt Magnesite and Ramming Mass/Mixes, where Dead Burnt Magnesite was exempt from duty, while Ramming Mass/Mixes attracted Excise Duty. The company availed credit on furnace oil used as fuel for manufacturing both dutiable and exempt goods. Show cause notices were issued for denying credit for availing the full amount of credit irrespective of the goods manufactured. The Assistant Commissioner disallowed the credit, but the Commissioner (Appeals) allowed it based on a Tribunal's judgment. The issue was whether the company should reverse modvat credit/pay duty proportionate to the furnace oil used in manufacturing dutiable goods cleared without duty payment.Issue 2:The Tribunal dismissed the Department's appeal against the Commissioner (Appeals) order, but the Supreme Court in a different case clarified the applicability of CENVAT credit for inputs used in exempted final products. The Supreme Court held that the principle of not allowing CENVAT credit for duty paid on inputs used in exempted final products is inherent in the CENVAT scheme. Sub-rule (1) highlights this principle, covering all inputs, including fuel, while Sub-rule (2) excludes fuel inputs. The legal effect of Sub-rule (1) must be applied to all inputs, including fuel, except non-fuel inputs. The Court found that the company was not entitled to benefit under the relevant provision, leading to setting aside the Tribunal and Commissioner (Appeals) orders, restoring the Assistant Commissioner's order.Issue 3:The Court clarified that the company would not be liable for penalty or interest as it was not proposed in the show cause notice, and the previous order did not cover this aspect. This decision was in line with the Supreme Court's judgment indicating that penalty and interest would not be imposed when conflicting decisions by different CESTAT benches exist. Therefore, the company was not required to pay penalty or interest based on the circumstances.In conclusion, the judgment addressed the issues of availing credit on inputs for manufacturing both dutiable and exempt goods, reversal of modvat credit/pay duty for fuel used in manufacturing, and the applicability of CENVAT credit for inputs used in exempted final products. The Supreme Court's clarification led to setting aside previous decisions and relieving the company from penalty or interest payment.