Whether cenvat credit can be allowed on duty paid LSHS utilized as an input in manufacture of fertilizer exempted from duty - Matter referred to Larger Bench: Supreme Court
By TIOL News Service
NEW DELHI, DEC 13, 2012: THE assessee utilizes cenvat duty paid Low Sulphur Heavy Stock (for short LSHS) as fuel input for generating steam. The steam so generated is utilized to generate electricity for the manufacture of fertilizer, which is exempt from excise duty. According to the assessee, it is entitled to claim cenvat credit on the input, that is, LSHS even though fertilizer is exempt from excise duty. The correctness of this view was disputed by the Revenue.
The Commissioner confirmed the demand of cenvat credit wrongly claimed by the assessee.
The case took several twists and turns.
1. The Tribunal Larger Bench by its order dated 27th December 2006/4th January 2007 (2007-TIOL-104-CESTAT-MUM-LB), held that the assessee was entitled to claim cenvat credit on the LSHS used as input for producing steam and electricity for the manufacture of fertilizer. According to the larger Bench, the issue raised by the assessee was fully covered in its favour by a decision of the Tribunal in Gujarat Narmada Fertilizers Co. Ltd. v. Commissioner of Central Excise, Vadodara, (2004-TIOL-1173-CESTAT-MUM) against which the Revenue's appeal before the Gujarat High Court was dismissed since no substantial question of law arose in Commissioner of Central Excise and Customs v. Gujarat Narmada Fertilizers Co. Ltd., (2005-TIOL-204-HC-AHM-CX). The Larger Bench held that, that the assessees are eligible to cenvat credit of duty paid on that quantity of LSHS which was used for producing steam and electricity used in turn in relation to manufacture of exempted goods, namely fertilizers .
2. Based on the Larger Bench Order, A division Bench allowed the assessees' appeals, which is now impugned in the Supreme Court.
3. Meanwhile, Revenue filed an appeal against the Larger Bench Decision and the Supreme Court in Commissioner of Central Excise v. Gujarat Narmada Fertilizers Company Limited, - 2009-TIOL-96-SC-CX set aside the order of the larger Bench and decided the issue raised in favour of the Revenue. The Supreme Court held that on a cumulative reading of Rule 6(1) and Rule 6(2) of the Rules (CENVAT CREDIT RULES) it is clear that the legal effect of Rule 6(1) of the Rules is applicable to all inputs, including fuel. Therefore, cenvat credit will not be permissible on the quantity of fuel used in the manufacture of exempted goods. As regards non-fuel inputs, an assessee would have to maintain separate accounts or be governed by Rule 6(3) of the Rules.
4. There was an earlier case of Commissioner of Central Excise Vadodara v. Gujarat State Fertilizers & Chemicals Ltd., (2008-TIOL-252-SC-CX) in which the Supreme Court had clearly held that a claim of modvat credit on LSHS is justified if it is used in the manufacture of steam, which in turn is used in the generation of electricity for the manufacture of fertilizer exempt from duty.
5. While deciding the case in (3) above, the Supreme Court had not noticed the decision in GSFCL case ion (4) above, which resulted in two diametrically opposite decisions on the same subject.
It was in this situation that the Supreme Court had to decide the present appeal. The Supreme Court observed,
“In GSFCL a view has been taken that modvat credit can be taken on LSHS used in the manufacture of fertilizer exempt from duty. Although this decision was rendered in the context of availing modvat credit under the Central Excise Rules, 1944 as they existed prior to the promulgation of the Cenvat Credit Rules, 2002 the principle of law laid down is general and not specific to the Central Excise Rules, 1944. The decision rendered in Gujarat Narmada has been rendered in the context of the Cenvat Credit Rules, 2002 and is, therefore, more apposite. However, since GSFCL does laydown a general principle of law, we have no option but to refer the issue to a larger Bench to resolve the conflict between GSFCL and Gujarat Narmada.
The conflict to be resolved is 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.
So, the issue is to be referred to a Larger Bench.
(See 2012-TIOL-117-SC-CX)
