IMPORTANT POINT
Cenvat credit to the extent of the input being used in the manufacture of exempted final products/to the extent of the excess electricity being wheeled out is liable to be reversed.

JUDGMENT

S. H. Kapadia, J.—

1. Leave granted.

2. The short question which arises for determination in this batch of civil appeals is : whether the assessee(s) was required to reverse the CENVAT credit in terms of Rule 6(1) of 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).

3. For the sake of convenience we may refer to the facts in Civil Appeal No.1308 of 2008 - Commnr. of Central Excise v. M/s. Gujarat Narmada Fertilisers Co. Ltd.

FACTS

4. The assessee is a 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 1.3.2002. The respondent functioned under CENVAT Credit Rules, 2002 (“2002 Rules”, for short) during the relevant period. There is no dispute that the entire quantity of Low Sulphur Heavy Stock (LSHS) was used as “fuel” within the respondent’s factory for burning in the boiler plant for producing steam. There is no dispute that the entire steam was used within the factory directly in or in elation to manufacture of final products or for production of electricity which was captively used in the manufacture of final products. The credit, however, was disallowed due to interpretation of Rule 6 of the 2002 Rules by the Commissioner who took the view that since fertilizers were exempted goods, credit on LSHS, even though used as “fuel” within the factory, was not allowable. Accordingly, one show cause notice was issued on 8.3.04 seeking to disallow CENVAT credit of Rs.2,17,61,795/- for the period March 2003 to September 2003. Vide Order dated 13.7.04, the said show cause notice stood confirmed by the Commissioner. The second show cause notice dated 28.7.04 was issued for a different period, namely, October 2003 to March 2004 which was also confirmed by the Commissioner who disallowed CENVAT credit vide his Order dated 30.8.04. Against the Commissioners’ Orders, dated 13.7.04 and 30.8.04, disallowing the said CENVAT credit, the respondent preferred appeals before CESTAT. The said appeals were referred to a larger Bench who by the impugned decision dated 27.12.06 held that credit was admissible on LSHS used as “fuel”. In passing the said Order the CESTAT followed the judgment of the Gujarat High Court in the case of Commnr. of Central Excise and Customs v. M/s. Gujarat Narmada Valley1 reported in (2006) 193 ELT 136, in which it was held that in sub-rule (2) of Rule 6 of the 2002 Rules an exception stood 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 cannot be insisted upon.

RELEVANT RULES

5. We hereinbelow reproduce relevant rules of the Central Excise Rules, 1944 and CENVAT Credit Rules, 2002 which read as follow:

“The Central Excise Rules, 1944 (as it stood on 29.8.2000) “AA. CREDIT OF DUTY PAID ON EXCISABLE GOODS USED AS INPUTS OR CAPITAL GOODS RULE 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 ma