Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

The Rule 6 of Cenvat credit or Rule 57C or 57CC of Central Excise Rules have given rise to lot of controversies. The Rule 6(2) of Cenvat Credit Rules or Rule 57AD of earlier Central Excise rules provided that the manufacturer has to maintain separate inventory of inputs for dutiable and exempted products. But there was exception that there is no need to maintain the separate inventory for the inputs which are used as fuel. Thus, it was concluded that the credit on inputs used as fuel will be allowed even if they are used for exempted goods also. This view was upheld upto High Court level. But the department contended that the aforesaid exception is provided in Rule 6(2) ibid but there is no exception under Rule 6(1) which is main section. It says that the credit will not be allowed on those inputs which are used in manufacture of exempted goods. As such, the revenue stand was that there is no need to maintain separate inventory for inputs used for fuel but the credit of inputs used in exempted goods will not be available. This matter travelled from adjudication stage to High Court and went to Apex court.

Relevant Legal Provisions: -

Rule 57AD of the Central Excise Rules, 1944: -

57AD. Obligation of manufacturer of dutiable and exempted goods. - (1) CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

(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. 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) final products falling under Chapters 50 to 63 of the Schedule to the Central Excise Tariff Act, 1985 ;

(ii) tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40;

(iii) black and white television sets, falling within Chapter 85;

(iv) newsprint, in rolls or sheets, falling within Chapter heading No.48.01, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in or in relation to the manufacture of such final products at the time of their clearance from the factory, or

(b) if the exempted goods are other than those described in clause (a) above, the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation.- The amount mentioned in (a) and (b) above shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

(3) No credit of the specified duty shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods (other than final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year).

(4) The provisions of sub- rule (1), sub-rule (2) and sub-rule (3) shall not be applicable in case the exempted goods are either,-

(i) cleared to a unit in a free trade 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 Parks; 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 Excises, dated 28th August, 1995; or

(v) cleared for export under bond in terms of the provisions of rule 13.

Rule 6 of the Cenvat Credit Rules, 2002

Rule 6. Obligation of manufacturer of dutiable and exempted goods.

(1)The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

Provided the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12 B of the Central Excise Rules, 2002 on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

(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-

1. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act;

2. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity;

3. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;

4. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;

5 . final products falling within Chapters 50 to 63 of the said First Schedule,

6. Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity.

7. Goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the erstwhile Ministry of Finance (Department of Revenue), namely:-

a) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June, 1992;

b) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th March, 1995;

c) No. 63/95-Central Excise, dated the 16th March, 1995, G.S.R. 255 (E), dated the 16th March, 1995;

d) No. 64/95-Central Excise, dated the 16th March, 1995, G.S.R. 256 (E), dated the 16th March, 1995; the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory.

Explanation I. - The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise.

Explanation II. - If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.

(5) The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either-

1. cleared to a unit in a free trade zone; or

2. cleared to a unit in a special economic zone; or

3. cleared to a hundred per cent. export-oriented undertaking; or

4. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or

5. 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

6. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.

7. gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper of zinc by smelting".

Commissioner of Central Excise v/s M/s Gujarat Narmada Fertilizers Co. Ltd.

[2009-TIOL-96-SC-CX]

Brief Facts of the Case: -

- Respondent-assessee are manufacturer of excisable goods such as fertilizers, methanol, formic acid, nitric acid, aceptic acid etc. out of which fertilizers were exempt from central excise duty under Notification No. 6/2000-CE, dated 01.03.02.

- Respondent-assessee was using the entire quantity of Low Sulphur Heavy Stock (LSHS) as “fuel” within their factory for burning in their boiler plant for producing steam. The entire steam was used within the factory directly in or in relation to manufacture of final products or for production of electricity which was captively used in the manufacture of final products.

- The Commissioner disallowed cenvat credit taken on fuel by interpreting provisions of Rule 6 of the Cenvat Credit Rules, 2002. It was held that since fertilizers were exempted goods, credit on LSHS was not allowable, eventhough it was used as “fuel” within the factory.

- Accordingly, several show cause notices were issued for different periods seeking to disallow Cenvat credit. The show cause notices were confirmed by the Commissioner.

- Respondent filed appeals before the Tribunal. The matter was referred to the Larger Bench.

- The Larger Bench followed the judgment of the High Court of Gujarat in the case of Commr. of Central Excise and Customs v/s M/s Gujarat Narmada Valley [(2006) 193 ELT 136] in which it was held that in sub-rule (2) of Rule 6 of the Rules, 2002, an exception was carved out in case of inputs “intended to be used as fuel” and in such cases the necessity of maintenance of a separate account or denial of credit could not be insisted upon. The Larger Bench held that credit was admissible on JSHS used as “fuel”.

- The Revenue further approached the Apex Court.

Question for Consideration: -

The question for consideration before the Apex Court is as under: -

“Whether the assessee(s) was required to reverse the Cenvat credit in terms of Rule 6 (1) of the Cenvat Credit Rules, 2002 on the quantity of LSHS which was used as “fuel” for producing steam and electricity, which, in turn, was used in or in relation to the manufacture of exempted goods, namely, fertilizers, during the disputed period(s).”

Appellant’s Contentions: -

Basically it was contended by the Revenue that Rule 6 (1)/Rule 57AD was a general bar that cenvat credit was not admissible on such quantity of inputs which are used in the manufacture of exempted goods. This bar was consistent with the basic idea of Cenvat Credit Scheme. Except for the circumstances mentioned in sub-rule (2), Cenvat Credit would not be allowed on such quantity of inputs used in the manufacture of exempted goods and even though fuel-inputs were excluded from sub-rule (2), such inputs would still fall under sub-rule (1).

Respondent’s Contentions: -

Assessee contended that inputs “intended to be used as fuel” have been specifically excluded from the obligations under Rule 6 as they are specifically excluded from sub-rule (2). It was further contended that sub-rule (3) applied only to cases where a manufacturer was required to maintain separate accounts under sub-rule (2) but opted not to do so and since LSHS was used as “fuel”, sub-rule (2) which carved out an exception to goods used as “fuel”, was not applicable and therefore, the assessee were not required to maintain separate accounts.

Judgment of the Apex Court: -

The Apex Court held as under:

v That sub-rule (1) of Rule 6 was plenary provision. It re-stated a principle that Cenvat credit for duty paid on inputs used in the manufacture of exempted final products was not allowable. Thus, sub-rule (1) merely highlights the principle which is in-built in the very structure of the Cenvat scheme.

v Sub-rule (1) covered all inputs, including fuel, whereas sub-rule (2) of Rule 6 referred to non-fuel inputs.

v Sub-rule (2) covered a situation where common cenvated inputs were used in or in relation to manufacture of dutiable final product and exempted final product except fuel-input but the fuel-input was excluded from that sub-rule.

v As sub-rule (1) is plenary, hence, it cannot be said that because sub-rule (2) was inapplicable to fuel-input(s), Cenvat credit will be automatically available to such inputs even if they were used in the manufacture of exempted goods.

v A cumulative reading of sub-rule (1) and sub-rule (2) made it clear that the circumstances specified in sub-rule (2), which inter alia requires separate accounting of inputs are not applicable to the fuel input. But it nowhere said in sub-rule (2) that the legal effect of sub-rule (1) will stand terminated in respect fuel-inputs which do not fall under sub-rule (2).

v 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.

v Therefore, sub-rule (1) was applicable in respect of goods used as “fuel” and on such application, the credit cannot be taken on the quantity of fuel used in the manufacture of exempted goods.

v It was held that this aspect had not been properly appreciated by the High Court of Gujarat in the case of M/s Narmada Valley.

v It was also held that the various bench of tribunal has given various verdicts due to the fact that Cenvat Credit Rules are not very well drafted.

Decision of the Apex Court: -

Appeals filed by the Revenue allowed. No penalty imposed as interpretation of Cenvat Credit Rules was involved. Matters remitted to Adjudicating Authority to decide the amount of duty payable by respondent-assessee.

Comments & Conclusion: -

Thus, it was held by the Apex Court that even if sub-rule (2) of Rule 6 was not made applicable to inputs used as fuel, sub-rule (1) of Rule 6 which is a general rule will be applicable to it and cenvat credit will not be available if the fuel inputs were used for manufacture of exempted goods. However, the Apex Court has clearly said that the Cenvat Credit Rules are not properly drafted. This is fault of the Government which has given rise to litigation and the matter went to Highest Court of India. The poor assessee has to incur the cost in the end. Is there any accountability on the part of the Government? Who has drafted these rules and whether any action can be taken against him?

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PJ/CASE STUDY/2009-10/014
14 October 2009

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PJ/CASE STUDY/2009-10/014 14 October 2009

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PJ/CASE STUDY/2009-10/014
14 October 2009