Important point
CENVAT Rules 2000 in effect substitute the MODVAT Rules and it is not necessary for inputs to be used within the factory premises where the manufacture of final products takes place for the purposes of availing of credit.

Headnote:Central Excise Tariff Act, 1985—Central Excise Rules, 1944—Rules 57A to 57J—CENVAT Rules 2000—Difference between MODVAT and CENVAT Schemes—Modified Value Added Tax Scheme (MODVAT) was introduced in 1986 granting credit of excise duties used in or in relation to manufacture of final products—In 2000 the MODVAT Rules were replaced by the CENVAT Rules—Appellants were availing of CENVAT credit on explosives and other inputs used in quarrying limestone, which was in turn used for manufacture of cement and clinkers —Limestone mines of appellants are situated at some distance away from the factory premises of appellants—Adjudicating Authority held that appellants were not entitled to the credit availed of by appellants—Demand of excise duty raised only on explosives—Whether adjudicating authority was correct in denying appellants the CENVAT credit on inputs—Whether it was necessary for inputs to be used within the factory premises where manufacture of final products takes place for purposes of availing of credit—Whether decision in Jaypee Rewa Cement v. CCE, 2001(133) ELT 3 (SC) would apply to CENVAT Rules 2000—(Yes).
       Held : The question whether it was necessary for inputs to be used within the factory premises where the manufacture as defined in Rule 57AB of final products takes place for the purposes of availing of credit, came up before a Bench of three Judges in the case of Jaypee Rewa Cement Vs. CCE (supra). As in this case, in that case the input in question was explosives which were used in quarrying limestone used in the manufacture of cement. The Court came to the conclusion on a consideration of the Rules which we have already quoted, that sub-rule (1) of Rule 57A did not in any way specify that the inputs have to be utilized within the factory premises. The Tribunal had relied upon Rule 57F in coming to the conclusion that the inputs in respect of which credit of duty was claimed must be those which were used in or brought in to the factory premises. (Para 11)
       The appeal of the manufacturer was accordingly allowed and it was held that the MODVAT was allowable on the use of the explosives in the manufacture of cement irrespective of the fact that the explosives were used directly in the mines and never entered the factory of the manufacturer of cement. In 2000 the MODVAT Rules were replaced by the CENVAT Rules by the Central Excise (2nd Amendment) Rules 2000. Basically there was a re-arrangement of the earlier rules which in substance remained the same. (Para 12)
       In this background, the question arose in the case of Commissioner of Central Excise, Jaipur Vs. J.K. Udaipur Udyog Limited (supra) whether the explosives used for blasting purposes in the mines and which had not been used in the factory premises for production or in relation to the manufacture of cement could qualify for CENVAT credit. The Court answered the question in the negative. (Paras 18 and 19)
       The schemes of MODVAT and CENVAT Credit are not therefore different and we are unable to agree with the conclusion of the Court in J.K. Udaipur Udyog that the decision in Jaypee Rewa Cement (supra) would have no application to CENVAT Rules. (Para 23)
       In our opinion the doubt expressed by the referring Bench about the correctness of the decision in CCE Vs. J.K. Udaipur Udyog Limited (supra) was well founded. Having regard to the fact that the CENVAT Rules in effect substitute the MODVAT Rules, the decision in Jaypee Rewa Cement would continue to apply. The decision in Commissioner of Central Excise, Jaipur Vs. J.K. Udaipur Udyog Limited (supra) holding to the contrary is, in our opinion, not good law. The reference is answered accordingly. (Para 24)

Judgment

Ruma Pal, J.—The question whether the decision in Jaypee Rewa Cement Vs. CCE 2001 (133) ELT 3 SC would apply to the CENVAT Rules 2000 framed under the Cement Excise Tariff Act 1985 (referred to as the ‘Act’) is to be decided on a reference made in this case. A Bench of two judges of this Court in Commissioner of Central Excise, Jaipur Vs. J.K. Udaipur Udyog Ltd. 2004 (171) ELT 289 SC held that Jaypee Rewa Cement did not apply to the CENVAT Rules. The view would doubted in this case by a Bench of coordinate strength which referred the following question to us:-

"In the light of the provisions of the Cenvat scheme vis-a-vis Modvat scheme reproduced hereinabove, we are of the view that the observations made in paragraph 9 of the decision of the Division Bench, quoted above, in the case of Commissioner of Central Excise, Jaipur vs. J.K. Udaipur Udyog Ltd. reported in 2004(171) ELT 289 needs reconsideration."

2. The reference was made in the factual context of the appellants availing of CENVAT credit on explosives and other inputs used in quarrying limestone, which was in turn used for the manufacture of cement and clinkers, which are classifiable under Chapter 25. The limestone mines of the appellants are situated at some distance away from the factory premises of the appellants. The Adjudicating Authority held that the appellants were not entitled to the credit availed of by the appellants and raised a demand for excise duty only on the explosives. The narrower question raised in this appeal therefore is whether the adjudicating authority was correct in denying the appellants the CENVAT credit on the inputs.

3. On the broader question, namely, whether there is a difference in substance between the MODVAT and the CENVAT schemes, Modified Value Added Tax Scheme (MODVAT) was introduced in 1986 granting credit of excise duties used in or in relation to the manufacture of final products. The scheme was contained in Rules 57A to 57J of the Central Excise Rules, 1944 (referred to as the ‘Rules’). We set out below the relevant extracts of these Rules :-

"Rule 57A - Applicability.—

(1) xxxx xxxx xxxx

(2) xxxx xxxx xxxx

(3) xxxx xxxx xxxx

(4) The credit of specified duty under this section shall be allowed on inputs used in the manufacture of final products as well as on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not.

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 used under Rule 57A". {Emphasis supplied}

4. We observe that Rule 57B commences with a non obstante clause. It allows credit to be taken by a manufacturer on 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. There is no qualification as to whether the inputs must be used in the main body of sub-rule (1). Qu

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2006 Supreme(SC) 50

Important pointCENVAT Rules 2000 in effect substitute the MODVAT Rules and it is not necessary for inputs to be used within the factory premises where the manufacture of final products takes place for the purposes of availing of credit.

Cases Referred (2)

Important point
CENVAT Rules 2000 in effect substitute the MODVAT Rules and it is not necessary for inputs to be used within the factory premises where the manufacture of final products takes place for the purposes of availing of credit.