J U D G M E N T
Madan B. Lokur, J.
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 Rules) read with Section 11A 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 8th
March 2004 and pertained to the period 31st March 2003 to September 2003
while the second show cause notice was dated 28th July 2004 and was for the
period October 2003 to March 2004.
4. 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 24th
June 2004. The second show cause notice was similarly adjudicated and an
adverse order passed on 30th August 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:
5. 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 numbered as Appeal
Nos.E/2517/2004 and E/3672/2004.
6. For reasons that are not apparent from the record, both appeals were
referred to a larger Bench and heard by the Vice-President and two members
of the Tribunal (hereinafter referred to for convenience as the larger
Bench). By an order dated 27th December 2006/4th January 2007, the larger
Bench held that the assessee was entitled to claim cenvat credit on the
LSHS used as input for producing steam and electricity for the manufacture
of fertilizer. According to the larger Bench, the issue raised by the
assessee was fully covered in its favour by a decision of the Tribunal in
Gujarat Narmada Fertilizers Co. Ltd. v. Commissioner of Central Excise,
Vadodara, 2004 (176) ELT 200 (Tri. – Mumbai) against which the Revenue’s
appeal before the Gujarat High Court was dismissed since no substantial
question of law arose. The decision of the Gujarat High Court is
Commissioner of Central Excise and Customs v. Gujarat Narmada Fertilizers
Co. Ltd., 2006 (193) ELT 136 (Gujarat).
7. The Tribunal was, therefore, of the opinion that the issue was no
longer res integra and the decision earlier rendered by the Tribunal was
binding upon the parties. The reference made to the larger Bench was then
answered in the following terms:-
“The reference is thus answered by holding that the assessees
are eligible to cenvat credit of duty paid on that quantity of
LSHS which was used for producing steam and electricity used in
turn in relation to manufacture of exempted goods, namely
8. Pursuant to the decision of the larger Bench, the substantive appeals
were placed before a Division Bench of the Tribunal. By an order dated
10th April 2008 (impugned before us) the Division Bench of the Tribunal
allowed the assessee’s appeals relying on the decision of the larger Bench.
Earlier proceedings in this Court:
9. In the meanwhile, the Revenue preferred an appeal to this Court
against the decision of the larger Bench of the Tribunal. By a judgment and
order dated 17th August 2009 (rendered after the impugned order passed by
the Tribunal), this Court in Commissioner of Central Excise v. Gujarat
Narmada Fertilizers Company Limited, (2009) 9 SCC 101 set aside the order
of the larger Bench and decided the issue raised in favour of the Revenue.
10. This Court held that the Tribunal (and later the Gujarat High Court)
did not correctly appreciate the legal position in Gujarat Narmada. In
coming to this conclusion, this Court referred to Rule 6 of the Rules. For
convenience, Rule 6(1) and 6(2) of the Rules are reproduced and they read
“6. Obligation of manufacturer of dutiable and excisable goods-
(1) The 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 xxx xxx xxx
(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.”
11. This Court was of the view that Rule 6(1) of the Rules is plenary and
that cenvat credit for duty paid inputs used in the manufacture of exempted
final products is not allowable. Rule 6(1) of the Rules covers all inputs,
including fuel. On the other hand, Rule 6(2) of the Rules refers to other
inputs (other than fuel) used in or in relation to the manufacture of the
final product (dutiable and exempted).
12. This Court further held that on a cumulative reading of Rule 6(1) and
Rule 6(2) of the Rules it is clear that the legal effect of Rule 6(1) of
the Rules is applicable to all inputs, including fuel. Therefore, cenvat
credit will not be permissible on the quantity of fuel used in the
manufacture of exempted goods. As regards non-fuel inputs, an assessee
would have to maintain separate accounts or be governed by Rule 6(3) of the
13. As mentioned above, when the substantive appeals were taken up for
consideration by the Division Bench of the Tribunal, the decision of this
Court in Gujarat Narmada was not available. Accordingly, by the impugned
order, the Division Bench of the Tribunal allowed the appeals filed by the
assessee relying on the decision of the larger Bench of the Tribunal. It is
under these circumstances that the Revenue is before us.
14. The first and in fact the only contention of the learned Additional
Solicitor General appearing for the Revenue was that these appeals deserve
to be allowed in view of the decision rendered by this Court in Gujarat
Narmada. It was submitted that the orders impugned in these appeals were
dependent upon the order passed by the larger Bench of the Tribunal on 27th
December 2006/4th January 2007. The decision of the larger Bench having
been set aside by this Court in Gujarat Narmada the substratum of the case
of the assessee is wiped out.
15. On the other hand, the submission of learned counsel for the assessee
was that the issue whether LSHS is an “input” as defined in Rule 2(g) of
the Rules is debatable. According to the assessee, it should be given a
wide meaning, but in Maruti Suzuki Ltd. v. Commissioner of Central Excise,
Delhi-III (2009) 9 SCC 193 this Court gave “input” a restrictive meaning.
The correctness of this view was doubted in Ramala Sahkari Chini Mills
Limited, Uttar Pradesh v. Commissioner, Central Excise, Meerut-I, (2010) 14
SCC 744 and the issue has been referred to a larger Bench of this Court. It
was submitted that if it is held in these appeals that LSHS is not an
input, then the assessee would be adversely affected. It was, therefore,
submitted that these appeals may also be referred to a larger Bench or we
may await the decision of the larger Bench of this Court.
16. On merits, it was submitted that while deciding Gujarat Narmada this
Court did not notice its earlier decision in Commissioner of Central Excise
Vadodara v. Gujarat State Fertilizers & Chemicals Ltd., (2008) 15 SCC 46.
In GSFCL it was clearly held in favour of the assessee that a claim of
modvat credit on LSHS is justified if it is used in the manufacture of
steam, which in turn is used in the generation of electricity for the
manufacture of fertilizer exempt from duty. Since that decision was
overlooked, this Court fell into error while deciding Gujarat Narmada
against the assessee.
17. Assuming “input” is not given a restrictive meaning, then in view of
GSFCL the issue whether the assessee is entitled to claim cenvat credit on
duty paid LSHS is no longer open to discussion and the appeals must be
dismissed on that basis alone.
18. In response, the learned Additional Solicitor General submitted that
the interpretation of “input” does not arise in these appeals and we may
proceed on the basis that “input” as defined in Rule 2(g) of the Rules may
be given a broad interpretation and that LSHS utilized by the assessee is
an input for the manufacture of fertilizer exempted from duty. The second
step, namely, entitlement to cenvat credit does not necessarily follow even
if the first step is decided in favour of the assessee. There was,
therefore, no necessity of referring these appeals to a larger Bench of
this Court and the case was fully covered in favour of the Revenue in view
of Gujarat Narmada.
19. There is an apparent conflict between GSFCL and Gujarat Narmada.
20. 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
Rules, 2002 and is, therefore, more apposite. However, since GSFCL does lay
down a general 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
21. The Registry may place the case papers before Hon’ble the Chief
Justice for constituting a larger Bench to decide the aforesaid conflict of
(Madan B. Lokur)
December 11, 2012