Supreme Court clarifies CENVAT credit on fuel inputs used for manufacturing exempted goods: Commissioner of Central Excise vs. Gujarat Narmada Valley Fertilizers Co. Ltd. (2019) INSC 1187 (03 December 2019)

Case Background

The case revolves around Gujarat Narmada Valley Fertilizers Co. Ltd. (the assessee), which used Low Sulphur Heavy Stock (LSHS) to generate steam and electricity. This steam and electricity were then used to manufacture fertilizers, which are exempt from excise duty. The assessee claimed CENVAT credit on the duty paid for LSHS, arguing that it was an input for the manufacturing process. The Revenue Department disputed this claim, arguing that CENVAT credit could not be availed for inputs used in the manufacture of exempted goods.

The Commissioner of Central Excise & Customs issued two show-cause notices to the assessee, demanding recovery of the CENVAT credit, along with interest and penalties. The first notice was for the period from 31 March 2003 to September 2003, and the second was for the period from October 2003 to March 2004. The Commissioner ruled against the assessee, confirming the demand for CENVAT credit and imposing interest and penalties.

Timeline

Course of Proceedings

The assessee appealed the Commissioner’s orders to the Customs, Excise & Service Tax Appellate Tribunal at Mumbai (the Tribunal). The appeals were initially referred to a larger bench of the Tribunal, which ruled in favor of the assessee, holding that they were eligible for CENVAT credit on LSHS used to produce steam and electricity for manufacturing fertilizers. The Tribunal relied on its earlier decision in Gujarat Narmada Fertilizers Co. Ltd. v. CCE, (2004) 176 ELT 200 (Tri), which had been upheld by the Gujarat High Court.

Subsequently, the Division Bench of the Tribunal allowed the assessee’s appeals, aligning with the larger bench’s decision. However, the Revenue Department appealed to the Supreme Court, leading to the present case. The Supreme Court noted that the larger bench judgment of the Tribunal and the judgment of the Gujarat High Court, which were relied upon by the Tribunal, had been overruled by the Supreme Court in Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd., (2009) 9 SCC 101.

Legal Framework

The core of the legal dispute lies in the interpretation of the CENVAT Credit Rules, 2002, specifically Rule 6, and its interaction with the earlier MODVAT Rules. The relevant provisions are:

Rule 57B(1) of the MODVAT Rules:

“Rule 57B. Eligibility of credit of duty on certain inputs.- (1) Notwithstanding anything contained in rule 57A, the manufacturer of final products shall be allowed to take credit of the specified duty paid on the following 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, namely:-
(i)inputs which are manufactured and used within the factory of production;
(ii)paints;
(iii)inputs used as fuel;
(iv)inputs used for generation of electricity or steam, used for manufacture of final products or for any other purpose, within the factory of production;
(v)packing materials and materials from which such packing materials are made provided the cost of such packing materials is included in the value of the final product;
(vi)accessories of the final product cleared alongwith such final product, the value of which is included in the assessable value of the final product.
Explanation.- For the purposes of this sub-rule, it is hereby clarified that the term ‘inputs’ refers only to such inputs as may be specified in a notification issued under rule 57A.”

Rule 6 of the CENVAT Credit Rules, 2002:

“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.”

The core issue revolves around whether fuel inputs used in manufacturing exempted goods are excluded from the general restriction on CENVAT credit under Rule 6(1) due to the exception in Rule 6(2).

Arguments

Arguments by the Revenue:

• The Revenue argued that Rule 6(1) of the CENVAT Credit Rules, 2002, is a general principle that disallows CENVAT credit on inputs used in the manufacture of exempted goods.
• They contended that the exception in Rule 6(2), which deals with inputs used in manufacturing both dutiable and exempted goods, specifically excludes fuel inputs.
• The Revenue asserted that the exclusion of fuel inputs from Rule 6(2) means they remain subject to the general prohibition in Rule 6(1), and therefore, no CENVAT credit is available for fuel used in manufacturing exempted goods.
• They relied on the Supreme Court’s judgment in Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd., (2009) 9 SCC 101, which held that fuel inputs used in the manufacture of exempted goods are not eligible for CENVAT credit.
• The Revenue distinguished the MODVAT rules from the CENVAT rules, arguing that the MODVAT rules dealt with inputs resulting in intermediate and final products, whereas the CENVAT rules deal with inputs that end up as exempted products.

Arguments by the Respondent (Gujarat Narmada Valley Fertilizers Co. Ltd.):

• The respondent argued that the MODVAT scheme and the CENVAT Credit Rules are not fundamentally different, and thus, the interpretation should not create differences between the two schemes.
• They contended that the exclusion of fuel inputs from Rule 6(2) means that fuel inputs are also excluded from the purview of Rule 6(1).
• The respondent argued that the exception for fuel inputs in Rule 6(2) was inserted to clarify that when an input is used as fuel, only the procedure of sub-rule (2) would not apply. Therefore, fuel inputs are outside the scope of sub-rule (1) as well.
• The respondent relied on the consistent view of the Tribunal that fuel inputs used in the manufacture of intermediate products, which then result in exempted and dutiable goods, should be kept outside the purview of Rule 6 to avoid excise duty.
• They cited Collector of Central Excise and Others vs. Solaris Chemtech Ltd. and Others (2007) 7 SCC 347, to support their argument that the MODVAT and CENVAT schemes are similar.

Submissions Table

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether under the CENVAT Credit Rules, 2002, an assessee is entitled to claim CENVAT credit on duty-paid LSHS utilized as an input in the manufacture of fertilizer exempt from duty.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered various judgments and legal provisions to arrive at its decision. These are categorized by the legal point they address:

Interpretation of CENVAT Credit Rules

• Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd., (2009) 9 SCC 101 – Supreme Court of India: This case was a key authority, where the Supreme Court held that CENVAT credit is not available on fuel inputs used in the manufacture of exempted goods.
• Rule 6 of the CENVAT Credit Rules, 2002: The court analyzed the provisions of Rule 6, specifically sub-rules (1) and (2), to determine the eligibility for CENVAT credit.

Interpretation of MODVAT Rules

• Commissioner of Central Excise, Vadodara vs. Gujarat State Fertilizers and Chemicals Ltd., (2008) 15 SCC 46 – Supreme Court of India: This case upheld the Tribunal’s judgments in Ballarpur Industries Ltd. vs. Collector of Central Excise (2000) 116 ELT 312 (Tri) and Raymond Ltd. vs. Commissioner of Central Excise (2000) 37 RLT 447 (CEGAT).
• Ballarpur Industries Ltd. vs. Collector of Central Excise (2000) 116 ELT 312 (Tri) – Customs, Excise & Service Tax Appellate Tribunal: This case dealt with the eligibility of MODVAT credit on fuel oils used for generating electricity.
• Raymond Ltd. vs. Commissioner of Central Excise (2000) 37 RLT 447 (CEGAT) – Customs, Excise & Service Tax Appellate Tribunal: This case construed the meaning of “for any other purpose” in Rule 57A of the MODVAT Rules.
• Rule 57A to 57D of the MODVAT Rules: The court examined these rules to understand the MODVAT scheme and its differences from the CENVAT scheme.
• Collector of Central Excise and Others vs. Solaris Chemtech Ltd. and Others (2007) 7 SCC 347 – Supreme Court of India: This case discussed the interpretation of “in or in relation to the manufacturer of final products” and the definition of “inputs” under Rule 57A of the MODVAT Rules.
• Vikram Cement vs. Commissioner of Central Excise, Indore, (2006) 2 SCC 351 – Supreme Court of India: This case stated that the MODVAT and CENVAT schemes are not different.

Authority Analysis

Judgment

The Supreme Court, after considering the arguments and authorities, ruled in favor of the Revenue. The court held that the assessee was not entitled to CENVAT credit on the duty paid for LSHS used to generate steam and electricity for manufacturing exempted fertilizers.

Treatment of Submissions

Treatment of Authorities

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following points:

• The court emphasized the principle that CENVAT credit is not allowed on inputs used in the manufacture of exempted goods, as stated in Rule 6(1) of the CENVAT Credit Rules, 2002.
• The court interpreted Rule 6(2) strictly, noting that the exception for inputs used in manufacturing both dutiable and exempted goods explicitly excludes fuel inputs.
• The court reasoned that the exclusion of fuel inputs from Rule 6(2) means that they remain governed by the general prohibition in Rule 6(1).
• The Court reiterated that sub-rule (1) is plenary and covers all inputs, including fuel, whereas sub-rule (2) refers to non-fuel inputs.
• The court distinguished the MODVAT rules from the CENVAT rules, emphasizing that the CENVAT rules specifically address inputs that end up as exempted products.
• The court relied on its previous judgment in Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd., (2009) 9 SCC 101, which had already clarified this issue.

Sentiment Analysis of Reasons

Fact:Law Ratio

The court’s decision was primarily driven by legal interpretations (80%) of the CENVAT Credit Rules, with less emphasis on the factual aspects (20%) of the case.

Logical Reasoning

The Court’s reasoning was based on a strict interpretation of the CENVAT Credit Rules, particularly Rule 6. The court determined that the exception in Rule 6(2) does not apply to fuel inputs, thus making them subject to the general prohibition in Rule 6(1).

The court considered the argument that the MODVAT and CENVAT schemes are similar but clarified that this general similarity does not override the specific provisions of the CENVAT rules. The court also addressed the argument that fuel inputs should be excluded from the purview of Rule 6(1) due to their exclusion from Rule 6(2), but rejected it, holding that the exclusion from Rule 6(2) does not exempt fuel inputs from the general rule in Rule 6(1).

The Supreme Court quoted from its previous judgment in Commissioner of Central Excise vs. Gujarat Narmada Fertilizers Co. Ltd., (2009) 9 SCC 101:

“In our view, sub-rule (1) is plenary. It restates a principle, namely, that CENVAT credit for duty paid on inputs used in the manufacture of exempted final products is not allowable. This principle is in-built in the very structure of the CENVAT scheme. Sub-rule (1), therefore, merely highlights that principle. Sub-rule (1) covers all inputs, including fuel, whereas sub-rule (2) refers to non-fuel inputs.”

The court also stated:

“The cumulative reading of sub-rules (1) and (2) makes it abundantly clear that the circumstances specified in sub-rule (2), which inter alia requires separate accounting of inputs, are not applicable to the fuel input(s). However, the said sub-rule (2) nowhere says that the legal effect of sub-rule (1) will stand terminated in respect of fuel inputs which do not fall in sub-rule (2).”

And further:

“Therefore, sub-rule (1) shall apply in respect of goods used as “fuel” and on such application, the credit will not be permissible on such quantity of fuel which is used in the manufacture of exempted goods.”

There were no minority opinions in this case. The three-judge bench unanimously agreed on the interpretation of the CENVAT Credit Rules.

Key Takeaways

• CENVAT credit is not available on duty paid for fuel inputs used in the manufacture of exempted goods.
• Rule 6(1) of the CENVAT Credit Rules, 2002, is a general rule that disallows credit on inputs used in the manufacture of exempted goods.
• The exception in Rule 6(2) does not apply to fuel inputs, meaning that fuel inputs are not eligible for CENVAT credit if used to manufacture exempted goods.
• The judgment reinforces the principle that the CENVAT scheme does not allow credit for inputs used in the production of exempted goods, especially for fuel inputs.
• This judgment clarifies the interpretation of CENVAT Credit Rules related to fuel inputs, resolving the conflict between previous judgments.