Cenvat credit is allowed on the inputs where the factory premises is situated at some distance away from the mines

PJ/Case Laws/2010-11/1029

Case: Vikram Cement Versus Commissioner Of Central Excise, Indore.

Citation: 2006 (194) E.L.T. 3 (S.C.)

Issue:- Whether cenvat credit is allowed on the inputs where the factory premises is situated at some distance away from the mines.

Brief Facts:- Theappellants were availing Cenvat credit on explosives and other inputs used in quarrying limestone, which was in turn used for the manufacture of cement and clinkers, and are classifiable under Chapter 25. The limestone mines of the appellants are situated at some distance away from the factory premises of the appellants. The Adjudicating Authority held that the appellants were not entitled to the credit availed of by the appellants and raised a demand for excise duty only on the explosives. The narrower question rose in this appeal therefore is whether the adjudicating authority was correct in denying the appellants the Cenvat credit on the inputs. On thebroader question, namely, whether there is a difference in substance between the Modvat and the Cenvat schemes, Modified Value Added Tax Scheme (Modvat) was introduced in 1986 granting credit of excise duties used in or in relation to the manufacture of final products. The scheme was contained in Rules 57A to 57J of the Central Excise Rules, 1944 (referred to as the ‘Rules’).
The question whether the decision in Jaypee Rewa Cement v. CCE - 2001 (133)E.L.T. 3 (S.C.) would apply to the Cenvat Rules, 2000 framed under the Central Excise Tariff Act, 1985 (referred to as the ‘Act’) is to be decided on a reference made in this case. A Bench of two judges of this Court in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Ltd. - 2004 (171)E.L.T. 289 (S.C.) held that Jaypee Rewa Cement did not apply to the Cenvat Rules. The view was doubted in this case by a Bench of co-ordinate strength which referred the following question to the Supreme Court:-
“In the light of the provisions of the Cenvat scheme vis-a-vis Modvat scheme reproduced hereinabove, we are of the view that the observations made in paragraph 9 of the decision of the Division Bench, quoted above, in the case of Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Ltd. reported in 2004 (171)E.L.T. 289 needs reconsideration”.
Reasoning of Judgment:-It is observed that Rule 57B commences with a non obstante clause. It allows credit to be taken by a manufacturer on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final products or not. There is no qualification as to where the inputs must be used in the main body of sub-rule (1). Qualifications have been introduced to the extent stated in Clauses (i) to (vi) read with the Explanation. Thus Clause (i) provides for inputs which are manufactured and used within the factory of production. Paints, fuel, packing materials and accessories are also treated as inputs under clauses (ii), (iii), (v) and (iv) without any requirement for user within the factory. Clause (iv) provides for credit on inputs used for generation of electricity or steam used for manufacture of the final products or for any other purposes “within the factory of production”. It appears to us on a plain reading of the clause that the phrase “within the factory of production” means only such generation of electricity or steam which is used within the factory would qualify as an intermediate product. The utilization of inputs in the generation of steam or electricity not being qualified by the phrase “within the factory of production” could be outside the factory. Therefore, whatever goes into generation of electricity or steam which is used within the factory would be an input for the purposes of obtaining credit on the duty payable thereon. As far as the Explanation is concerned, the inputs are restricted to inputs notified under Rule 57A. There is no dispute that both explosives and limestone are notified under Section 57A for manufacture of the final product viz. cement.
Further Rule 57F(4) provides that the credit on inputs sent by a manufacturer from the factory to a job worker for test, repair etc. but ultimately utilized in the final product is allowable.
Another Rule 57J allows credit on inputs used in manufacture of intermediate products described in Column 3 of the Table provide the intermediate products are received by the manufacturer for use in or in relation to the manufacture of final products described in the corresponding entry in Column 4 of the Table. Explosives, limestone and cement are admittedly covered by Columns 1, 2 and 3 respectively of the Table. It may be noted at this stage that Rule 57J(2) was also explained by a Trade Notice. No. 38/1999 dated 2nd April, 1991 issued by the Bombay Collectorate. The question whether it was necessary for inputs to be used within the factory premises where the manufacture as defined in Rule 57AB of final products takes place for the purposes of availing of credit, came up before a Bench of three Judges in the case of Jaypee Rewa Cement v. CCE (supra). As in this case, in that case the input in question was explosives which were used in quarrying limestone used in the manufacture of cement. The Court came to the conclusion on a consideration of the Rules which we have already quoted, that sub-rule (1) of Rule 57A did not in any way specify that the inputs have to be utilized within the factory premises. The Tribunal had relied upon Rule 57F in coming to the conclusion that the inputs in respect of which credit of duty was claimed must be those which were used in or brought in to the factory premises. In reversing the decision of the Tribunal this Court observed that :-
“The Tribunal, however, has not referred to the provisions of Rule 57J, the opening portion of which makes it clear that the said Rule will be applicable notwithstanding anything contained in the other Rules. According to Rule 57J, when the Central Government by notification specified the inputs used in the manufacture of intermediate products received by the manufacturer for use in or in relation to the manufacture of final product, then all such products on which duty has been paid credit will be allowed.
Explosives would fall under column (2) being a tariff item in Chapter 36; the intermediate product, namely, lime stone would fall under column 3 being covered by Chapter 25; and the final product, namely, cement would also fall under Chapter 25 and would fall under column 4. The reading of Rule 57J along with the aforesaid notification can leave no manner of doubt that even in respect of inputs used in the manufacture of intermediate product which product is then used for the manufacture of the final product. The manufacturer would be allowed credit on the duty paid in respect of the input. On the explosives a duty had been paid and the appellants would be entitled to claim credit because the explosives were used for the manufacture of the intermediate product, namely, lime stone which, in turn, was used for the manufacture of cement”. The appealof the manufacturer was accordingly allowed and it was held that the Modvat was allowable on the use of the explosives in the manufacture of cement irrespective of the fact that the explosives were used directly in the mines and never entered the factory of the manufacturer of cement.
In 2000 the Modvat Rules were replaced by the Cenvat Rules by the Central Excise (2nd Amendment) Rules, 2000. Basically there was a re-arrangement of the earlier rules which in substance remained the same. Thus Rule 57AA defined inputs as:-
“input” means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or stem used for manufacture of final products or for any other purpose within the factory of production and also includes lubricating oils, greases, cutting oils and coolants.
Analyzed,it is clear that sub-rule (d) of Rule 57AA has merely reframed Rule 57B to include all the ingredients of inputs while at the same time broadening the base not only by referring to “all goods” but also by using the word “includes”. Rule 57AC provides for the conditions for allowing Cenvat credit in respect of inputs received in the factory of the manufacturer. Sub-rule (1) of Rule 57AC which was relied on in J.K. Udaipur Udyog to differ from the conclusion in Jaypee Rewa Cement provides that the Cenvat credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer.
Rule 57J ofthe Modvat Rules was deleted. This led to controversy and on 29th of August, 2000, a clarification was issued by the Central Board of Excise and Customs (CBEC) inter alia to the effect. Consequently, with the intention of re-introducing the benefit granted earlier under Rule 57J, Rule 57AB was introduced under the heading “Cenvat credit”. Rule 57AB effectively duplicates the substance of Rule 57J(1) and (2) and deals with a situation where inputs are received by a job worker for production of intermediate goods which are used in the manufacture of a final product. In this background, the question arose in the case of Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Limited (supra) whether the explosives used for blasting purposes in the mines and which had not been used in the factory premises for production or in relation to the manufacture of cement could qualify for Cenvat credit.
The Court answered the question in the negative saying that the scheme for Modvat and Cenvat Credits being different and in view of the definition of “input” given in sub-rule (d) of Rule 57AA of the Rules and the omission of a Rule similar to Rule 57J, the ratio of Jaypee Rewa Cement (supra) can have no application here.
Three reasons were given by the Court for holding that credit could be taken only on inputs received in the factory of the manufacturer of the final product. First, the Court held that the definition of input given in sub-rule (d) of Rule 57AA was “entirely different from the manner in which the said word had been expounded in the explanation to Rule 57A of the Modvat Rules”. We cannot agree with this reading of the Section. As we have said there was only a re-arrangement of the several provisions of Rule 57B in Rule 57AA. Rule 57AA is in fact more broadbased than Rule 57B. Second, theCourt proceeded on the basis that under the Cenvat scheme there was no provision similar to Rule 57J of the Modvat scheme. As we have seen, Rule 57J was replaced in substance by Rule 57AB. This provision was overlooked. The third reason given by the Court in J.K. Udaipur Udyog for holding that the Cenvat Scheme was different from the Modvat scheme was Rule 57AC(1). However, that Rule is limited to inputs received in the factory of the manufacturer and does not impinge on Rule 57AB at all.
The schemesof Modvat and Cenvat credit are not therefore, different and we are unable to agree with the conclusion of the Court in J.K. Udaipur Udyog that the decision in Jaypee Rewa Cement (supra) would have no application to Cenvat Rules.
The Apex Court opined that the doubt expressed by the referring Bench about the correctness of the decision in CCE v. J.K. Udaipur Udyog Limited (supra) was well founded. Having regard to the fact that the Cenvat Rules in effect substitute the Modvat Rules, the decision in Jaypee Rewa Cement would continue to apply. The decision in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Limited (supra) holding to the contrary is, not good law.

Decision:- The reference is answered accordingly.
Comment:- This landmark verdict is very helpful in ending the controversy relating to decision of Modvat rules will not apply in case of new Cenvat credit rules. Though it is old decision but it has relevance now also. But the decision of Maruti Suzuki has also come.

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PJ/Case Laws/2010-11/1029

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