2010 (2) TMI 361 - HC - Central Excise

Cenvat- Notification No. 6/2002-C.E.- Whether the Customs Excise and Service Tax Appellate Tribunal (CESTAT) was right in allowing deemed credit in respect of the fibre/yarn used in the grey fabrics which was an indirect input in the assessee s final product processed fabric in view of the Notification No. 6/2002-C.E. (N.T.) dated 1st March 2002? Held that- The very fact that yarn/fibre is mentioned as an input in respect of non-composite mills also makes it clear that the notification was to allow deemed credit in respect of such inputs although they were not to be used directly by the non-composite mills. We therefore decide the question against the Revenue and in favour of the respondent-assessee. The appeal is dismissed.

Summary

Issues:
Interpretation of Notification No. 6/2002-C.E. (N.T.) regarding deemed credit for fibre/yarn used in grey fabrics as indirect input in the final product processed fabric.

Analysis:
1. The primary issue in this case revolves around the interpretation of Notification No. 6/2002-C.E. (N.T.) dated 1st March, 2002, concerning the entitlement of deemed credit for fibre/yarn used in grey fabrics as an indirect input in the final product processed fabric.

2. The appellant contended that the notification referred to a table of inputs and final products, arguing that the input of the respondent-manufacturer was grey fabric, not yarn/fibre, and thus, the respondent should not claim the benefit of the notification for its processed fabrics.

3. Conversely, the respondent's counsel argued that the notification, read with Rule 11 of the Cenvat Credit Rules, 2002, allows deemed credit for inputs used in the manufacture of the final product mentioned in the notification, irrespective of direct usage. The distinction between composite mills and non-composite mills was highlighted, emphasizing that grey fabric contains fibre/yarn, qualifying as a direct input.

4. Rule 11 of the Cenvat Credit Rules, 2002 empowers the Central Government to declare inputs for deemed credit, even if not used directly in the final product, as long as they are contained in it.

5. The notification distinguishes between composite mills and non-composite mills, with Explanation 2 defining a composite mill as engaging in fabric processing and yarn spinning, which does not apply to the respondent. Explanation 3 clarifies that the notification does not apply if processed fabric is used for further processing.

6. The Tribunal's decision, upheld by the High Court, affirmed that Rule 11 allows deemed credit for inputs contained in the final product, even if not used directly. Grey fabrics contain yarn/fibre, meeting the rule's requirements, and the notification's intent is to allow deemed credit for such inputs in non-composite mills.

7. Rejecting the Revenue's interpretation, the Court emphasized that the notification's inclusion of yarn/fibre for non-composite mills indicates the intent to provide deemed credit for these inputs, even if indirectly used. Upholding the Tribunal's decision, the Court dismissed the appeal in favor of the respondent-assessee.