TaxTMI 
TaxTMI 
2009 (8) TMI 14
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....ty. Assessee claimed CENVAT credit on "input" in accordance with CENVAT Credit Rules, 2002 (for short, "2002 Rules"). Assessee has installed three gas turbines in their factory for generation of electricity. All the three turbines have capacity to generate electricity of 20 MW each. Till June 2002, assessee was using natural gas as fuel for running the three gas turbines. No excise duty was leviable on natural gas and, therefore, there was no question of availing CENVAT credit on natural gas. During July 2002 to December 2002, assessee started using diesel as fuel to run the three turbines. In view of the said Rules barring availment of credit on diesel, the assessee did not avail any CENVAT Credit on diesel procured by them. From January 2003 onwards, assessee are using naphtha as fuel to run the gas turbines and they are availing CENVAT Credit on naphtha used for generation of electricity in gas turbines. Assessee also uses diesel generating set (DG set) for generation of electricity with the use of diesel for which they had not availed any credit. In their factory, assessee has a common distribution point for electricity generated in turbines as well as DG set and the entire ele....
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....roduct", however, that condition did not apply to goods falling under the inclusive part of the definition of "input". Therefore, once the fuel stood admittedly used in the factory for generation of electricity, it came within the definition of the word "input". Learned counsel next urged that the expression "within the factory of production" did not qualify goods used as fuel. In this connection, it is urged, that, naphtha used as fuel for generation of electricity came under two alternative provisions, namely, "input used as fuel" or "input used for generation of electricity" and, therefore, it was open to the appellant to contend that naphtha used as fuel for generation of electricity stood covered within the expression "goods used as fuel". According to learned counsel, when the case of the appellant stood covered by two alternative provisions it is open to the appellant to contend that he is covered by one of them. It was urged that the expression "within the factory of production" stands attached only to one category of goods in the inclusive part of the definition, namely, "goods used for generation of electricity or steam" and that the said expression "within the factory of....
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....t of duty paid on fuel became undeniable. Learned counsel next contended that under Rule 6(1) when input was used in the manufacture of exempted goods, credit was not admissible. However, Rule 6(1) was not attracted to the facts of the present cases as naphtha was "used as fuel" in generation of electricity which is not an excisable item. According to learned counsel, since electricity was neither exempted nor chargeable to `nil' rate of duty, Rule 6(1) was not applicable in the case of naphtha used in the generation of electricity or steam and, therefore, the appellant was entitled to avail full credit on naphtha as the restriction under Rule 6(1) was not applicable. Therefore, wheeling out a part of electricity generated in the factory of the appellant to its joint ventures or vendors could not have deprived the appellant of the credit of duty paid on naphtha used as fuel in their factory. 7. Mr. Gourab Banerji, learned Addl. Solicitor General, appearing for the Department submitted that the basic idea of CENVAT credit is that it is admissible so long as the inputs are used in or in relation to the manufacture of final products, whether directly or indirectly and, therefor....
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....ther exempted nor chargeable to `nil' rate of duty hence in such cases Rules 6 was not applicable. According to learned counsel, Rule 6 was applicable to cases where the final product was either exempted or charged to `nil' rate of duty and since electricity was not excisable commodity the said rule was not applicable. Learned counsel also emphasized on Rule 6(1) in support of his contention that CENVAT credit was not admissible on such quantity of inputs which were used in the manufacture of exempted goods. The said bar, according to learned counsel, was consistent with the basic idea of CENVAT scheme. On interpretation of Rule 6(2) it was urged that on proper analysis of the said sub-rule it is clear that the said sub- rule had imposed an obligation on the manufacturer when he manufactured both dutiable and exempted goods and in discharge of that obligation he had an option either to maintain separate accounts on inputs used in the manufacture of dutiable and exempted goods or he had to pay specified percentage of the price of the exempted goods. According to learned counsel, in respect of "goods used as fuel", it was physically impossible to maintain separate account(s) ....
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....der section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); v. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by clause 161 of the Finance Bill, 2003, which clause has, by virtue of the declaration made in the said Finance Bill Under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law; vi. the additional duty leviable under Section 3 of the Customs Tariff Act, equivalent to the excise specified under clauses (i), (ii), (iii), (iv) and (v) above; and vii. the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003), paid on any inputs or capital goods received in the factory on or after the first day of March, 2002, including the said duties paid on any inputs used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published vide number G.S.R. 547 (E), dated the 25th March, 1986, and....
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.... 14th November, 2002], No.57/2002-Central Excise, dated 14th November, 2002 [G.S.R.765(E), dated the 14th November, 2002] and No.56/2003-Central Excise, dated the 25 th June, 2003 [G.S.R.513 (E), dated the 25th June, 2003] shall respectively be utilized only for payment of duty on final products, in respect of which exemption under the said notifications No.39/2001-Central Excise, dated the 31st July, 2001, No.56/2002-Central Excise, dated the 14th November, 2002, No.57/2002- Central Excise, dated 14th November, 2002 and No.56/2003-Central Excise, dated the 25th June, 2003, is availed. 4. When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 7. 4A. Notwithstanding anything contained in these rules,- (a) a first or second stage dealer, dealing exclusively in goods falling under Chapter 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62 or 63 of the First Schedule to the Tariff Act, may, at his opt....
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....y ( CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. ii. in a Special Economic Zone, and used in the manufacture of the final products in any other place in India, shall be admissible equivalent to the amount calculated in the following manner, namely:- X multiplied by {( 1+ BCD/100) multiplied by ( CVD/100)}, where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. ii. CENVAT credit in respect of i. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); ii. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by clause 161 of the Finance Bill, 2003, which clause has, by virtue of the declaration made in the said Finance Bill Under the Provisional Collection of Taxes Act, 1931 (16 of 1931),....
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.... 2. Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. 3. The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:- a. if the exempted goods are- i. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act; ii. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity; iii. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer; iv. Omitted. v. newsprint, in rolls or sheets, falling within heading No.48.01 of the said....
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....it in a free trade zone; or b. cleared to a unit in a special economic zone; or c. cleared to a hundred per cent. export-oriented undertaking; or d. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or e. supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or f. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002. g. Gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting." (emphasis supplied by us) "CENVAT Credit Rules, 2004 RULE 2. Definitions.- In these rules, unless the context otherwise requires,- (k) "input" means- (i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petr....
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....) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004), paid on- (i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004, including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004. Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products....
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....39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003], shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of: (5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9: Provided tha....
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....(iii) the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; (v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (vi) the education cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004); shall be utilized only towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), or the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004, respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves if such inputs are removed as such or after being partially processed or on any output service. ....
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....is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a) if the exempted goods are- (i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act (hereinafter in this rule referred to as the said First Schedule); (ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity; (iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer; iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity; (v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule; (vi) final products falling within Chapters 50 to 63 of the said First Schedule, (vii) goods supplied to defence per....
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....in sub- clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. (6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either- (i) cleared to a unit in a special economic zone; or (ii) cleared to a hundred per cent. export-oriented undertaking; or (iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or (iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or (v) cleared for export under bond in terms of the provisions of the Central Excise Ru....
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....irectly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of the finished product. 13. Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form part of the process in which "inputs" are transformed into separate identifiable commodity, though it may stand connected to such processes. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression "used in relation to manufacture" that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product. 14. In the case of Collector of Central Excise, New Delhi v. M/s. Ballarpur Industries Ltd. reported in (1989) 4 SCC 566 the difference between the expression "used in the manufacture" and "used as input (raw material)" was highlighted. In that judgment, it was held that undoubtedly the said two expressions ar....
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.... categories mentioned in the inclusive part is "used as packing material". Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product. 15. Coming to the analysis of the inclusive part of the definition one finds that it covers: (a) Lubricating oils, greases, cutting oils and coolants; (b) Accessories; (c) Paints; (d) Packing materials; (e) Input used as fuel; (f) Input used for generation of steam or electricity. 16. In our earlier discussion, we have referred to two considerations as irrelevant, namely, use of input in the manufacturing process, be it direct or indirect as also a....
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....n the inclusive part after the words "steam used" is substituted by the words "used in or in relation to the manufacture of final products". In other words, the crucial requirement of the definition clause is restated by the Legislature. We may note that the CENVAT Credit Rules of 2004 came in force in September, 2004. In some of the cases in batch before us the show cause notice goes right up to January 2005, hence, CENVAT Credit Rules, 2004 also apply to those cases. In short, an item would fall within the category of "inputs" as defined only on compliance with all the three parts of the definition clause. 19. The question which still remains to be answered is: whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gives it to the grid for distribution? In the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) ELT 444 (SC) the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own economics. Applying the said test, we hold that when ....