CENVAT credit cannot be denied for inter-unit stock transfers where nil-rated intermediates are used to make dutiable final goods.

CENVAT credit could not be denied on a rigid factory-by-factory basis where a nil-rated intermediate product was transferred between units of the same manufacturer for further manufacture of dutiable final goods. The court treated the movement as a stock transfer, not a sale, because the units were under common ownership and no third-party sale or consideration was shown. It also held that the intermediate product did not become the final product merely because it left one unit, and that the fuel input credit could not be refused when the final goods were dutiable. The assessee's credit entitlement was restored.

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Issues: (i) Whether the nil-rated intermediate product cleared from one unit of the same manufacturer ceased to be an intermediate product and became the final product for CENVAT credit purposes; (ii) Whether its movement from one unit to another was a stock transfer and not a sale; (iii) Whether CENVAT credit on fuel used in one unit could be denied merely because the dutiable final products were manufactured in another unit of the same manufacturer.

Issue (i): Whether the nil-rated intermediate product cleared from one unit of the same manufacturer ceased to be an intermediate product and became the final product for CENVAT credit purposes.

Analysis: The scheme of credit was held to operate on the basis of the real final product and the avoidance of cascading. The intermediate product, though nil-rated and moved out of the Salem unit, was used only for further manufacture of dutiable goods at the Belpahar unit. On that footing, the intermediate product did not become the final product merely because it was cleared from one unit.

Conclusion: The nil-rated product was an intermediate product, and the dutiable goods manufactured after its use were the relevant final products. The finding was in favour of the assessee.

Issue (ii): Whether its movement from one unit to another was a stock transfer and not a sale.

Analysis: The transfer was between units of the same manufacturer, without consideration and without any third-party sale element. The common ownership and common accounts supported the character of a stock transfer. The department did not establish any sale transaction.

Conclusion: The movement was held to be a stock transfer and not a sale. The finding was in favour of the assessee.

Issue (iii): Whether CENVAT credit on fuel used in one unit could be denied merely because the dutiable final products were manufactured in another unit of the same manufacturer.

Analysis: Rule 57AD and Rule 6 were construed as denying credit only where exempted final goods were involved, while the fuel exception could not be used to create an absolute bar. The definition of input under Rule 57AA(d) was interpreted liberally so as not to defeat the credit scheme by a rigid factory-by-factory approach. Since the final goods were dutiable and the units belonged to the same manufacturer, the physical separation of units did not justify denial of credit.

Conclusion: CENVAT credit on furnace oil could not be denied on the ground that the intermediate product was manufactured in one unit and the dutiable final products in another. The finding was in favour of the assessee.

Final Conclusion: The appeal succeeded, the Tribunal's order denying credit was set aside, and the assessee's entitlement to CENVAT credit on the fuel was restored because the credit scheme could not be defeated by treating a stock transfer between units of the same manufacturer as the final taxable event.

Ratio Decidendi: Where an intermediate nil-rated product is transferred between units of the same manufacturer for further manufacture of dutiable final goods, CENVAT credit on fuel used in its manufacture cannot be denied merely because the final manufacture occurs in another unit, provided the transaction is a stock transfer and the final goods are dutiable.

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