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CASE NO.: Appeal (civil)  1197 of 2005

PETITIONER: M/s Vikram Cement

RESPONDENT: Commnr. Of Central Excise, Indore

DATE OF JUDGMENT: 18/01/2006

BENCH: Ruma Pal, B.N. Srikrishna & Dalveer Bhandari

JUDGMENT: J U D G M E N T With C.A.Nos.3422/2004 and 4149-4153/2004, 4120-4122/2004, C.A Nos. 7175-7189/2004,  C.A Nos. 2318-2320/2005,  CA  Nos. 1815, 6514, 1613, 6169-71, 6698 of 2005  and SLP (C)No.23205/2003 & SLP (C) No.19603/2005)

RUMA PAL, J.                  The question whether the decision in Jaypee Rewa  Cement Vs. CCE 2001 (133) ELT 3 SC would apply to the  CENVAT Rules 2000 framed under the Central Excise Tariff  Act 1985 (referred to as the ’Act’) is to be decided on a  reference made in this case. A Bench of two judges of this  Court in Commissioner of Central Excise, Jaipur Vs. J.K.  Udaipur Udyog Ltd 2004 (171) ELT 289 SC held that Jaypee  Rewa Cement  did not apply to the CENVAT Rules. The view   was doubted in this case by a Bench of coordinate strength   which referred the following question to us:- "In the light of the provisions of the  Cenvat scheme vis-‘-vis Modvat scheme  reproduced  hereinabove, we are of the  view that the observations made in  paragraph 9 of the decision of the  Division Bench, quoted above, in the case  of Commissioner of Central Excise,  Jaipur vs. J.K. Udaipur Udyog Ltd.  reported in 2004 (171) ELT 289 needs  reconsideration".

       The reference was made in the factual context of the  appellants availing of CENVAT credit on explosives and other  inputs used in quarrying limestone, which was in turn used  for the manufacture of cement and clinkers, which are  classifiable under Chapter 25.  The limestone mines of the  appellants are situated at some distance away from the factory  premises of the appellants.  The Adjudicating Authority held  that the appellants were not entitled to the credit availed of by  the appellants and raised a demand for excise duty only on the  explosives.  The narrower question raised in this appeal  therefore is whether the adjudicating authority was correct in  denying  the appellants the CENVAT credit on the inputs. On the broader question, namely, whether there is a  difference in substance between the MODVAT and the  CENVAT schemes, Modified Value Added Tax Scheme  (MODVAT)  was introduced in 1986 granting credit of excise  duties used in or in relation to the manufacture of final  products. The scheme was contained in Rules 57A to 57J of  the Central Excise Rules, 1944 (referred to as the ’Rules’). We

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set out below the relevant extracts of these Rules:- "Rule 57A - Applicability.\027

       (1)     xxxx             xxxx          xxxx             (2)     xxxx     xxxx         xxxx            (3)     xxxx             xxxx         xxxx    

(4) The credit of specified duty under this  section shall be allowed on inputs used in  the manufacture of final products as well  as on inputs used in or in relation to the  manufacture of the final products  whether directly or indirectly and  whether contained in the final product or  not.

Rule 57B. Eligibility of credit of duty  on certain inputs\027(1) Notwithstanding  anything contained in Rule 57A, the  manufacturer of final 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 used  under Rule 57A". {Emphasis supplied}

    We observe that Rule 57B commences with a non  obstante clause. It allows credit to be taken  by a   manufacturer on 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.  There is no qualification as to where the inputs must be used  in the main body of sub-rule (1).  Qualifications have been  introduced to the extent stated in Clauses (i) to (vi) read with  the Explanation.  Thus clause (i) provides for inputs which are

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manufactured and used within the factory of production.  Paints, fuel, packing materials and accessories are also treated  as inputs under clauses (ii), (iii), (v) and (iv) without any  requirement for user within the factory.  Clause (iv) provides  for credit on inputs used for generation of electricity or steam  used for manufacture of the final products or for any other  purposes "within the factory of production".  It appears to us  on a plain reading of the clause that the phrase "within the  factory of production" means only such generation of  electricity or steam which is used within the factory would  qualify as an intermediate product.  The utilization of inputs  in the generation of steam or electricity not being qualified by  the phrase "within the factory of production" could be outside  the factory.  Therefore, whatever goes into generation of  electricity or steam which is used within the factory would be  an input for the purposes of obtaining credit on the duty  payable thereon.  As far as the Explanation is concerned, the  inputs are restricted to inputs notified under Rule 57A.  There  is no dispute that both explosives and limestone are notified  under Section 57A for manufacture of the final product viz.  cement.  The next relevant rule is Rule 57F. What we are  concerned with is  sub-rule (4) of Rule 57F. This provides: "(4) The inputs can also be removed as  such or after they have been partially  processed by the manufacturer of the  final products to a place outside his  factory under the cover of a challan  specified in this behalf by the Central  Board of Excise and Customs, for the  purposes of test, repair, refining, re- conditioning or carrying out any other  operation necessary for the manufacture  of the final products or for manufacture  of intermediate products necessary for  the manufacture of final products and  return the same to his factory".

Therefore credit on inputs sent by a manufacturer from  the factory to a job worker for test, repair etc. but ultimately  utilized in the final product, is allowable. Then comes Rule 57J which, in so far as it is material,  reads:- Rule 57J. Credit of duty in respect of  inputs used in an intermediate  product.\027(1) Notwithstanding anything  contained in these rules, the  manufacturer shall be allowed to take  credit of the specified duty paid on inputs  described in column (2) of the Table  below and used in the manufacture of  intermediate products described in  column (3) of the said Table received  by  the said manufacturer for use in or in  relation to the  manufacture of final  products described in the corresponding  entry in column (4) of the said Table."

"(2) The manufacturer of final products  shall take credit under sub-rule (1) only if  the intermediate products are  manufactured in a factory as a job work  in respect of which the exemption  contained in the notification of the  Government of India in the Ministry of

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Finance (Department of Revenue)  No.214/86-Central Excises, dated the  25th March, 1986 has been availed of".

(3) xxx xxx             xxx             xxx       

                            {Emphasis supplied}   

 This Rule allows credit on inputs used in manufacture  of intermediate products described in column 3 of the Table  provided the intermediate products are received by the  manufacturer for use in or in relation to the manufacture of  final products described in the corresponding entry in column  4 of the Table. Explosives, limestone and cement are  admittedly covered by columns 1,2 and 3 respectively of the  Table.   It may be noted at this stage that Rule 57J(2) was  explained by a Trade Notice No.38/1999 dated 2nd April, 1991  issued by the Bombay Collectorate. It was said :- "the basic aim of the MODVAT Scheme is  to avoid the cascading effect of duties on  a product.  Therefore, the scheme permits  MODVAT credit on all goods forming a  part of the final product, though the final  product may be manufactured in several  stages, provided duty is paid at  each  stage of the manufacturing chain.

However, to ensure an unbroken chain of  MODVAT, rule 57J has been incorporated  under the MODVAT Scheme so as to  extend credit of duty on certain inputs,  even in respect of exempted intermediate  products (notified under Notification  No.351/86. C.E., dated 20.6.1986) which  are brought from outside.  However, one  of the provisions of this notification  requires that the intermediate products  should be manufactured in a factory as a  job work and exemption contained in  Notification No.214/86-C.E. dated  25.3.1986 should have been availed in  respect of them.  Thus, it may be  observed that rule 57J grants limited  flexibility of job work.  The rule merely  requires that the unit availing this facility  should be a job worker in terms of  Notification No.214/86-C.E. A  manufacturing unit of the same  manufacturer can also be a job worker.   Therefore, so far as the aforesaid  manufacturing  unit is job worker, it  would also be eligible  for credit under  rule 57J".

We do not, for the purpose of this reference, discuss Rule  57Q which deals with credit on capital goods used as inputs. The question whether it was necessary for inputs to be  used within the factory premises where the manufacture as  defined in Rule 57AB of final products takes place for the  purposes of availing of credit, came up before a Bench of three  Judges in the case of Jaypee Rewa Cement Vs. CCE (supra).   As in this case, in that case the input in question was  explosives which were used in quarrying limestone used in the

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manufacture of cement.  The Court came to the conclusion on  a consideration of the Rules which we have already quoted,  that sub-rule (1) of Rule 57A did not in any way specify that  the inputs have to be  utilized within the factory premises.   The Tribunal had relied upon Rule 57F in coming to the  conclusion that the inputs in respect of which credit of duty  was claimed must be those which were used in or brought in  to the factory premises. In reversing the decision of the  Tribunal this Court observed that:- "The Tribunal, however, has not referred  to the provisions of Rule 57J, the opening  portion of which makes it clear that the  said Rule will be applicable  notwithstanding anything contained in  the other Rules.  According to Rule 57J,  when the Central Government by  notification specified the inputs used in  the manufacture of intermediate products  received by the manufacturer for use in  or in relation to the manufacture of final  product, then all such products on which  duty has been paid credit will be  allowed\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005.

Explosives would fall under column (2)  being a tariff item in Chapter 36; the  intermediate product, namely, lime stone  would fall under column 3 being covered  by Chapter 25; and the final product,  namely, cement would also fall under  Chapter 25 and would fall under column  4.  The reading of Rule 57J along with the  aforesaid notification can leave no  manner of doubt that even in respect of  inputs used in the manufacture of  intermediate product which product is  then used for the manufacture of a final  product.  The manufacturer would be   allowed credit on the duty paid in respect  of the input. On the explosives a duty  had been paid and the appellants would  be entitled to claim credit because  the  explosives were used for the manufacture  of the intermediate product, namely, lime  stone which, in turn, was used for the  manufacture of cement".

The appeal of the manufacturer was accordingly allowed  and it was held that the MODVAT was allowable  on the use of  the explosives in the manufacture of cement irrespective of the   fact that  the explosives were used directly in the mines and  never entered the factory of the manufacturer of cement. In 2000 the MODVAT Rules were replaced by the  CENVAT Rules by the Central Excise (2nd Amendment) Rules  2000. Basically there was a re-arrangement of the earlier rules  which in substance remained the same.  Thus Rule 57AA  defined inputs as :- "input" means all goods, except 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 accessories  of the final products cleared along with

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the final products, goods used as paint,  or as packing material, or as fuel, or  for  generation of electricity or stem used for  manufacture of final products or for any  other purpose within the factory of  production and also includes lubricating  oils, greases, cutting oils and coolants.                                  {Emphasis supplied}

Analyzed, it is clear that sub-rule (d) of Rule 57AA has  merely reframed Rule 57B to include all the ingredients of  inputs while at the same time broadening the base not only by  referring to "all goods" but also by using the word "includes".   Rule 57AC  provides for the conditions for allowing  CENVAT credit in respect of inputs received in the factory of  the manufacturer. Sub-rule (1) of Rule 57AC which was relied  on in J.K. Udaipur Udyog  to differ from the conclusion in  Jaypee Rewa Cement reads:- "Rule 57AC. Conditions for allowing  CENVAT credit.- (1) The CENVAT credit  in respect of inputs may be taken  immediately on receipt of the inputs in  the factory of the manufacturer".   Rule 57 J of the MODVAT Rules was deleted. This led to   controversy and on 29th of August, 2000, a clarification was  issued by the Central Board of Excise and Customs (CBEC)  inter alia to the effect that:- "It has been represented  that when the  inputs are sent directly to a job worker,  the erstwhile MODVAT credit scheme  permitted availment of MODVAT credit  under Rule 57J read with the Notification  No.214/86-C.E. as amended. Several  associations have requested that similar  provision may be made in the CENVAT  scheme. This request has been acceded  to and Rule 57AB(1) has been amended  suitably for this purpose.  The amended  provisions of Rule 57AB (1) apply to  goods received in the factory on or after  1st April, 2000. Credit is therefore  permissible in respect of intermediate  goods received from a job worker on or  after 1.4.2000. Credit shall,  of course, be  allowed only if the intermediate products  received by the manufacturer of the said  final products are accompanied by any of  the documents as specified under rule  57AE(1) evidencing the payment of duty  on such inputs of capital goods".                                  {Emphasis supplied}

Consequently, with the intention of re-introducing the  benefit granted earlier under Rule 57J, Rule 57AB was  introduced under the heading "CENVAT credit".  The material  extracts of Rule 57AB reads as follows:- 57AB(1) A manufacturer or producer of  final products shall be allowed to take  credit (hereinafter  referred to as the  CENVAT credit) of.\027

(i)     the duty of excise specified in the  First Schedule to the Central Excise  Tariff Act, 1985 (hereinafter referred

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to as the said First Schedule) ,  leviable under the Act;

(ii)    xxx             xxx             xxx              xxx  (iii)   Xxx             xxx             xxx             xxx (iv)    Xxx             xxx             xxx             xxx (v)     Xxx             xxx             xxx             xxx  paid on any inputs or capital goods  received in the factory on or after the first  day of March, 2001, including, the said  duties paid on any inputs or capital  goods 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 GSR 547(E),  dated the 25th March, 1986, and received  by the manufacturer for use in or in  relation to the manufacture of final  products, on or after the first day of  March, 2001." {Emphasis supplied}

       Rule 57AB effectively duplicates the substance of Rule  57J (1) and (2) and deals with a situation where inputs are  received by a job worker for production of intermediate goods  which are used in the manufacture of a final product. In this background, the question arose in the case of  Commissioner of Central Excise, Jaipur Vs. J.K. Udaipur  Udyog Limited (supra) whether the explosives used for  blasting purposes in the mines and which had not been used  in the factory premises for production or in relation to the  manufacture of cement could qualify for CENVAT credit. The Court answered the question in the negative and in  paragraph 9 of the judgment as reported said:- "The scheme for MODVAT and CENVAT  Credits being different and in view of the  definition of "input" given in sub-rule (d)  of Rule 57AA of the Rules and the  omission of a Rule similar to Rule 57J,  the ratio of Jaypee Rewa Cement (supra)  can have no application here".

Three reasons were given by the Court for holding that  credit could be taken only on inputs received in the factory of  the manufacturer of the final product.  First, the Court held  that the definition of input given in sub-rule (d) of Rule 57AA  was "entirely different from the manner in which the said word  had been expounded in the explanation to Rule 57A of the  MODVAT Rules".  We cannot agree with this reading of the  Section.  As we have said there was only a re-arrangement of  the several provisions of Rule 57B in Rule 57AA. Rule 57AA is  in fact more broadbased than Rule 57B.   Second, the Court proceeded on the basis that under the  CENVAT scheme there was no provision similar to Rule 57J of  the MODVAT scheme.  As we have seen, Rule 57J was  replaced in substance by Rule 57AB. This provision was  overlooked. The third reason given by the Court in J.K. Udaipur  Udyog  for holding that the CENVAT Scheme was different  from the MODVAT Scheme was Rule 57AC(1).  However, that  Rule is limited to inputs received in the factory of the

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manufacturer and does not impinge on Rule 57AB at all.   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 that the  decision in Jaypee Rewa Cement (supra) would have no  application to CENVAT Rules.   In our opinion the doubt expressed by the referring  Bench about the correctness of the decision in CCE Vs. J.K.  Udaipur Udyog Limited (supra) was well founded.  Having  regard to the fact that the CENVAT Rules in effect substitute  the MODVAT Rules, the decision in Jaypee Rewa Cement  would continue to apply.  The decision in Commissioner of  Central Excise, Jaipur Vs. J.K. Udaipur Udyog Limited  (supra) holding to the contrary is, in our opinion, not good  law.  The reference is answered accordingly.  All the appeals  and special leave petitions will now be listed for being disposed  of in the light of this judgment.