By TIOL News Service

MUMBAI, MAR 17, 2013: YESTERDAY, we reported the CESTAT decision in this case with the caption – "ONGC, Uran loses Rs.40 Crore CENVAT credit case in CESTAT but escapes with a token penalty of Rs.2000/- ONGC, ISDs also avoid the penalty noose." [See 2013-TIOL-451-CESTAT-MUM]

And, we parted by saying – watch out tomorrow …

But naturally, the matter travelled to the Bombay High Court.

The substantial questions of law were:-

(a) Whether in the facts and circumstances of the case the Appellate Tribunal was right in holding that the Appellants are not eligible to CENVAT Credit of service tax paid on input services received by the Appellants even on a pro-rata basis for payment of CENVAT duty on dutiable final products solely on the finding that the crude oil and natural gas are exempted, but saleable/marketable in themselves;

(b) Whether in the facts and circumstances of the case the Appellate Tribunal was right in not deciding the question whether the Appellants were entitled to CENVAT credit of service tax paid on the input services received by the Appellants prior to the registration as Input Service Distributor but distributed post the registration; and

(c) In any case, whether the Appellate Tribunal, in the facts of the case, was right in sustaining a penalty of Rs.2,000.00 on the Appellants under Rule 15 of the CENVAT Credit Rules, 2004.

The High Court admitted the appeal on the substantial questions of law set out in (a) and (c) above.

After hearing the arguments, the High Court relied upon the apex Court decisions in Escorts Ltd. v. Commissioner of Central Excise, Delhi (2004-TIOL-72-SC-CX) and Collector of Central Excise v. Solaris Chemtech Limited (2007-TIOL-135-SC-CX) and observed –

"We are fortified in the conclusion which we have drawn from these binding principles which have been enunciated in the judgements of the Supreme Court.

17. For these reasons, we have come to the conclusion that the Tribunal was in error in coming to the conclusion that the Appellant was dis-entitled to the benefit of CENVAT credit in respect of the input services used in or in relation to the manufacture of dutiable final products on the ground, as the Tribunal held, that crude oil which is subject to a further process of manufacture at the Uran plant for the production of dutiable final products is exempted from central excise duty. ONGC admittedly also produces dutiable final products. The production of those dutiable products is possible only on the continuous supply of crude oil. We, however, clarify that as a manufacturer of both dutiable and exempted goods, the Appellant would be required to comply with the discipline and rigour of rule 6 and would be entitled to take CENVAT credit only on that quantity of input service which is used in the manufacture of the ultimate dutiable product. We accordingly answer question (a) in the negative.

18. As regards question (b), the Tribunal has not expressed any opinion in view of its finding on the first question. In view of our answer to question (a), we restore the appeal to the file of the Tribunal for the disposal of question (b). In view of the decision on question (a) and in the facts and circumstances of the case, we answer question (c) in the negative."

The Appeal was disposed of in the above terms.

In passing : So, the matter is back with the CESTAT as far as ONGC, Uran is concerned. Now, let us also find out whether the Department is also knocking the doors of the High Court in the matter of relief granted from imposition of penalty to the ONGC ISDs and the penalty of Rs.2000/- imposed.

(See 2013-TIOL-202-HC-MUM-ST)