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2009 (8) TMI 14

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..... s etc., which is sold at a price. - 5554-55 of 2009 - Dated:- 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 is : whether the Department is right in reversing proportionate CENVAT credit to the extent of power wheeled out by the appellant to its sister units, vendors, joint ventures. Basically, in both the civil appeals we are required to construe the word input as defined in Rule 2(g) of CENVAT Credit Rules, 2002. 3. M/s. Maruti Suzuki Ltd. (appellant) is engaged in the business of manufacturing motor vehicles falling under Chapter 87 of Central Excise Tariff Act, 1985. These motor vehicles are cleared on payment of duty. Assessee claimed CENVAT credit on input in accordance with CENVAT Credit Rules, 2002 (for short, 2002 Rules ). Assessee has installed three gas turbines in their factory for generation of electricity. All the three turbines have capacity to generate electricity of 20 MW each. Till June 2002, assesse .....

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..... t 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 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. There is no dispute that the appellant had used naphtha as fuel for generation of electricity, hence, the said item fell within the inclusive part of the definition. According to learned counsel, there was a condition in the specific part of the said Rule, namely, that the goods must be used in or in relation to the manufacture of final product , however, that condition did not apply to goods falling under the inclusive part of the definition of input . Therefore, once the fuel stood admittedly used in the factory for generation of electricity, it came within the definition of the word input . Learned counsel next urged that the expression within the fact .....

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..... 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 Department to deny credit on the ground that part of the electricity stood cleared outside the factory to its joint ventures, vendors etc. According to learned counsel, Rule 3(1) of the said 2002 Rules permitted credit to be taken on inputs received in the factory whereas Rule 3(4) required credit to be surrendered on removal of input as such, therefore, when the goods received in the factory were used as fuel and the said goods were not removed from the factory, credit of duty paid on fuel became undeniable. Learned counsel next contended that under Rule 6(1) when input was used in the manufacture of exempted goods, credit was not admissible. However, Rule 6(1) was not attracted to the facts of the present cases as naphtha was used as fuel in generation of electricity which is not an excisable item. According to lea .....

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..... 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 specific purpose of generation of electricity consumed outside the factory of production and consequently the said naphtha would not fall within the definition under Rule 2(g). Coming to the interpretation of Rule 6 of the 2002 Rules, learned counsel submitted, that where electricity stood generated but sold outside the factory to third party, the said rule was not applicable. According to learned counsel, electricity generated as a final product was neither exempted nor chargeable to nil rate of duty hence in such cases Rules 6 was not applicable. According to learned counsel, Rule 6 was applicable to cases where the final product was either exempted or charged to nil rate of duty and since electricity was not excisable commodity the said rule was not applicable. Learned counsel also emphasized on Rule 6(1) in supp .....

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..... rpose 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 Act, leviable under the Act; ii. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act; iii. the additional duty of excise leviable under section 3 of the Additional Duties 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), as amended by clause 161 of the Finance Bill, 2003, which clause has, by virtue of the declaration made in the said Finance Bill Under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law; vi. the additional duty leviable under Section 3 of the Customs Tariff Act .....

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..... , 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 exemption under the notifications No.39/2001-Central Excise, dated the 31st July, 2001 [G.S.R.565(E), dated the 31st July, 2001], No.56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th November, 2002], No.57/2002-Central Excise, dated 14th November, 2002 [G.S.R.765(E), dated the 14th November, 2002] and No.56/2003-Central Excise, dated the 25 th June, 2003 [G.S.R.513 (E), dated the 25th June, 2003] shall respectively be utilized only for payment of duty on final products, in respect of which exemption under the said notifications No.39/2001-Central Excise, dated the 31st July, 2001, No.56/2002-Central Excise, dated the 14th November, 2002, No.57/2002- Central Excise, dated 14th November, 2002 and No.56/2003-Central Excise, dated the 25th June, 2003, is availed. 4. When inputs or c .....

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..... 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 the amount calculated in the following manner, namely:- Fifty per cent. of [ X multiplied by{( 1+ BCD/100) multiplied 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. ii. in a Special Economic Zone, and used in the manufacture of the final products in any other place in India, shall be admissible equivalent to the amount calculated in the following manner, namely:- X multiplied by {( 1+ BCD/100) multiplied 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. ii. CENVAT credit in .....

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..... 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 rule. 2. Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. 3. The manufacturer, 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 Tar .....

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..... alue 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 unit in an Electronic Hardware Technology Park or Software Technology Park; or e. 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.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or f. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002. g. Gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting. (emphasis supplied by us) CENVAT Credit Rules, 2004 RULE 2. Definitions.- In these rules, unless the context otherwise requires, .....

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..... tion 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 product or by the provider of output services on or after the 10th day of September, 2004, including the said duties, or tax, or cess paid on any input or input service, as the case may be, used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final product, on or after the 10th day of September, 2004. Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products and the provider of output service sh .....

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..... 02 [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], shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notifications is availed of: (5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9: Provided that such payment shall not be required to be made where any inputs are removed outside the premises of the provider of output service for providing the output service: Provided further that such payment shall not be required t .....

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..... dditional 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 (Textiles and Textile Articles) Act, 1978 or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), or the education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004, respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves if such inputs are removed as such or after being partially processed or on any output service. Provided that the credit of the education cess on excisable goods and education cess on taxable services can be utilised, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services. Explanation.- For the removal of doubts, it is hereby declared that the credit of the additional .....

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..... 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 fertilizer; iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for generation of electricity; (v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule; (vi) final products falling within Chapters 50 to 63 of the said First Schedule, (vii) goods supplied to defence personnel or for defence projects or to the Ministry of Defence for official purposes, under any of the following notifications of the Government of India in the Ministry of Finance (Department of Revenue), namely:- (1) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June, 1992; (2) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th March, 1995; (3) No. 63/95-Central Excise, dated the 16th March, 1995, G.S .....

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..... ing; 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.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or (v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or (vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting. . (emphasis supplied by us) Finding: 9. Coming to the statutory definition of the word input in Rule 2(g) in the CENVAT Credit Rules, 2002, it may be noted that the said definition of the word input can be divided into three parts, namely: (i) specific part (ii) inclusive part (iii) place of use 10. Coming to the specific part, one finds that the word input is defined to mean all goods, except light diesel oil, high speed diesel oil and petrol, used in or in relation to .....

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..... ture 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 material) was highlighted. In that judgment, it was held that undoubtedly the said two expressions are distinct and separate, but, when an ancillary process (like electricity generation) aids the making of an end product, then, the ancillary process gets integrally connected to the end product. In the said judgment, this Court applied what is called as the dependence test . It may, however, be noted that in the definition of input the expression used in or in relation to the manufacture of final product is not a standalone item. It has to be read in entirety and when so read it reads as used in or in relation to the manufacture of final product whether directly or indirectly and whether contained in the final product or not . These words whether directly or indirectly and whether contained in the final product .....

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..... finition 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 indirect as also absence of the input in the final product on account of the use of the expression used in or in relation to the manufacture of final product . Similarly, we are of the view that consideration such as input being used as packing material, input used as fuel, input used for generation of electricity or steam, input used as an accessory and input used as paint are per se also not relevant. All these considerations become relevant only when they are read with the expression used in or in relation to the manufacture of final product in the substantive/specific part of the definition. In each case it has to be established that inputs mentioned in the inclusive part is used in or in relation to the manufacture of final product . It is the functional utility of the said item which would constitute the re .....

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..... s 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 electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the input used in that electricity generation is an input used in the manufacture of final product. However, 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. In such a case, it cannot be said that electricity generated is used in or in relation to the manufacture of final product, within the factory . Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures, vendors, grid e .....

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