CENVAT credit on duty-paid inputs is not permissible when used in the manufacture of exempt final products, reinforcing that the contrary interpretations create a conflict needing clarification.

JUDGMENT

R.F. Nariman, J.

1) This matter has come before us on a reference made by a Division Bench of this Court in Commissioner of Central Excise, Vadodara vs. Gujarat Narmada Valley Fertilizers Company Limited, (2013) 15 SCC 336 as follows:-

“15. There is an apparent conflict between GSFCL and Gujarat Narmada. 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 Signature Not Verified Rules, 2002 and is, therefore, more apposite. D Ni Ag Tit Aal Rly A s Jig An Ned by R However, since GSFCL does lay down a general Date: 2019.12.09 1 R7 e: a3 s0 o:3 n6 : IST 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.”

2) The facts that are necessary in order to appreciate the reference so made are set out in the reference order itself as follows:-

“1. 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.

2. Consequently, the Commissioner, Central Excise & Customs, Vadodara-II (hereinafter referred to as “the Commissioner”) issued two notices to the assessee to show cause why CENVAT credit wrongly availed by it should not be recovered under Rule 12 of the CENVAT Credit Rules, 2002 (hereinafter referred to as “the Rules”) read with Section 11-A of the Central Excise Act, 1944 . The assessee was also required to show cause why interest be not recovered on the wrongly availed CENVAT credit and why penalty be not imposed on it.

3. The first show-cause notice issued to the assessee was dated 8-3-2004 and pertained to the period 31-3-2003 to September 2003 while the second show-cause notice was dated 28-7-2004 and was for the period October 2003 to March 2004. The assessee replied to both the show-cause notices and after giving the assessee an opportunity of hearing, the Commissioner adjudicated the first show-cause notice by passing an order adverse to the assessee on 24-6-2004. The second show-cause notice was similarly adjudicated and an adverse order passed on 30-8- 2004. By these orders, the Commissioner confirmed the demand of CENVAT credit wrongly claimed by the assessee. The Commissioner also directed the assessee to pay interest on the demanded amount and also imposed personal penalty under Rule 13 of the Rules.

Proceedings before the Tribunal

4. Feeling aggrieved, the assessee preferred two appeals before the Customs, Excise & Service Tax Appellate Tribunal at Mumbai (hereinafter referred to as “the Tribunal”). The appeals were numbere