TMI Blog2013 (4) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... final products that are manufactured by the Appellant at its Uran plant are fundamentally premised upon the manufacturing process which commences at Mumbai Offshore. There can be no manner of doubt that the input services which go into the process of production at Mumbai Offshore meet the description of services that are utilised by the manufacturer directly or indirectly in or in relation to the manufacture of dutiable final products. The manufacture of the dutiable final products cannot take place without the process in question. To accept the contention of the Revenue would be to completely ignore the implication of the words "used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products." Such a construction as proposed by the Revenue is impermissible. These words used in the subordinate legislation fulfill the statutory object and purpose of presenting a cascading effect and burden of duty. They must be given their plain and natural meaning. At the same time, it would be necessary to clarify that Cenvat credit can be availed of only on that quantity of input service which is used in the manufacture of dutiable goods. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are sunk into the reservoirs, due to the high pressure therein. As the hydrocarbon mix rises upwards, the pressure progressively decreases resulting in the lighter hydrocarbons hitherto dissolved in the liquid hydrocarbons separating out rapidly. Simultaneously, such hydrocarbons as are gaseous at ambient temperature and pressure but remain in liquid form in the reservoir due to high pressure, also turn into a gaseous state and separate out from the liquid phase. In this stage, the crude oil is vigorously effervescent and is not fit for storage or transportation. The gas-oil mix rising through the pipes needs to be brought to a stable state, that is, a stage when no more gases separate from it at the atmospheric pressure and ambient temperature. A stabilised mix of hydrocarbons is known in the industry as crude oil which comprises of hydrocarbons which are in a liquid state at atmospheric pressure and ambient temperature. 3. The gas oil mix which is extracted through each oil well of ONGC is transported to one of the process platforms through sub-sea high pressure pipelines. Each process platform stabilises the gas-oil mix in different stages. The first stage of the stabilisati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w crude oil received from well platforms is stabilized by getting rid of lighter hydrocarbons through a process of gradual decompression carried out in two stages. The first stage is to bring down the pressure to around 5 kg/sq.cm. in the first separator while the second stage is to bring it to around 3 kg/sq.cm., in the second separator. The semistabilised crude at this point is still effervescent and is transported to the Uran plant through dedicated high pressure process pipelines. The gas separating out from the raw crude is collected and transported to the Uran plant through similar dedicated pipelines, after de-moisturisation so as to protect it against corrosion by hydrogen sulphide. At the Uran plant, the process of stabilisation of crude oil is completed. Alongside, the lighter hydrocarbon mix collected during the process of stabilisation at the Uran plant is put through the process of fractionation, yielding excisable downstream products such as C2C3, LPG (C3C4), Naphtha and Residual Gas (CNG). 6. ONGC manufactures both dutiable and exempted goods. Crude oil is exempted from payment of the duty of excise. ONGC, it is an admitted position, transfers the semi-stabilised c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispatched from the oilfields of Mumbai High to other refineries. 8. The Commissioner of Central Excise, Customs and Service Tax, Raigad, by an order dated 6 May 2011 confirmed the demand of duty and disallowed Cenvat credit amounting to Rs.40.57 crores. An equivalent penalty was imposed together with interest. 9. In appeal, the CESTAT by an order dated 29 November 2012 partly allowed the appeal preferred by ONGC as well as the appeals filed by the Input Service Distributors by deleting the penalty which was imposed by the adjudicating authority, save and except for a penalty of Rs.2,000/- that was imposed on the Appellant. The Tribunal upheld the order of adjudication, confirming the demand of Rs.40.57 crores under rule 14 of the Cenvat Credit Rules, 2004 read with section 11A of the Act and allowed interest inter alia under rule 14 read with section 11AB. 10. The Tribunal has held that crude oil manufactured at Mumbai Offshore is a saleable commodity which is sold by ONGC to its buyers and, that as a matter of fact, before the Uran plant came into existence, the entire crude oil manufactured at Mumbai Offshore was sold. In the circumstances, the Tribunal came to the conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 on the Appellants under Rule 15 of the CENVAT Credit Rules, 2004. The appeal is admitted on the substantial questions of law set out in (a) and (c ) above. With the consent of Counsel for the Appellant and the Respondent, the appeal has been taken up for hearing and final disposal. 12. The learned Senior Counsel appearing on behalf of the Appellant submits that: (i) Under Rule 3(1) of the Cenvat Credit Rules, 2004, a manufacturer or producer of final products or a provider of taxable service is allowed to take credit inter alia of the duty of excise specified in the First and Second Schedules to the Excise Tariff Act, paid on inter alia "any input service received by the manufacturer of final product or by the provider of output services"; (ii) The expression "final products" as defined in rule 2(h) means excisable goods manufactured or produced from inputs or using input service; (iii) The expression "input service" is defined in rule 2(1) to mean inter alia any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products; (iv) The expressions "whether directly or indirectly" and "in or in relation to the manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices on or after the 10th day of September, 2004." (emphasis supplied) In the present case, it is clause (ii) which is of relevance. Hence, in order to enable a manufacturer to avail of Cenvat credit, the requirement is that the duty of excise ought to have been paid on any input service received by the manufacturer of a final product. The expression "input service" is defined in rule 2(1) as follows:- "(1) "input service" means any service,- (i) used by a provider of taxable service for providing an output service, or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to setting up, modernization, renovation or repairsof a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit ratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t service which is not intended for use and is not used in the manufacture of dutiable goods. Rule 6(5) confers an option to follow one of two courses of action to a manufacturer not opting to maintain separate accounts. Under Rule 6(5), which has a non obstante provision over-riding sub-rules (1), (2) and (3) credit of the whole of the service tax paid on taxable services of a specified description is allowable unless such a service is used exclusively in or in relation to the manufacture of exempted goods or provision of exempted services. In other words, where a service is of the description which is specified in Rule 6(5), the manufacturer is entitled to credit of the whole of the service tax unless the service is used exclusively, that is to say solely in or in relation to the manufacture of exempted goods or any provision of exempted services. 14. Now, in the present case, ONGC is a manufacturer both of dutiable and exempted products. Crude oil as well as natural gases are exempted products. The Tribunal has held against the Appellant in regard to its entitlement to avail of input service on the ground that crude oil at Mumbai Offshore is in itself a saleable commodity sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of final products." Such a construction as proposed by the Revenue is impermissible. These words used in the subordinate legislation fulfill the statutory object and purpose of presenting a cascading effect and burden of duty. They must be given their plain and natural meaning. At the same time, it would be necessary to clarify that Cenvat credit can be availed of only on that quantity of input service which is used in the manufacture of dutiable goods. 15. In arriving at this conclusion, we have placed reliance on two judgements of the Supreme Court. The first judgment is a judgement in Escorts Ltd. v. Commissioner of Central Excise, Delhi - 2004 (171) E.L.T. 145 (S.C.). In Escorts's case, the Appellant manufactured tractors and availed of Modvat credit in respect of duties paid on inputs which were used in the manufacture of parts. The parts were cleared to another factory of the Appellant, without payment of duty, by claiming the benefit of an exemption Notification. The parts were used in the manufacture of tractors on which duty was paid. Modvat credit was denied on the ground that the parts constituted final goods in themselves which were cleared without the payment of duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess did not result into the manufacture of cement and caustic soda and, therefore, Modvat credit was not admissible for the duty paid on LSHS. Electricity, as the Supreme Court noted, is not an excisable item. The Supreme Court held that without the utilisation of LSHS, it was not possible to manufacture cement or caustic soda and, therefore, LSHS fell within the ambit of the expression used "in or in relation to manufacture of final products". The wide ambit of the expression "used in or in relation to the manufacture of the final product" has been emphasised by the Supreme Court in the following observations:- "Lastly, we may point out that in order to appreciate the arguments advanced on behalf of the Department one needs to interpret the expression "in or in relation to the manufacture of final products". The expression "in the manufacture of goods" indicates the use of the input in the manufacture of the final product. The said expression normally covers the entire process of converting raw-materials into finished goods such as caustic soda, cement etc. However, the matter does not end with the said expression. The expression also covers inputs "used in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsumed. Without continuous supply of such electricity generated in the plant it is not possible to manufacture cement, caustic soda etc. Without such supply the process of electrolysis was not possible. Therefore, keeping in mind the expression "used in relation to the manufacture" in Rule 57A we are of the view that the assessees were entitled to MODVAT credit on LSHS. In our opinion, the present case falls in clause (c), therefore, the assessees were entitled to MODVAT credit under Explanatory clause (c) even before 16-3-95. Inputs used for generation of electricity will qualify for MODVAT credit only if they are used in or in relation to the manufacture of the final product, such as cement, caustic soda etc. Therefore, it is not correct to state that inputs used as fuel for generation of electricity captively consumed will not be covered as inputs under Rule 57A." We are fortified in the conclusion which we have drawn from these binding principles which have been enunciated in the judgements of the Supreme Court. 17. For these reasons, we have come to the conclusion that the Tribunal was in error in coming to the conclusion that the Appellant was dis-entitled to the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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