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2009 (8) TMI 14

..... les of 2004 vis-a vis CENVAT Credit Rules of 2002 that the word "for" in the inclusive part after the words "steam used" is substituted by the words "used in or in relation to the manufacture of final products" - to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale) the "process and the use test" fails. In such a case, the nexus between the process and the use gets disconnected. - assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption) - They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. - 5554-55 of 2009 - 17-8-2009 - S.H. KAPADIA and AFTAB ALAM, JJ. Civil Appeal No. 5554 of 2009 (Arising out of S.L.P. (C) No.3826 of 2009) WITH Civil Appeal No. 5555 of 2009 - (Arising out of S.L.P. (C) No.5362 of 2009) [Judgment per S. H. KAPADIA, J.] - Leave granted. FACTS IN THE LEAD MATTER 2. The issue in the present civil appeal i .....

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..... H. It may be noted that even the joint ventures, vendors etc. to whom excess electricity is wheeled out in turn manufacture final products. ARGUMENTS 5. At the outset it may be noted that the civil appeals in question concern the period January 2003 to October 2003 and November 2003 to March 2004 during which period CENVAT Credit Rules, 2002 was amended by Notification No.13/2003-CE(NT) dated 1.3.2003. Accordingly we are confining the arguments advanced by learned counsel on both sides to the said Rules. 6. Mr. V. Lakshmi Kumaran, learned counsel appearing on behalf of the appellant, submitted as follows. So long as naphtha is used as fuel for generation of electricity, appellant is entitled to take credit of duty paid on it and there is no need to reverse proportionate credit to the extent of power wheeled out to joint ventures, vendors etc. According to learned counsel, Rule 2(g) of the said 2002 Rules which defined input , was in two parts. The first part was the specific part which was followed by the inclusive part. In the inclusive part several items stood included such as lubricating oils, greases, cutting oils, coolants, accessories, goods used as paint, or as packing mater .....

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..... mean that goods used for generation of electricity should be used within the factory of production of final product(s). In other words, according to learned counsel, the said expression within the factory of production would apply to items used for generation of electricity and not to electricity as such and since in the present case naphtha stood used within the factory of production of the final product, it fell within the definition of input . Consequently, the appellant was entitled to the credit of duty paid on the entire quantity of naphtha used as fuel. It was next urged on behalf of the appellant that once naphtha came to be used in generation of electricity which was partly used for captive consumption and partly in other units of the appellant it was not open to the Department to deny credit on the ground that part of the electricity was cleared outside the factory to the joint ventures, vendors etc. In this connection, it was submitted that under the said Rules, a manufacturer of final product was allowed to take credit of specified duty paid on any input received in the factory after 1.4.2002. There was no condition attached to it. Hence, it was not open to the Departm .....

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..... rt was merely to illustrate certain inputs in respect of which a possible doubt existed as to whether or not they stood used in or in relation to the manufacture of final product(s) and further the inclusive part stood qualified by the fact that all the items mentioned therein had to be used within the factory of production. Therefore, according to learned counsel, the inclusive part of the definition restricted the benefit to specified items which were required to be used within the factory of production. In this connection, learned counsel gave examples of specific items, mentioned in Rule 2(g) of the 2002 Rules, like lubricating oils, greases, cutting oils and coolants which also fell within the definition if used within the factory of production . In fact, according to learned counsel, the said items stood specifically included to clarify doubt as to whether the said items could be used within the factory of production. In the alternative, it was submitted that the appellant has used naphtha in the generation of electricity, part of which has been consumed outside the factory or production; that the said input has not been used as fuel per se but it has been used for the specif .....

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..... e leviable thereon, and includes goods which are chargeable to Nil rate of duty; (g) input means all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production. Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; RULE 3. CENVAT credit.- 1. A manufacturer or producer of final products shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of - i. the duty of excise specified in the First Schedule to the Tariff .....

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..... dit taken on inputs if such inputs are removed as such of after being partially processed; of (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub-rule (2) of Rule 16 of Central Excise Rules, 2000. Provided that while paying duty, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month for payment of duty relating to the month. Provided further that the CENVAT credit of the duty paid on the inputs used in the manufacture of final products cleared after availing of the exemption under the notification numbers 32/99-Central Excise, dated the 8th July, 1999 [G.S.R.508(E) dated the 8th July, 1999] and 33/99-Central Excise dated the 8th July, 1999 [G.S.R.509 (E) dated 8th July, 1999], shall be utilized only for payment of duty on final products cleared after availing of the exemption under the said notification numbers 32/99-Central Excise, dated 8th July, 1999 and 33/99-Central Excise, dated the 8th July, 1999.] Provided also that the CEENVAT credit of the duty paid on the inputs used in the manufacture of final products cleared after availing of the exe .....

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..... ount, as referred to in clause (a); (c) the amount paid under clause (a) shall be eligible as CENVAT credit as if it were a duty paid by a person who removes such goods under sub- rule(4A). 5. The amount paid under sub-rule (4) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (4). 6. Notwithstanding anything contained in sub-rule (1),- i. CENVAT credit in respect of inputs or capital goods produced or manufactured,- i. in a free trade zone or by a hundred per cent. export- oriented undertaking or by a unit in an Electronic Hardware Technology Park or Software Technology Park (other than a unit which pays excise duty under section 3 of the Act read with notification No. 8/97- Central Excise, dated the 1st March, 1997, number G.S.R 114 (E), dated the 1st March, 1997 or No. 20/2002-Central Excise, dated the 1st March, 2002) and used in the manufacture of the final products in any other place in India, in case the unit pays excise duty under section 3 of the Act read with notification No. 2/95- Central Excise, dated the 4th January, 1995, number G.S.R. 189 (E), dated the 4th January, 1995, shall be admissible equivalent to .....

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..... or the Second Schedule of the Central Excise Tariff Act, 1985 (5 of 1986). iii. the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31 respectively of the First Schedule to the Tariff Act shall be allowed to the extent of thirty rupees per square metre; iv. ***. Explanation.- Where the provisions of any other rule or notification provide for grant of partial or full exemption on condition of non- availability of credit of duty paid on any input or capital goods, the provisions of such other rule or notification shall prevail over the provisions of these rules. Rule 6. Obligation of manufacturer of dutiable and exempted goods.- 1The 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). Provided the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12B of the Central Excise Rules, 2002 on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rul .....

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..... cluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. ExplanationI.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise. Explanation II.- If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken. 4. No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year. 5. The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either- a. cleared to a unit in a free trade zone; or b. cleared to a unit in a special economic zone; or c. cleared to a hundred per cent. export-oriented undertaking; or d. cleared to a .....

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..... s of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); (iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); (v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vi); (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; and (x) the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004), paid on- (i) any input or capital goods received in the factory of manufacture of final product or premises of the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final prod .....

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..... it is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be: Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs, or input services, used in the manufacture of final products cleared after availing of the exemption under the 2 0 following notifications of Government of India in the Ministry of Finance (Department of Revenue),- (i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999]; (ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002]; (v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th November, 2002]; (vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]; and (vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th September, 2003], .....

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..... ied by (CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. (b) CENVAT credit in respect of - (i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 (40 of 1978); (ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (iii) the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; (v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (vi) the education cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 (23 of 2004); shall be utilized only towards payment of duty of excise or as the case may be, of service tax leviable under the said Additional Duties of Excise (Tex .....

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..... ods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider of output service, opting not to maintain separate accounts, shall follow either of the following conditions, as applicable to him, namely:- (a) if the exempted goods are- (i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act (hereinafter in this rule referred to as the said First Schedule); (ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity; (iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of .....

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..... on where exemption is granted based upon the value or quantity of clearances made in a financial year. (5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub- clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services. (6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either- (i) cleared to a unit in a special economic zone; or (ii) cleared to a hundred per cent. export-oriented undertaking; or (iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or (iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.10 .....

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..... hind the above expression is to widen the ambit of the definition so as to attract all goods, which do not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of the finished product. 13. Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form part of the process in which inputs are transformed into separate identifiable commodity, though it may stand connected to such processes. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression used in relation to manufacture that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product. 14. In the case of Collector of Central Excise, New Delhi v. M/s. Ballarpur Industries Ltd. reported in (1989) 4 SCC 566 the difference between the expression used in the manufacture and used as input (raw m .....

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..... the substantive part qualified by the place of use. For example, one of the categories mentioned in the inclusive part is used as packing material . Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product. 15. Coming to the analysis of the inclusive part of the definition one finds that it covers: (a) Lubricating oils, greases, cutting oils and coolants; (b) Accessories; (c) Paints; (d) Packing materials; (e) Input used as fuel; (f) Input used for generation of steam or electricity. 16. In our earlier discussion, we have referred to two considerations as irrelevant, namely, use of input in the manufacturing process, be it direct or ind .....

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..... the inclusive part after the words steam used is substituted by the words used in or in relation to the manufacture of final products . In other words, the crucial requirement of the definition clause is restated by the Legislature. We may note that the CENVAT Credit Rules of 2004 came in force in September, 2004. In some of the cases in batch before us the show cause notice goes right up to January 2005, hence, CENVAT Credit Rules, 2004 also apply to those cases. In short, an item would fall within the category of inputs as defined only on compliance with all the three parts of the definition clause. 19. The question which still remains to be answered is: whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gives it to the grid for distribution? In the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) ELT 444 (SC) the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own economics. Applying the said test, we hold that when the elect .....

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..... and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. 21. Before concluding, it may be clarified that on account of repeated amendments in the CENVAT Credit Rules, huge litigation in the country stands generated. In the circumstances, we are of the view that penalty is not leviable on appellant/assessee, particularly when in large number of other cases, on account of conflict of views expressed by various Tribunals/High Court, the assessees have also succeeded. Hence, although M/s. Maruti Suzuki Ltd. (appellant) has failed in their civil appeals the Department will not impose penalty. 22. For the aforestated reasons, we dismiss Civil Appeal No. of 2009 - (arising out of S.L.P. (C) No.3826 of 200 .....

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