Whether Cenvat credit is available on pollution control equipments installed for effective disposal of harmful gas generated during manufacture of HSD?

PJ/Case Law/2013-14/2017

Case:- INDIAN OIL CORPORATION LTD. V/S COMMISSIONER OF C. EX., ROHTAK

Citation:- 2013 (297) E.L.T. 394 (Tri.-Del.)

Brief Facts: - The appellant are a refinery engaged in the manufacture of petroleum products namely Motor Spirit, High Speed Diesel (HSD), SKO, Naphtha, Furnace Oil, Liquefied Petroleum Gas (LPG), Aviation Turbine Fuel (ATF) etc. chargeable to Central Excise duty under Chapter 27 of the Central Excise Tariff. During the period of dispute i.e. during period from April, 2000 to March, 2003, the appellant were availing of Cenvat credit of excise duty paid on the inputs and capital goods in accordance with the provisions of Central Excise Rules, 1944/Cenvat Credit Rules, 2001/2002. The dispute in this case is about eligibility for Cenvat credit of the capital goods namely Sulphur Recovery Unit (SRU) and Standby Sulphur Recovery Unit (SSRU). The total capital goods Cenvat credit availed by the appellant in respect of these capital goods is Rs. 6,22,91,614/-. The department is of the view that these capital goods are not eligible for Cenvat credit, as the same have been exclusively used for manufacture of exempted final product - Sulphur which is chargeable to nil rate of duty and, hence, is an exempted final product. Accordingly, invoking Rule 57R(1)/57AD(3) of Central Excise Rules, 1944 and Rule 6(4) of Cenvat Credit Rules, 2001/2002, the department issued a show cause notice for recovery of the above-mentioned amount of Cenvat credit from the appellant along with interest and imposition of penalty. This show cause notice was adjudicated by the Commissioner vide Central Excise, Rohtak vide Order-in-Original dated 31-8-2005 by which the Commissioner confirmed the above-mentioned Cenvat credit demand along with interest and imposed penalty of equal amount on the appellant under the provisions of Central Excise Rules, 1944/Cenvat Credit Rules, 2001/2002. Commissioner in this order held that the SRU and SSRU having been used exclusively for manufacture of Sulphur, an exempted final product, are not eligible for capital goods Cenvat credit in terms of the provisions of Rule 57R(1)/57AD(3) of the Central Excise Rules, 1944 and Rule 6(4) of Cenvat Credit Rules, 2001/2002. Aggrieved by this order of the Commissioner, the assessee filed the present appeal.

Appellant’s Contention:-The appellants contended that denial of capital goods credit to them ultimately defeats the norm of Pollution Control Board and also the direction of Ministry of Environment, Govt. of India. When they proposed installation of Diesel Hydrogen-Desulphurisation (DHDS) Project at Panipat Refinery, the Ministry of Environment has given permission under certain terms and conditions as is embodied in para 2(vi) of the permission letter dated 5th March, 1997. So also by letter dated 2-11-1996 Pollution Control Board of Haryana, Chandigarh required them to manufacture low sulphur diesel, so as to prevent effluent and air emission. According to condition No. 10 of the permission letter their Unit will enhance capacity of ETP, so that provision of 20% extra capacity is maintained all the time after adding effluent to be generated from DHDS Plant. So also there was a condition under clause 13 of the permission letter that the unit shall maintain the efficiency of sulphur recovery plant to the level as 99% efficiency both in the case of refinery as well as DHDS plant. The manner as to how the emission test is to be conducted was also the condition of the permission letter of the Pollution Control Board. Because of these requirements the plants/capital goods were required to be installed in their premises. Therefore, denial of capital goods credit shall be unjustified.

Respondent’s Contention:-The Respondents submitted that the plant which has reduced the sulphur content of the diesel is not a plant installed which should get capital goods credit. Hence, credit is not allowable to the assessee.
Reasoning of Judgment: - The Hon’ble Tribunal held that when the purpose of the Pollution Control Board and Environment Ministry is defeated, the order of adjudication should not sustain. There is nothing material found to held that the sulphur recovery plant is not integrally connected plant with the DHDS plant. When Revenue could not prove that there is no integral connection between DHDS plant and low sulphur recovery plant, the appellant succeeds.
They further held that the appellant among other products, manufactured diesel which in terms of ISI specifications could not contain sulphur above a limit specified in the ISI specifications. Since the Crude Oil used, sometimes, has high sulphur content, this results in the sulphur content of the HSD manufactured out of such crude oil having sulphur beyond the permissible limit. For removal of sulphur so as to bring the sulphur content within the acceptable limit, the HSD is processed in the Diesel Hydrogen Desulphurization unit, where the HSD is reacted with hydrogen in presence of a catalyst, as a result of which the sulphur present in the HSD reacts with hydrogen and hydrogen sulphide gas is found. Since hydrogen sulphide gas has very foul smell and is poisonous, the same cannot be released in the atmosphere and it is for this reason that the Pollution Control Authorities have directed the appellant to install not only Sulphur Recovery Unit, but also a Standby Sulphur Recovery Unit so that there is no release of Hydrogen Sulphide in the atmosphere. The function of SRU is to extract sulphur from hydrogen sulphide. Though sulphur emerging as an inevitable and unavoidable by-product being nil tariff rate item is an exempted final product, it cannot be said that the SRU and SSRU have been used for manufacture of sulphur, as looking to the use of the SRU and SSRU which have to be installed in terms of the directions of the Pollution Control Authorities, use is more in the nature of Pollution Control Equipment. In fact Diesel Hydrogen Desulphurization (DHDS) plant together with SRU and SSRU has to be treated as capital goods used for manufacture of marketable HSD and not the capital goods used for manufacture of Sulphur. Therefore, the Commissioner’s finding that SRU and SSRU are the capital goods used exclusively for manufacture of exempted final product - sulphur is incorrect and, as such, the impugned order is not sustainable. The SRU & SSRU have to be treated as the capital goods used in the manufacture of marketable HSD meeting the ISI specifications and which is a dutiable final product. The impugned order, therefore, is set aside.

Decision:- The appeal was allowed.

Comment:-The essence of this case is that the cenvat credit of duty paid on the installation of SRU and SSRU is admissible as the said goods are installed as a pollution control measure statutorily required by the Ministry of Environment. It was held that the said machines are installed to help in the effective disposal of the harmful gases emitted during the course of manufacture of quality HSD as per norms prescribed. As such, the credit on said pollution control equipments cannot be denied merely on the grounds that it is used for generating harmful gases that are subject to nil rate of duty and so the said goods are exclusively used in the manufacture of exempted goods. The credit on such goods is admissible as it is statutory requirement to install such equipments in the manufacture of HSD as per norms prescribed.

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PJ/Case Law/2013-14/2017

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