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REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 4189-4196 OF 2010

THE COMMISSIONER OF CENTRAL EXCISE,  VADODARA-II Appellant(s)

VERSUS

GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. Respondent(s)

WITH

SPECIAL LEAVE PETITION (C) NO. 9101 OF 2014

J U D G M E N T

R.F. Nariman, J.

1) This matter has come before us on a reference made by a

Division  Bench of  this Court  in  Commissioner  of Central

Excise,  Vadodara vs.  Gujarat  Narmada  Valley  Fertilizers

Company Limited, (2013) 15 SCC 336 as follows:-

“15. There is an apparent conflict between GSFCL and  Gujarat Narmada.  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

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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 duty.”

2) The facts that are necessary in order to appreciate the

reference so made are set out in the reference order itself

as follows:-  

“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 “the Rules”) read with Section 11-A 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 8-3-2004 and pertained to the period  31-3-2003  to  September  2003  while  the second show-cause notice was dated 28-7-2004 and was for the period October 2003 to March 2004. 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 24-6-2004. The  second  show-cause  notice  was  similarly adjudicated and an adverse order passed on 30-8- 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.

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Proceedings before the Tribunal

4. 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 of 2004 and E/3672 of 2004.

5.  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 27-12-2006/4-1-2007 (Gujarat Narmada Valley Fertilizers Co. Ltd. v. CCE, (2007) 208 ELT 342 (Tri), the larger Bench held that the assessee was entitled to claim CENVAT credit on 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.  CCE,  (2004)  176  ELT  200  (Tri)  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  CCE and  Customs v.  Gujarat  Narmada Fertilizers Co. Ltd., (2006) 193 ELT 136 (Guj).

6. 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 fertilizers.”

7. Pursuant to the decision of the larger Bench, the  substantive  appeals  were  placed  before  a Division Bench of the Tribunal.  By an order dated 10-4-2008 (Gujarat Narmada Valley Fertilizers Co. Ltd. v. CCE, Appeals Nos. E/2517 of 2004 & 3672 of 2004, order dated 10-4-2008 (Tri) (impugned before us) the Division Bench of the Tribunal allowed the assessee’s appeals relying on the decision of the larger Bench.”

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3) The impugned order in the present case, which is dated

10.04.2008 only refers to and follows the larger Bench of

the  Customs,  Excise  &  Service  Tax  Appellate  Tribunal

judgment  dated  27.12.2006  which,  in  turn,  followed  the

judgment  of  a  single  Judge  of  the  Gujarat  High  Court

reported as CCE     and Customs vs. Gujarat Narmada Fertilizers

Co. Ltd., (2006) 193 ELT 136 (Guj).  We may indicate that

both the larger Bench judgment, in appeal before this Court,

as well as the said Gujarat High Court, have been overruled

by the judgment of this Court in  Commissioner of Central

Excise vs.  Gujarat Narmada Fertilizers Co. Ltd., (2009) 9

SCC 101.

4) Mr. Dhruv Agarwal, learned Senior Advocate appearing on

behalf of the Revenue, has placed before us the reference

order i.e. the judgment reported as (2009) 9 SCC 101 [CCE v.

Gujarat Narmada Fertilizers Co. Ltd., (supra)] together with

the judgment reported in  Commissioner of Central Excise,

Vadodara vs. Gujarat State Fertilizers and Chemicals Ltd.,

(2008)  15  SCC  46  as  also  the  two  Appellate  Tribunal’s

judgments  in  Ballarpur  Industries  Ltd. vs.  Collector  of

Central Excise (2000) 116 ELT 312 (Tri) and Raymond Ltd. vs.

Commissioner of Central Excise (2000) 37 RLT 447 (CEGAT)

which were expressly approved by this Court in Commissioner

of Central Excise, Vadodara vs.  Gujarat State Fertilizers

and Chemicals Ltd., (2008) 15 SCC 46. The  learned  Senior

Advocate then placed the MODVAT Rules which existed prior to

the coming into force of the CENVAT Credit Rules on which

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these judgments were based and argued that Rule 57A to 57D

of the MODVAT Rules were different from Rule 6(1) and (2) of

the CENVAT Credit Rules which need to be interpreted in the

facts of this case, in that the scheme under the MODVAT

Rules dealt with inputs which resulted in intermediate and

final products, as opposed to the CENVAT Credit Rules which

deals with inputs which finally end up as exempted products,

perhaps together with dutiable goods.  According to him, the

ratio of the two Appellate Tribunal judgments are completely

different from the ratio of this Court’s judgment in (2009)

9 SCC 101 [CCE vs.  Gujarat Narmada Fertilizers Co. Ltd.,

(supra) and consequently the Division Bench which referred

to the matter to us ought not to have referred the matter at

all as there is, in fact, no conflict between the ratio of

these  two  Appellate  Tribunal’s  judgments  as  approved  in

Commissioner of Central Excise, Vadodara vs. Gujarat State

Fertilizers and Chemicals Ltd., (2008) 15 SCC 46 and this

Court’s  judgment  in  (2009)  9  SCC  101  [CCE vs.  Gujarat

Narmada Fertilizers Co. Ltd., (supra).

5) Mr. Dushyant Dave, learned Senior Advocate appearing on

behalf of the respondent has, however, placed a judgment of

this Court in which it was stated that the MODVAT scheme and

the  CENVAT  Credit  Rules  and  the  successor  CENVAT  Credit

Rules were not different, as a general rule, and, therefore,

differences should not be found between the earlier scheme

and the scheme of Rule 6(1) & (2) when, in fact, there is

none.  He relied on this Court’s judgment in Collector of

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Central  Excise and  Others vs.  Solaris  Chemtech Ltd.  and

Others (2007) 7 SCC 347 and also argued that quite apart

from  the  reference  made,  the  judgment  of  this  Court  in

(2009) 9 SCC 101 [CCE vs.  Gujarat Narmada Fertilizers Co.

Ltd., (supra) was incorrect in that it failed to notice the

last part of Rule 6(1) which stated that the rule will not

apply in cases covered by sub-rule (2) of Rule 6 of the

CENVAT Credit Rules.  He also argued that the exception so

far as the input was fuel that is contained in Rule 6(2) was

so inserted to make it clear that the moment an input is

used as fuel, only the procedure of sub-rule (2) would not

apply; and, in point of fact, therefore, inputs which are

fuels would be outside the ken of sub-rule (1) as well.  He

also  exhorted  us  to  accept  the  consistent  view  of  the

Tribunal  in  all  these  cases  that  where  inputs  are  fuel

inputs and they result in the manufacture of intermediate

products which, in turn, result in the manufacture of excise

free and dutiable goods, fuel as an input is kept outside

the  scheme  of  Rule  6  so  that  excise  duty  does  not  get

attracted in such cases.   

6) Having  heard  learned  counsel  for  both  sides,  it  is

important first to set out the MODVAT Rules as they obtained

prior to the CENVAT Credit Rules of 2002.  Rule 57B(1) of

the MODVAT Rules reads as follows:-

“Rule  57B.  Eligibility  of  credit  of  duty  on

certain  inputs.-  (1)  Notwithstanding  anything

contained in rule 57A, the manufacturer of final

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products shall be allowed to take credit of the

specified duty paid on the following inputs, used

in or in relation to the manufacture of the final

products,  whether  directly  or  indirectly  and

whether contained in the final products or not,

namely:-

(i) inputs  which  are  manufactured  and  used

within the factory of production;

(ii) paints;

(iii) inputs used as fuel;

(iv) inputs used for generation of electricity

or steam, used for manufacture of final

products or for any other purpose, within

the factory of production;

(v) packing materials and materials from which

such packing materials are made provided

the  cost  of  such  packing  materials  is

included  in  the  value  of  the  final

product;

(vi) accessories of the final product cleared

alongwith such final product, the value of

which is included in the assessable value

of the final product.

Explanation.- For the purposes of this sub-rule,

it  is  hereby  clarified  that  the  term  ‘inputs’

refers only to such inputs as may be specified in

a notification issued under rule 57A.”

7) As opposed to this, Rule 6 of the CENVAT Credit Rules,

2002 which is set out in (2009) 9 SCC 101 [CCE vs. Gujarat

Narmada Fertilizers Co. Ltd., (supra) reads as follows:-

“6.  Obligation  of  manufacturer  of  dutiable  and

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exempted 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 the CENVAT credit on inputs shall

not be denied to job-worker referred to in Rule

12-B  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.”  

8) This Court in (2009) 9 SCC 101 [CCE vs. Gujarat Narmada

Fertilizers Co. Ltd., (supra), after setting out the Central

Excise MODVAT Rules as they stood in 2000, together with the

CENVAT Credit Rules, then went on to hold:

“15.  As  can  be  seen  from  the  submissions,  the

contention of the assessee is that exclusion of

fuel inputs from the purview of sub-rule (2) of

Rule  6  would  mean  that  such  inputs  are  also

automatically excluded from sub-rule (1) whereas

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according  to  the  Department  sub-rule  (1)  is  a

general rule which provides, that except for the

circumstances  mentioned  in  sub-rule  (2),  CENVAT

credit shall not be allowed on such quantity of

inputs used in the manufacture of exempted goods

and even though fuel-inputs are excluded from sub-

rule (2), such inputs would still fall under sub-

rule (1).  

16.  In  our  view,  sub-rule  (1)  is  plenary.  It

restates a principle, namely, that CENVAT credit

for duty paid on inputs used in the manufacture of

exempted  final  products  is  not  allowable.  This

principle is in-built in the very structure of the

CENVAT scheme.  Sub-rule (1), therefore, merely

highlights that principle.  Sub-rule (1) covers

all inputs, including fuel, whereas sub-rule (2)

refers to non-fuel inputs.  Sub-rule (2) covers a

situation where common  cenvatted inputs are used

in or in relation to manufacture of dutiable final

product and exempted final product but the fuel

input  is  excluded  from  that  sub-rule.  However,

exclusion of fuel input vis-a-vis non-fuel input

would  still  fall  in  sub-rule  (1).   As  stated

above, sub-rule (1) is plenary, hence, it cannot

be said that because sub-rule (2) is inapplicable

to fuel-input(s), CENVAT credit is automatically

available to such inputs even if they are used in

the manufacture of exempted goods.  

17.  The cumulative reading of sub-rules (1) and

(2)  makes  it  abundantly  clear  that  the

circumstances  specified  in  sub-rule  (2),  which

inter alia requires separate accounting of inputs,

are not applicable to the fuel input(s). However,

the said sub-rule (2) nowhere says that the legal

effect of sub-rule (1) will stand terminated in

respect of fuel inputs which do not fall in sub-

rule (2). In other words, the legal effect of sub-

rule (1) has to be applied to all inputs including

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fuel inputs, only exception being non-fuel inputs,

for which one has to maintain separate accounts or

in its absence pay 8%/10% of the total price of

the exempted final products.  

18. Therefore, sub-rule (1) shall apply in respect

of goods used as "fuel" and on such application,

the  credit  will  not  be  permissible  on  such

quantity of fuel which is used in the manufacture

of exempted goods. In our  view, the above aspect

has not been properly appreciated by the Gujarat

High Court in Gujarat Narmada (2006) 9 SCC 193.  

19. For the above reasons, we find merit in the

Department's civil appeals.”  

9) Thus, the finding of this Court restates an important

principle  under  the  CENVAT  Credit  Rules,  and  which  is

inbuilt in the structure of the CENVAT Credit scheme, which

is that Cenvat credit for duty paid on inputs used in the

manufacture of exempted final products cannot be allowed.

It is only a reflection of this larger principle which is

contained in Rule 6.  When Rule 6(1) says that the CENVAT

Credit shall not be allowed on such quantity of inputs which

is used in the manufacture of exempted goods, it relies upon

the definition of “inputs” contained in these Rules which

certainly include LSHS and steam and electricity that are

produced in the manufacturing process utilizing LSHS.  The

exception that is contained in sub-rule (2) refers to all

inputs except inputs intended to be used as fuel which then

results in the manufacture of final products which are both

chargeable to duty as well as exempted goods.  What is clear

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is that the exception to sub-rule (1) which is contained in

sub-rule (2) itself contains an exception, namely, inputs

intended to be used as fuel.  This being the case, the

moment it is found that inputs are intended to be used as

fuel, such inputs go outside the ken of sub-rule (2) of Rule

6.  When this happens, the exception contained in sub-rule

(2) does not come into effect at all as a result of which

sub-rule (1) must be applied on its own terms.

10) We  have  now  to  see  the  judgment  of  this  Court  in

Commissioner of Central Excise, Vadodara vs. Gujarat State

Fertilizers and Chemicals Ltd., (2008) 15 SCC 46.  This

judgment  has  only  upheld  two  Tribunal  judgments,  one

contained in Ballarpur Industries Ltd. (supra) and the other

contained in Raymond Ltd. (supra).

11) When we come to the judgment in  Ballarpur Industries

Ltd.  (supra), the  Tribunal  was  concerned  with  the

interpretation of Rule 57A-D of the Central Excise Rules as

they stood prior to 16.03.1995.  The bone of contention in

this case was that electricity not being excisable goods at

all cannot be considered to be an intermediate product for

the purpose of exempting from duty final products in which

electricity is an intermediate product. The Tribunal held

that fuel oils for generation of electricity which is used

for  manufacture  of  final  products  by  the  assessee  is

eligible to MODVAT credit in terms of Rule 57A.  It can thus

be seen that the issue in Ballarpur Industries Ltd. (supra)

was different from the issue in the present case, as was

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Rule 57A-D of the MODVAT Rules being different from Rule 6

of  the  CENVAT  Credit  Rules.   Equally,  the  judgment  in

Raymond Ltd. (supra) concerned itself with Rule 57A, C and D

in which it construed the meaning of the expression “for any

other purpose” contained in Rule 57A in para 12.  The ratio

of this judgment is also therefore far removed from the

facts of the present case as the present case does not deal

with the expression “for any other purpose”.

12) We now come to the judgment of this Court in  Vikram

Cement vs. Commissioner of Central Excise, Indore, (2006) 2

SCC 351, which was strongly relied upon by Mr. Dushyant

Dave, learned Senior Advocate, in particular, para 24 of the

judgment which reads as follows:

“24. The schemes of MODVAT and CENVAT credit are not therefore different and we are unable to agree with the conclusion of the Court in J.K. Udaipur Udyog, (2004) 7 SCC 344.”  

Considering that the CENVAT Credit Rules are the successor

rules  to  the  MODVAT  Rules,  as  a  general  statement,  the

scheme contained in both the MODVAT as well as the CENVAT

scheme may well be similar.  However, that does not answer

the precise question before us.

13) Mr. Dave relied upon Solaris Chemtech Ltd., (supra) in

which Rule 57A of the MODVAT Rules came up for construction.

This  judgment  again  went  into  what  was  the  correct

interpretation of the expression “in or in relation to the

manufacturer  of  final  products”  and  the  definition  of

“inputs” for the purpose of Rule 57A.  Having gone into

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these two aspects of Rule 57A, para 15 then lays down the

law as follows:-

“15.  In  the  present  case,  LSHS  is  used  to generate  electricity  which  is  captively consumed.  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 57-A 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  Explanation  clause  (c) even  before  16-3-1995.   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 57-A.”   

14) This judgment again does not take the respondent’s case

any further.  As we have seen, the issue in this case was

entirely different, electricity not being an excisable item

which  is  captively  consumed  and  used  to  manufacture

cement/caustic  soda  was  held  nonetheless  to  be  used  in

relation to the “manufacturer” of the final product.  The

issue in the present case is whether, given the scheme of

Rule 6 of the CENVAT Credit Rules, fuel used as inputs which

are covered by Rule 6(1) can at all be said to be within the

exception contained in Rule 6(2).

15) This being the case, we are of the view that there is

no conflict between the earlier judgment of Commissioner of

Central Excise, Vadodara vs. Gujarat State Fertilizers and

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Chemicals Ltd., (2008) 15 SCC 46 and (2009) 9 SCC 101 [CCE

vs. Gujarat Narmada Fertilizers Co. Ltd., (supra).  Also, we

are of the view that even after independently applying our

minds to Rule 6 as it stood, the interpretation of this

Court contained in (2009) 9 SCC 101 [CCE v. Gujarat Narmada

Fertilizers Co. Ltd., (supra) is correct.   

16) As a result, the appeals are allowed and the order

dated 10.04.2008 is set aside, except in respect of Appeal

Nos. E 87-88/2005 before the Tribunal, where matters have

been remanded by the Tribunal on points other that what has

been decided by this judgment.  

17) Accordingly, Special Leave Petition (C) No.  9101 of

2014 is disposed of in the light of this judgment.   

   .......................... J.

       (ROHINTON FALI NARIMAN)

                     .......................... J.   (ANIRUDDHA BOSE)

                     .......................... J.   (V. RAMASUBRAMANIAN)

New Delhi; December 03, 2019.