REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.1308 OF 2008

Commnr. of Central Excise      … Appellant (s)

Versus

M/s. Gujarat Narmada Fertilizers Co. Ltd.        … Respondent(s)

WITH

Civil Appeal No.1862 of 2006

Civil Appeal Nos. 5553  of 2009 - (Arising out of S.L.P. (C) No.4663 of 2009)

Civil Appeal No.4169 of 2008

J U D G M E N T

S. H. KAPADIA, J.

1. Leave granted.

2. The  short  question  which  arises  for  determination  in  this  

batch of civil appeals is : whether the assessee(s) was required to  

reverse the CENVAT credit in terms of Rule 6(1) of Cenvat Credit  

Rules, 2002 on the quantity of LSHS which was used as “fuel” for  

producing steam and electricity, which, in turn, was used in or in

relation to the manufacture of exempted goods, namely, fertilizers,  

during the disputed period(s).   

3. For the sake of convenience we may refer to the facts in Civil  

Appeal No.1308 of 2008 – Commnr. of Central Excise v. M/s.  

Gujarat Narmada Fertilisers Co. Ltd.

FACTS

4. The assessee is a manufacturer of excisable goods such as  

fertilizers, methanol, formic acid, nitric acid, aceptic acid, etc. out  

of  which  fertilizers  were  exempt  from central  excise  duty  under  

Notification  No.6/2000-CE,  dated  1.3.2002.   The  respondent  

functioned under CENVAT Credit  Rules,  2002 (“2002 Rules”,  for  

short)  during the relevant  period.   There  is  no dispute  that  the  

entire quantity of Low Sulphur Heavy Stock (LSHS) was used as  

“fuel” within the respondent’s factory for burning in the boiler plant  

for producing steam.  There is no dispute that the entire steam was  

used within the factory directly in or in relation to manufacture of  

final products or for production of electricity which was captively  

used in the manufacture of final products.  The credit,  however,  

was disallowed due to interpretation of Rule 6 of the 2002 Rules by  

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the  Commissioner  who  took  the  view  that  since  fertilizers  were  

exempted goods, credit on LSHS, even though used as “fuel” within  

the factory, was not allowable.  Accordingly, one show cause notice  

was  issued  on  8.3.04  seeking  to  disallow  CENVAT  credit  of  

Rs.2,17,61,795/-  for the period March 2003 to September 2003.  

Vide  Order  dated  13.7.04,  the  said  show  cause  notice  stood  

confirmed by the Commissioner.   The second show cause notice  

dated 28.7.04 was issued for a different period, namely, October  

2003  to  March  2004  which  was  also  confirmed  by  the  

Commissioner who disallowed CENVAT credit vide his Order dated  

30.8.04.  Against the Commissioners’  Orders,  dated 13.7.04 and  

30.8.04,  disallowing  the  said  CENVAT  credit,  the  respondent  

preferred appeals before CESTAT.  The said appeals were referred  

to a larger Bench who by the impugned decision dated 27.12.06  

held that credit was admissible on LSHS used as “fuel”.  In passing  

the said Order the CESTAT followed the judgment of the Gujarat  

High Court in the case of Commnr. of  Central Excise and Customs  

v. M/s. Gujarat Narmada Valley reported in (2006) 193 ELT 136, in  

which it was held that in sub-rule (2) of Rule 6 of the 2002 Rules  

an exception stood carved out in case of  inputs “intended to be  

used as fuel” and in such cases the necessity of maintenance of a  

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separate account or denial of credit cannot be insisted upon.

RELEVANT RULES

5. We hereinbelow reproduce relevant rules of the Central Excise  

Rules, 1944 and CENVAT Credit Rules, 2002 which read as follow:

“The Central Excise Rules, 1944 (as it stood on  29.8.2000)

"AA. CREDIT OF DUTY PAID ON EXCISABLE GOODS USED AS INPUTS OR  CAPITAL GOODS  

RULE 57AD. Obligation of manufacturer of dutiable and exempted goods.-  (1) 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).  

(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. 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) final products falling under Chapters 50 to 63 of the Schedule to the Central  Excise Tariff Act, 1985 ;  

(ii) tyres of a kind used on animal drawn vehicles or handcarts and their tubes,  falling within Chapter 40;  

(iii) black and white television sets, falling within Chapter 85;  

(iv) newsprint, in rolls or sheets, falling within Chapter heading No.48.01,  

the  manufacturer  shall  pay  an  amount  equivalent  to  the  CENVAT  credit  attributable  to  inputs  used  in  or  in  relation  to  the  manufacture  of  such  final  products at the time of their clearance from the factory, or  

(b) if the exempted goods are other than those described in clause (a) above, the  manufacturer  shall  pay an amount  equal  to  eight  per  cent.  of  the total  price,  excluding sales tax and other taxes, if any, paid on such goods, of the exempted  

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final product charged by the manufacturer for the sale of such goods at the time  of their clearance from the factory.  

Explanation.- The amount mentioned in (a) and (b) above shall be paid by the  manufacturer by debiting the CENVAT credit or otherwise.  

(3) No credit of the specified duty shall be allowed on capital goods which are  used exclusively in the manufacture of exempted goods (other than 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).  

(4)  The provisions of  sub-  rule (1),  sub-rule (2) and sub-rule (3)  shall  not  be  applicable in case the exempted goods are either,-  

(i) cleared to a unit in a free trade 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 Parks; 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 Excises, dated 28th August, 1995;  or  

(v) cleared for export under bond in terms of the provisions of rule 13.”      

CENVAT Credit Rules, 2002

RULE 6. Obligation of manufacturer of dutiable and 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 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  

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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 Tariff Act;  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. Omitted.  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. Naptha (RN) and furnace oil falling within Chapter 27 of  

the said First Schedule used for generation of electricity; viii. 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 erstwhile 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.R.255 (E), dated the 16th March, 1995;

(4)  No.64/95-Central  Excise,  dated  the  16th March,  1995,  G.S.R.256(E), dated the 16th March, 1995;  

the manufacturer  shall  pay an amount equivalent to the CENVAT  credit  attributable  to  inputs  used  in,  or  in  relation  to,  the  manufacture of such final products at the time of their clearance  from the factory; or  

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b. if  the  exempted  goods  are  other  than  those  described  in  condition (a), the manufacturer shall  pay an amount equal to  eight per cent. of the total price, excluding 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.   

Explanation I.- 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. ”  

6. It may be noted that sub-rules (1) and (2) of Rule 57AD of the  

Central Excise Rules, 1944 is  pari materia with sub-rules (1) and  

(2) of Rule 6 of the CENVAT Credit Rules, 2002.   

SUBMISSIONS

7. According  to  Shri  Gourab  Banerji,  learned  Addl.  Solicitor  

General appearing for the Department, Rule 57AD(1)/Rule 6(1) is a  

general bar that CENVAT credit is not admissible on such quantity  

of inputs which are used in the manufacture of exempted goods.  

According to learned counsel, this bar is consistent with the basic  

idea  of  CENVAT scheme.   Learned counsel  submitted that  on a  

bare reading of sub-rule (2) of Rule 6 of the 2002 Rules, it is clear  

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that the said sub-rule imposes an obligation on the manufacturer  

when he is manufacturing dutiable and exempted goods to either  

maintain separate accounts qua inputs on dutiable and exempted  

goods  or  if  he  does  not  choose  to  do  so  he  has  to  pay  certain  

specified amount.   In the alternative,  learned counsel  submitted  

that since LSHS was used for generation of electricity or steam it  

did  not  fall  in  the  category  of  “inputs  used  as  fuel”  and  

consequently  the  assessee  herein  was  required  to  maintain  

separate  account  or  pay  a  certain  specified  amount  under  sub-

rules (2) and (3) of Rule 6 of the 2002 Rules.

8. Shri S.K. Bagaria, learned senior counsel appearing on behalf  

of the assessee(s), submitted that inputs “intended to be used as  

fuel”  have  been specifically  excluded from the  obligations  under  

Rule 6 of the CENVAT Credit Rules, 2002.  According to learned  

counsel, inputs “intended to be used as fuel” have been specifically  

excluded  from  the  requirement  of  sub-rule  (2)  by  using  the  

expression  “except  inputs  intended  to  be  used  as  fuel”  and  

consequently the obligation of maintaining separate accounts and  

taking credit only on inputs intended for use in the manufacture of  

dutiable goods is not applicable in respect of inputs “intended to be  

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used as fuel”.  According to learned counsel, under sub-rule (3) of  

Rule 6, a manufacturer opting not to maintain separate accounts  

has to follow either of the two conditions mentioned in clauses (a)  

and (b) of sub-rule (3) of Rule 6.  Clause (a) applies to specified  

exempted goods whereas clause (b) applies to exempted goods other  

than those mentioned in clause (a).  In respect of exempted goods  

covered by clause (b), the manufacturer shall pay an amount equal  

to 8%/10%, as the case may be, of the total price, excluding taxes,  

if  any,  charged  by  the  manufacturer  for  sale  of  such  goods.  

Therefore, according to learned counsel, sub-rule (3) makes it clear  

that it applies only to cases where a manufacturer is required to  

maintain separate accounts under sub-rule (2) but opted not to do  

so and since in the present case LSHS is used as “fuel”, sub-rule  

(2), which carves out an exception to goods used as “fuel”, is not  

applicable,  and  therefore  the  assessee(s)  was  not  required  to  

maintain separate accounts.  In other words, according to learned  

counsel, inputs “intended to be used as fuel” have been specifically  

excluded  from  the  obligation  of  maintaining  separate  accounts  

under sub-rule (2) and, therefore, in respect of these inputs there is  

no question of opting or not opting to maintain separate accounts  

under sub-rule (2)  and consequently the present case cannot be  

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covered by sub-rule (3) which applies only to a manufacturer opting  

not to maintain separate account(s).    

FINDINGS

9. 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 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).   

10. 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  

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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-à-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.   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 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.  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  

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view, the above aspect has not been properly appreciated by the  

Gujarat High Court in the above case of  M/s. Gujarat Narmada  

Valley reported in (2006) 193 ELT 136 (supra).  

11. For the above reasons, we find merit in the Department’s civil  

appeals.

12. Before concluding, one point needs to be noted.  In this batch  

of cases there is a civil  appeal bearing  Civil Appeal No.1862 of  

2006 – CCEC, Vadodara v. M/s. Gujarat Narmada Valley which  

concerns the period November 2000 to  February  2001.   In  that  

matter,  apart from interpretation of Rule 6(1) and Rule 6(2),  the  

question  which  arises  for  determination  is  :  whether  the  

Department was right in reversing proportionate CENVAT credit to  

the extent of electricity wheeled out/cleared to the Grid and to the  

Township.  Therefore, on the question of interpretation of Rule 6(1)  

and Rule 6(2), the above reasoning squarely covers the case.  On  

the  question  of  reversal  of  CENVAT  credit,  to  the  extent  of  the  

electricity wheeled out/cleared to the Grid and to the Township,  

our Judgment delivered today in the case of M/s. Maruti  Suzuki  

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Ltd. v. Commissioner of Central Excise, Delhi-III [Civil Appeal No.  

of 2009 –(arising out of S.L.P. (C) No.3826 of 2009)], would apply.  

13. It may be noted that litigation on interpretation of CENVAT  

Credit Rules has arisen on account of various conflicting decisions  

given by the various Benches of CESTAT, the reason being that the  

Rules have not been properly drafted.  In the circumstances, we are  

of  the  view  that  in  this  batch  of  cases  no  penalty  is  leviable,  

however, in order to decide the amount of duty payable by each of  

the  assessees,  the  matters  are  remitted  to  the  Adjudicating  

Authority to decide the amount of duty payable without penalty on  

reversal  of  credit  to  the  extent  of  the  input  being  used  in  the  

manufacture of exempted final products/to the extent of the excess  

electricity being wheeled out to the Grid and to the Township.   

14. Subject to what is stated above, the civil appeals filed by the  

Department are allowed with no order as to costs.

……………………………J.                                    (S.H. KAPADIA)

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……….………………….J.                                     (AFTAB ALAM)   

New Delhi; August 17, 2009.

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