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2026 Supreme(Online)(Mad) 56665
IN THE HIGH COURT OF JUDICATURE AT MADRAS JUDGMENT RESERVED ON : 15 / 04 / 2026 JUDGMENT PRONOUNCED ON : 25 / 06 / 2026 CORAM:
THE HONOURABLE DR. JUSTICE G.JAYACHANDRAN AND THE HONOURABLE MR. JUSTICE R.SAKTHIVEL R.C. 10 OF 2010 The Commissioner of Central Excise Salem … Petitioner Vs.
1.Customs, Excise & Service Tax Appellate Tribunal South Zonal Bench, 26, 1st Floor, Haddows Road, Shastri Bhavan Annex, Chennai .
2.M/s.Tata Refectories Ltd, Karuppur, Salem. … Respondents REFERENCE : Reference case filed under Section 35 H (1) of the Central Excise Act, 1944, seeking answer on the following reference: “Whether the Hon’ble CEGAT, Chennai is legal and correct in upholding the impugned order that the credit availed in respect of the furnace oil used in the factory for the manufacture of DBM, an exempted goods, need not be reversed, due to the fact that no sale is involved in their transactions and as per erstwhile Rule 57CC(1) & 57CC(8) reversal of credit is not required?”
For Petitioner : Mr.M.Santhanaraman S.S.C. for GST & Customs For Respondents : Mr.Raghavan Ramabadhran * * *
For the Appellants/Petitioners: M. Santhanaraman
For the Respondents: Raghavan Ramabadhran
MODVAT credit on fuel inputs used for manufacturing intermediate products (even if nil-rated/exempted) is not required to be reversed if those products are used to manufacture dutiable final goods, as Rule 57CC's adjustment mechanism specifically excludes inputs used as fuel.
Headnote:The case involves an analysis of Section 35 H (1) of the Central Excise Act, 1944 and Rule 57CC of the Central Excise Rules, 1944. A manufacturer produced both exempted goods (Dead Burnt Magnesite - DBM) and dutiable goods, utilizing furnace oil as fuel. The DBM was either used captively or stock-transferred to another unit of the same entity for the manufacture of dutiable final products. The dispute arose when the Department sought recovery of MODVAT credit on furnace oil used for the exempted DBM, claiming it should be reversed. The primary issue was whether the CEGAT was correct in upholding that credit for furnace oil used for DBM need not be reversed because no sale was involved and Rule 57CC(1) & 57CC(8) did not require it. The court reasoned that Rule 57CC specifically applies to inputs "other than inputs used as fuel," meaning the adjustment mechanism for exempted goods does not apply to fuel. Furthermore, the court held that when an intermediate product is used to manufacture dutiable final goods within the same entity, it does not disentitle the manufacturer from claiming input credit. C.E.G.A.T. is legal and correct in upholding the impugned order that the credit availed in respect of the fuel - furnace oil used in the factory for the manufacture of D.B.M., an exempted good, need not be reversed, due to the fact that no sale is involved in their transactions and as per erstwhile Rule 57CC(1) & 57CC(8) reversal of credit is not required.
ORDER
R.SAKTHIVEL, J.
This reference case arises out of the Reference Case Petition No.5 of 2005 filed by 'the Commissioner of Central Excise, Salem' ['Department' for convenience] under Section 35 H (1) of the Central Excise Act, 1944. This Court on April 15, 2010 passed the following Order:
"This is a reference application on behalf of the Revenue under Section 35 H (1) of the Central Excise Act, 1944.
2. The following question of law has been raised in this reference case petition:-
"Whether the Hon'ble CEGAT, Chennai is legal and correct in upholding the impugned order that the credit availed in respect of the furnace oil used in the factory for the manufacture of DBM, an exempted goods, need not be reversed, due to the fact that no sale is involved in their transactions and as per erstwhile Rule 57CC(1) & 57CC(8) reversal of credit is not required?"
3. Learned Standing Counsel for the petitioner submits that the Tribunal had followed the decision of the Bombay High Court in M/s.Ballarpur Industries Ltd. vs. Commissioner of Central Excise, Nagpur (2001 (138) ELT 94 (T-Mumbai), but, that judgment has been reversed by the Supreme Court in 2007 (8) SCC 89, allowing the appeal filed by the Department. An identical question has also been referred by this Court in R.C.P.No.27 of 2003 on 21.03.2005.
4.In view of the above, we direct the Tribunal to state a case and refer the same to us for our opinion. Accordingly, the reference case petition is closed."
2. Pursuant to the afore-extracted Order of this Court, 'the Customs, Excise and Service Tax Appellate Tribunal, Chennai' ['C.E.S.T.A.T.' for short] submitted Statement of Case.
3. Hereinafter, any reference to Rule 57CC shall be deemed to be a reference to Rule 57CC of the erstwhile Central Excise Rules, 1944.
4. Brief facts set out in the Statement of Case reads thus:
4.1. 'M/s. Tata Refractories Ltd, Karuppur, Salem' ['T.R.L.' for short], having Central Excise Registration Certificate No.6/92 are engaged in the manufacture of refractory products both exempted (Dead Burnt Magnesite, hereinafter referred to as D.B.M.) and dutiable (Refractory Motors, Ramming mass, hereinafter referred to as R.M. collectively) falling under Chapter heading 25 and 38 respectively of the Central Excise Tariff Act, 1985. The exempted goods - D.B.M. besides being used captively in the manufacture of dutiable goods -R.M., are also cleared on stock-transfer basis to their main unit without payment of duty. They took MODVAT Credit on inputs including inputs used as fuel in terms of Rule 57AB of the then Central Excise Rules, 1944 and used such fuel in the manufacture of both dutiable and exempted goods. However, they had failed to reverse the MODVAT credit taken on furnace oil used in the manufacture of exempted goods till 31/03/2000. From 01/04/2000, they had availed MODVAT Credit on the entire quantity of furnace oil consumed by them, irrespective of whether it was used in relation to the dutiable final product or not. They did not reverse the proportionate MODVAT credit on such quantity of furnace oil used in the manufacture and clearance (as stock transfer) of exempted goods -DBM.
4.2. As, in terms of Rule 57AD (1) of the then Central Excise Rules, 1944, MODVAT credit was not available on such of quantity of furnace oil used in the manufacture and clearance of exempted goods, a show cause notice dated May 3, 2001 was issued by the Deputy Commissioner of Central Excise, Salem Division, Salem proposing recovery of MODVAT Credit of Rs.42,66,972/-attributable to that quantity of furnace oil used in the manufacture and clearance of exempted goods - D.B.M. during the period from April 2000 to February, 2001. After due process of law, the Commissioner of Central Excise, Coimbatore, vide Order-in-Original No.28/2002 (Comm) dated June 17, 2002 ordered recovery of the entire amount besides imposing a penalty equal to the amount of credit wrongly availed.
4.3. Being aggrieved, T.R.L. filed an appeal before the C.E.G.A.T.,
