REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION Civil Appeal No.  5554    of 2009

(Arising out of S.L.P. (C) No.3826 of 2009)

M/s. Maruti Suzuki Ltd.            … Appellant (s)

Versus

Commissioner of Central Excise, Delhi-III … Respondent(s)

WITH

Civil Appeal No. 5555  of 2009 - (Arising out of S.L.P. (C) No.5362 of 2009)

J U D G M E N T

S. H. KAPADIA, J.

1. 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, assessee was  

using natural gas as fuel for running the three gas turbines.  No  

excise duty was leviable on natural gas and, therefore, there was no  

question of availing CENVAT credit on natural gas.  During July  

2002 to December 2002, assessee started using diesel as fuel to  

run the three turbines.  In view of the said Rules barring availment  

of credit on diesel, the assessee did not avail any CENVAT Credit on  

diesel procured by them.  From January 2003 onwards, assessee  

are using naphtha as fuel to run the gas turbines and they are  

availing  CENVAT  Credit  on  naphtha  used  for  generation  of  

electricity in gas turbines.  Assessee also uses diesel generating set  

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(DG set) for generation of electricity with the use of diesel for which  

they had not availed any credit.  In their factory, assessee has a  

common distribution point for electricity generated in turbines as  

well as DG set and the entire electricity which is generated in the  

turbines and DG set(s), placed in the factory, is distributed through  

common distribution point.   

4. During  the  disputed  period  assessee  cleared  a  part  of  

electricity generated in the factory to its joint ventures, vendors etc.  

In addition, assessee met its electricity requirements by electricity  

captively generated by the assessee in their turbines.  During the  

said period, assessee generated 1,44,469.80 KWH of electricity out  

of  which  18,838.49  KWH  of  electricity  stood  wheeled  out  

(approximately 13% of total net power generation).  This electricity  

stood cleared at  the  different  rates  for  the entire  period varying  

from Rs.4.65/KWH to Rs.9.72/KWH.  It may be noted that even the  

joint ventures, vendors etc. to whom excess electricity is wheeled  

out in turn manufacture final products.  

ARGUMENTS

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5. At the outset it may be noted that the civil appeals in question concern the  

period January 2003 to October 2003 and November 2003 to March 2004 during  

which  period  CENVAT  Credit  Rules,  2002  was  amended  by  Notification  

No.13/2003-CE(NT) dated 1.3.2003.  Accordingly we are confining the arguments  

advanced by learned counsel on both sides to the said Rules.

6. Mr.  V.  Lakshmi  Kumaran,  learned  counsel  appearing  on  behalf  of  the  

appellant, submitted  as follows.  So long as naphtha is used as fuel for generation  

of electricity, appellant is entitled to take credit of duty paid on it and there is no  

need to reverse proportionate credit to the extent of power wheeled out 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,  

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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 factory of production” did not qualify goods used as  

fuel.  In this connection, it is urged, that, naphtha used as fuel for generation of  

electricity came under two alternative provisions, namely, “input used as fuel” or  

“input  used  for  generation  of  electricity”  and,  therefore,  it  was  open  to  the  

appellant to contend that naphtha used as fuel for generation of electricity stood  

covered within the expression “goods used as fuel”.  According to learned counsel,  

when the case of the appellant stood covered by two alternative provisions it is  

open to the appellant to contend that he is covered by one of them.  It was urged  

that the expression “within the factory of production” stands attached only to one  

category of goods in the inclusive part of the definition, namely, “goods used for  

generation of electricity or steam” and that the said expression “within the factory  

of production” was not attached to any previous items, mentioned in the inclusive  

part  of the definition and, therefore,  the said expression “within the factory of  

production” was not applicable to input “naphtha” used as fuel.  Consequently,  

according to learned counsel, so long as naphtha received in the appellant’s factory  

was used as fuel, the same stood covered by the definition of “input” irrespective  

of  the  fact  that  some portion of  electricity  generated  by  use  of  naphtha  stood  

cleared outside.  In the alternative, it was urged, that, even assuming for the sake  

of argument that the expression “within the factory of production” stood attached  

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to the expression “goods used for generation of electricity” it would only mean  

that goods used for generation of electricity should be used within the factory of  

production of final product(s).  In other words, according to learned counsel, the  

said expression “within the factory of production” would apply to items used for  

generation of electricity and not to electricity as such and since in the present case  

naphtha stood used within the factory of production of the final product, it fell  

within the definition of “input”.  Consequently, the appellant was entitled to the  

credit of duty paid on the entire quantity of naphtha used as fuel.  It  was next  

urged on behalf of the appellant that once naphtha came to be used in generation  

of electricity which was partly used for captive consumption and partly in other  

units of the appellant it  was not open to the Department  to deny credit  on the  

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  

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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 learned  

counsel, since electricity was neither exempted nor chargeable to ‘nil’ rate of duty,  

Rule 6(1) was not  applicable in  the case of naphtha used in the generation of  

electricity or steam and, therefore, the appellant was entitled to avail full credit on  

naphtha as the restriction under Rule 6(1) was not applicable.  Therefore, wheeling  

out a part of electricity generated in the factory of the appellant to its joint ventures  

or vendors could not have deprived the appellant of the credit  of duty paid on  

naphtha used as fuel in their factory.

7. Mr.  Gourab  Banerji,  learned  Addl.  Solicitor  General,  appearing  for  the  

Department submitted that the basic idea of CENVAT credit is that it is admissible  

so long as the inputs are used in or in relation to the manufacture of final products,  

whether  directly  or  indirectly  and,  therefore,  the  CENVAT  scheme  was  not  

designed to grant windfall benefits by way of credit to inputs not used ultimately  

in or in relation to manufacture of the final products but are used in or in relation  

to the production of electricity which is not even excisable.  According to learned  

counsel, the definition of the word “input” in Rule 2(g) of the CENVAT Credit  

Rules, 2002 was required to be read as a whole and not in a disjunctive manner as  

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suggested on behalf of the appellant.  According to learned counsel, the specific  

part of Rule 2(g) covered all inputs as long as they were used in or in relation to  

the  manufacture  of  final  product(s),  directly  or  indirectly.   In  this  connection,  

learned  counsel  submitted  that  the  scope  of  the  inclusive  part  was  merely  to  

illustrate certain inputs in respect of which a possible doubt existed as to whether  

or not they stood used in or in relation to the manufacture of final product(s) and  

further the inclusive part stood qualified by the fact that all the items mentioned  

therein had to be used within the factory of production.  Therefore, according to  

learned  counsel,  the  inclusive  part  of  the  definition  restricted  the  benefit  to  

specified items which were required to be used within the factory of production.  

In this connection, learned counsel gave examples of specific items, mentioned in  

Rule 2(g) of the 2002 Rules, like lubricating oils, greases, cutting oils and coolants  

which also fell within the definition “if used within the factory of production”.  In  

fact,  according to learned counsel,  the said items stood 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  

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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 support of his contention that CENVAT  

credit  was  not  admissible  on  such  quantity  of  inputs  which  were  used  in  the  

manufacture of exempted goods.  The said bar, according to learned counsel, was  

consistent with the basic idea of CENVAT scheme.  On interpretation of Rule 6(2)  

it was urged that on proper analysis of the said sub-rule it is clear that the said sub-

rule had imposed an obligation on the manufacturer when he manufactured both  

dutiable and exempted goods and in discharge of that obligation he had an option  

either to maintain separate accounts on inputs used in the manufacture of dutiable  

and exempted goods or he had to pay specified percentage of the price of the  

exempted goods.  According to learned counsel, in respect of “goods used as fuel”,  

it was physically impossible to maintain separate account(s) of fuel used in the  

manufacture  of  dutiable  and  exempted  goods  and,  therefore,  the  Legislature  

thought it fit not to give the said option of maintaining separate accounts of goods  

used as fuel and in such cases the only option available was to pay a specified  

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amount.  In any event, according to learned counsel, on facts since naphtha was  

used as fuel in the generation of electricity/steam, Rule 6(2) became applicable.     

ANALYSIS OF THE RULES

8. We  hereinbelow  reproduce  relevant  rules  of  the  CENVAT  

Credit Rules 2002 and CENVAT Credit Rules 2004 which read as  

follow :

“The CENVAT Credit Rules, 2002

Rule 2. Definitions.- In these rules, unless the context otherwise requires,-  

(d) “exempted goods” means goods which are exempt from the whole of  the duty of excise leviable thereon, and includes goods which are  chargeable to “Nil” rate of duty;  

(g)  “input” means all goods, except light diesel oil, 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 lubricating oils,  greases,  cutting  oils,  coolants,  accessories  of  the  final  products  cleared  along with the final product, 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.  

Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit,  commonly known as petrol, shall not be treated as an input for any purpose  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;  

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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, equivalent to the excise specified under clauses (i), (ii), (iii),  (iv) and (v) above; and

vii. the  additional  duty  of  excise  leviable  under  section  157  of  the  Finance Act, 2003 (32 of 2003),  

paid on any inputs or capital goods received in the factory on or after  the first day of March, 2002, including the said duties paid on any inputs  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 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 products, on or after the first day of March, 2002.

 Explanation.-  For  the  removal  of  doubts  it  is  clarified  that  the  manufacturer of the final products shall be allowed CENVAT credit of  additional duty leviable under section 3 of the Customs Tariff Act on  goods falling under heading 98.01 of the First Schedule to the Customs  Tariff Act.  

2. Notwithstanding  anything contained in  sub-rule  (1),  the manufacturer  or  producer of final products shall be allowed to take CENVAT credit of the  duty paid on inputs lying in stock or in process or inputs contained in the  final products lying in stock on the date on which any goods cease to be  exempted goods or any goods become excisable.  

3. The CENVAT credit may be utilized for payment of –

(a) any duty of excise on any final products; or

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(b)  an  amount  equal  to  CENVAT  credit  taken  on  inputs  if  such  inputs  are  removed as such of after being partially processed; of  

(c) an amount equal to the CENVAT credit taken on capital goods if such capital  goods are removed as such; or

(d) an amount under sub-rule (2) of Rule 16 of Central Excise Rules, 2000.  

Provided that while paying duty, the CENVAT credit shall be utilized only to the  extent such credit is available on the last day of the month for payment of duty  relating to the month.

Provided further that the CENVAT credit of the duty paid on the inputs used in  the  manufacture  of  final  products  cleared  after  availing  of  the  exemption  under the notification numbers 32/99-Central Excise, dated the 8th July, 1999  [G.S.R.508(E) dated the 8th July, 1999] and 33/99-Central Excise dated the 8th  

July,  1999  [G.S.R.509  (E)  dated  8th July,  1999],  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 25th 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 capital goods, on which CENVAT credit has been taken,  are removed as such from the factory, the manufacturer of the final products  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 7.  

4A.  Notwithstanding anything contained in these rules,-

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(a) a first or second stage dealer, dealing exclusively in goods falling under  Chapter 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62 or 63 of the First  Schedule to the Tariff Act, may, at his option, remove such goods, whether  or not after undertaking activities such as packing, repacking, on payment  of an amount equal to the duty of excise, which is leviable on such goods at  the rate applicable on the date of removal and on the value determined for  such goods under sub-section (2) of Section 3 or Section 4 of the Act, as the  case may be.  The provisions of the Central Excise Rules, 2002, in so far  they relate to removal of goods on invoice, maintenance of accounts, filing  of return, manner of payment or failure to pay such amount shall apply, as  if such amount is a duty of excise liable to be paid by an assessee:

Provided that such option once exercised by the said dealer, shall not be  withdrawn during the remaining part of the financial year;

(b) the first or second stage dealer of goods referred to in clause (a), who  avails of the option referred to in said clause, may take credit of duties  referred to in sub-rule (1) of Rule 3, paid on such goods for utilizing the  same for payment of such amount, as referred to in clause (a);

(c) the amount paid under clause (a) shall be eligible as CENVAT credit as if  it  were  a  duty  paid  by  a  person  who  removes  such  goods  under  sub- rule(4A).  

5. The amount paid under sub-rule (4) shall be eligible as CENVAT credit as  if it was a duty paid by the person who removed such goods under sub-rule (4).  

6. Notwithstanding anything contained in sub-rule (1),-  

i. CENVAT credit in respect of inputs or capital goods produced or  manufactured,-  

i. in  a  free  trade  zone  or  by  a  hundred  per  cent.  export- oriented undertaking or by a unit in an Electronic Hardware  Technology Park or Software Technology Park (other than a  unit which pays excise duty under section 3 of the Act read  with  notification  No.  8/97-  Central  Excise,  dated  the  1st  March,  1997,  number G.S.R 114  (E),  dated the  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  

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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 respect of  i. the additional duty of excise leviable under section 3 of the  

Additional Duties of Excise (Textiles and Textile Articles) Act,  1978 (40 of 1978);  

ii. 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; and  

iii. the additional duty leviable under section 3 of the Customs  Tariff Act, equivalent to the duty of excise specified under  clauses (i) and (ii) above,  

shall be utilised only towards payment of duty of excise leviable  under the said Additional Duties of Excise (Textiles and Textile  Articles) Act, or the National Calamity Contingent duty leviable  under  Section  136  of  the  Finance  Act,  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; 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.

Explanation.-  For  removal  of  doubts,  it  is  clarified  that  the  credit of the additional duty of excise leviable under section 3 of  the Additional  Duties  of  Excise  (Goods of  Special  Importance)  Act, 1957 (58 of 1957), may be utilized towards payment of duty  of  excise  leviable  under  the  First  Schedule  or  the  Second  Schedule of the Central Excise Tariff Act, 1985 (5 of 1986).

iii. the  CENVAT  credit,  in  respect  of  additional  duty  leviable  under  section 3 of the Customs Tariff Act, paid on marble slabs or tiles  

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falling under sub-heading No. 2504.21 or 2504.31 respectively of the  First Schedule to the Tariff Act shall be allowed to the extent of  thirty rupees per square metre;  

iv. ***.

Explanation.-  Where  the  provisions  of  any  other  rule  or  notification  provide  for  grant  of  partial  or  full  exemption  on  condition  of  non- availability of credit of duty paid on any input or capital goods, the  provisions  of  such  other  rule  or  notification  shall  prevail  over  the  provisions of these rules.  

Rule 6. Obligation of manufacturer of dutiable and exempted goods.-  

1The 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.  

2Where  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.  3The  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;  

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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  

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.  

4No CENVAT credit shall be allowed on capital goods which are used exclusively  in the manufacture of exempted goods, other than the final products which are  exempt  from the  whole  of  the  duty  of  excise  leviable  thereon  under  any  

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notification where exemption is granted based upon the value or quantity of  clearances made in a financial year.  5The 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,- (k) "input" means- (i) all goods, except light diesel oil, 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  lubricating  oils,  greases,  cutting  oils,  coolants,  accessories  of  the  final  products  cleared  along with  the  final  product,  goods used as paint,  or  as packing material,  or  as fuel,  or for  generation of electricity or steam used in or in relation to manufacture of  final products or for any other purpose, within the factory of production;

(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit,  commonly known as petrol and motor vehicles,  used for providing any  output service; Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit,  commonly  known  as  petrol,  shall  not  be  treated  as  an  input  for  any  purpose whatsoever.

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Explanation 2.- Input 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 or a provider of taxable  service  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 Excise  Tariff Act, leviable under the Excise Act; (ii)  the  duty  of  excise  specified  in  the  Second Schedule  to  the  Excise Tariff Act, leviable under the Excise 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); (vi) the Education Cess on excisable goods leviable under section  91 read with section 93 of the Finance (No.2) Act, 2004 (23 of  2004); (vii) the additional duty leviable under section 3 of the Customs  Tariff Act, equivalent to the duty of excise specified under clauses  (i), (ii), (iii), (iv), (v) and (vi);  (viii) the additional duty of excise leviable under section 157 of  the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act;  and (x) the Education 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-  

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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  shall  be  allowed  CENVAT  credit  of  additional  duty  leviable under section 3 of the Customs Tariff Act on goods falling  under heading 9801 of the First Schedule to the Customs Tariff  Act.

(2) Notwithstanding anything contained in sub-rule (1), the manufacturer  or producer of final products shall be allowed to take CENVAT credit of  the duty paid on inputs lying in stock or in process or inputs contained in  the  final  products  lying  in  stock  on  the  date  on  which  any  goods  manufactured by the said manufacturer or producer cease to be exempted  goods or any goods become excisable.

(3) Notwithstanding anything contained in sub-rule (1),  in relation to a  service which ceases to be an exempted service, the provider of the output  service shall be allowed to take CENVAT credit of the duty paid on the  inputs received on and after the 10th day of September, 2004 and lying in  stock on the date on which any service ceases to be an exempted service  and used for providing such service.

(4) The CENVAT credit may be utilized for payment of – (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such  inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods  if such capital goods are removed as such; or (d)  an  amount  under  sub  rule  (2)  of  rule  16  of  Central  Excise  Rules, 2002; or  (e) service tax on any output service:

Provided that while paying duty of excise or service tax, as the  case  may  be,  the  CENVAT credit  shall  be  utilized  only to  the  extent  such  credit  is  available  on  the  last  day  of  the  month  or  quarter, as the case may be, for payment of duty or tax relating to  that month or the quarter, as the case may be:

Provided further that the CENVAT credit of the duty, or service  tax, paid on the inputs, or input services, used in the manufacture  of final products cleared after availing of the exemption under the  

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following notifications of Government of India in the Ministry of  Finance (Department of Revenue),-

(i)  No.  32/99-Central  Excise,  dated  the  8th  July,  1999  [G.S.R. 508(E), dated 8th July, 1999]; (ii)  No.  33/99-Central  Excise,  dated  the  8th  July,  1999  [G.S.R. 509(E), dated 8th July, 1999]; (iii) No. 39/2001-Central Excise, dated the 31st July, 2001  [G.S.R. 565 (E), dated the 31st July, 2001]; (iv) No. 56/2002-Central Excise, dated the 14th November,  2002 [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 to be made when  any capital  goods are removed outside the premises of the provider of  output service for providing the output service and the capital goods are  brought back to the premises within 180 days, or such extended period not  exceeding  180  days  as  may  be  permitted  by  the  jurisdictional  Deputy  Commissioner of Central Excise,  or Assistant  Commissioner of Central  Excise, as the case may be, of their removal.

(6) The amount  paid  under  sub-rule  (5)  shall  be  eligible  as  CENVAT  credit as if  it  was a duty paid by the person who removed such goods  under sub-rule (5).

(7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4), -

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(a) CENVAT credit in respect of inputs or capital goods produced  or  manufactured,  by  a  hundred  per  cent.  export-oriented  undertaking or by a unit  in an Electronic  Hardware Technology  Park or in a Software Technology Park other than a unit  which  pays excise duty levied under section 3 of the Excise Act read with  serial  numbers  3,5,  6  and 7 of notification No.  23/2003-Central  Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st  March, 2003] and used in the manufacture of the final products or  in providing an output service, in any other place in India, in case  the unit pays excise duty under section 3 of the Excise Act read  with  serial  number  2  of  the  notification  No.  23/2003-Central  Excise, dated the 31st March, 2003, [G.S.R. 266(E), dated the 31st  March,  2003],  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.

(b) CENVAT credit in respect of - (i)  the additional  duty of  excise  leviable  under  section 3 of the  Additional  Duties  of Excise  (Textiles  and Textile  Articles)  Act,  1978 (40 of 1978); (ii) the National Calamity Contingent duty leviable under section  136 of the Finance Act, 2001 (14 of 2001); (iii) the education cess on excisable goods leviable under section  91 read with section 93 of the Finance (No.2) Act, 2004 (23 of  2004); (iv) the additional duty leviable under section 3 of the Customs  Tariff Act, equivalent to the duty of excise specified under items  (i), (ii) and (iii) above; (v) the additional 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  

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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 duty of excise leviable under section 3  of the Additional Duties of Excise (Goods of Special Importance)  Act, 1957 (58 of 1957) paid on or after the 1st day of April, 2000,  may be utilized towards payment of duty of excise leviable under  the First Schedule or the Second Schedule to the Excise Tariff Act.

(c)  the  CENVAT  credit,  in  respect  of  additional  duty  leviable  under section 3 of the Customs Tariff Act, paid on marble slabs or  tiles  falling  under  sub-heading  No.  2504.21  or  2504.31  respectively of the First Schedule to the Excise Tariff Act shall be  allowed to the extent of thirty rupees per square meter;  Explanation.- Where  the  provisions  of  any  other  rule  or  notification  provide  for  grant  of  whole  or  part  exemption  on  condition of non-availability of credit of duty paid on any input or  capital  goods,  or  of  service  tax  paid  on  input  service,  the  provisions of such other rule or notification shall prevail over the  provisions of these rules.

RULE 6  .   Obligation of manufacturer of dutiable and exempted goods  and provider of taxable and exempted services.-  (1) The CENVAT credit shall not be allowed on such quantity of input or  input  service  which  is  used  in  the  manufacture  of  exempted  goods  or  exempted services, except in the circumstances mentioned in sub-rule (2).

(2) Where  a  manufacturer  or  provider  of  output  service  avails  of  CENVAT credit in respect of any inputs or input services, except inputs  intended  to  be  used  as  fuel,  and  manufactures  such  final  products  or  provides such output service which are chargeable to duty or tax as well as  exempted goods or services, then, the manufacturer or provider of output  service  shall  maintain  separate  accounts  for  receipt,  consumption  and  inventory of input and input service meant for use in the manufacture of  dutiable final products or in providing output service and the quantity of  input meant for use in the manufacture of exempted goods or services and  take CENVAT credit only on that quantity of input or input service which  

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is intended for use in the manufacture of dutiable goods or in providing  output service on which service tax is payable.

(3) Notwithstanding  anything  contained  in  sub-rules  (1)  and  (2),  the  manufacturer  or  the  provider  of  output  service,  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 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.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  and  input  services  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 condition (a),  the manufacturer shall pay an amount equal to ten 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;

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(c) the provider of output service shall utilize credit only to extent of an  amount  not  exceeding  twenty  per  cent.  of  the  amount  of  service  tax  payable on taxable output service.

Explanation I.- The amount mentioned in conditions (a) and (b) shall be  paid by the manufacturer  or provider  of output service by debiting the  CENVAT credit or otherwise. Explanation II.- If the manufacturer or provider of output service fails to  pay the said amount, it shall be recovered along with interest in the same  manner, as provided in rule 14, for recovery of CENVAT credit wrongly  taken.

(4) No CENVAT credit shall be allowed on capital goods which are used  exclusively  in  the  manufacture  of  exempted  goods  or  in  providing  exempted services, other than the 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.

(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit  of the whole of service tax paid on taxable service as specified in sub- clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh),  (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance  Act  shall  be  allowed  unless  such  service  is  used  exclusively  in  or  in  relation  to  the  manufacture  of  exempted  goods  or  providing  exempted  services.

(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable  in case the excisable goods removed without payment of duty are either-

(i) cleared to a unit in a special economic 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 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)

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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 the manufacture of final  

products whether directly or indirectly and whether contained in  

the final product or not. The crucial requirement, therefore, is that  

all  goods  “used  in  or  in  relation  to  the  manufacture”  of  final  

products qualify as “input”. This presupposes that the element of  

“manufacture” must be present.

11. In the case of J.K. Cotton Spinning and Weaving Mills Co.  

Ltd.  v.  S.T.O. reported in 1965 (16) STC 563 this Court held that  

the  expression  “in  the  manufacture  of  goods”  should  normally  

encompass the entire process carried on by the dealer of converting  

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raw material into finished goods. It was further held that where any  

particular  process  (generation  of  electricity)  is  so  integrally  

connected with the ultimate production of goods, that, but for such  

process, manufacture of goods would be inexpedient, then goods  

required in such process would fall within the expression “in the  

manufacture of goods”.  

12. In the case of  Union Carbide India Ltd.  v.  Collector of  

Central Excise, Calcutta-I reported in 1996 (86) ELT 613 (Tri) a  

larger  Bench  of   CEGAT  observed  that  a  wide  impact  of  the  

expression “used in relation to manufacture” must be allowed its  

natural play. Inputs (raw materials) used in the entire process of  

conversion  into  finished  products  or  any  other  process  (like  

electricity  generation)  which  is  integrally  connected  with  the  

ultimate production of final product has to fall  within the above  

expression.  It  was  observed  that  the  purpose  was  to  widen  the  

scope,  ambit  and  content  of  “inputs”.  According  to  the  Special  

Bench of CEGAT, the purpose behind the above expression is to  

widen the ambit of the definition so as to attract all goods, which  

do not enter directly or indirectly into the finished product, but are  

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used  in  any  activity  concerned  with  or  pertaining  to  the  

manufacture of the finished product.  

13. Electricity generation is a separate and distinct activity. It is  

an independent activity. It has its own economics. It does not form  

part of the process in which “inputs” are transformed into separate  

identifiable  commodity,  though  it  may  stand  connected  to  such  

processes. It may not have any concern with the manufacture of  

the finished product. However, it is an ancillary activity. It is an  

activity which is anterior to the process of manufacture of the final  

product.  It is on account of the use of the above expression “used  

in  relation  to  manufacture”  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  

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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  

or  not”  indicates  the  intention  of  the  legislature.  What  the  

legislature  intends  to  say  is  that  even  if  the  use  of  input  (like  

electricity) in the manufacturing process is not direct but indirect  

still such an item would stand covered by the definition of “input”.  

In the past, there was a controversy as to what is the meaning of  

the word “input”, conceptually. It was argued by the Department in  

a number of cases that if the identity of the input is not contained  

in the final product then such an item would not qualify as input.  

In  order  to  get  over  this  controversy  in  the  above  definition  of  

“input”,  the  Legislature  has clarified  that  even if  an item is  not  

contained in the final product still  it would be classifiable as an  

“input”  under  the  above  definition.  In  other  words,  it  has  been  

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clarified  by  the  definition  of  “input”  that  the  following  

considerations will not be relevant:

(a) use of input in the manufacturing process be  it direct or indirect;

(b) even if the input is not contained in the final  product,  it  would  still  be  covered  by  the  definition.

These considerations have been made irrelevant by the use of the  

expression “goods used in or in relation to the manufacture of final  

product” which, as stated above, is the crucial requirement of the  

definition of “input”.  Moreover, the said expression, viz, “used in or  

in  relation  to  the  manufacture  of  the  final  product”  in  the  

specific/substantive part of the definition is so wide that it would  

cover innumerable items as “input” and to avoid such contingency  

the  Legislature  has  incorporated  the  inclusive  part  after  the  

substantive part qualified by the place of use.  For example, one of  

the categories mentioned in the inclusive part is “used as packing  

material”.   Packing  material  by  itself  would  not  suffice  till  it  is  

proved that the item is used in the course of manufacture of final  

product.  Mere fact that the item is a packing material whose value  

is included in the assessable value of final product will not entitle  

the manufacturer to take credit.  Oils and lubricants mentioned in  

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the definition are required for smooth running of machines, hence  

they are included as they are used in relation to manufacture of the  

final product.  The intention of the Legislature is that inputs falling  

in the inclusive part must have nexus with the manufacture of the  

final product.   

15. Coming to the analysis of the inclusive part of the definition  

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  

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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 relevant consideration. Unless and until the said input is used  

in  or  in  relation to  the manufacture  of  final  product  within the  

factory of production, the said item would not become an eligible  

input.  The  said  expression  “used  in  or  in  relation  to  the  

manufacture”  have  many  shades  and  would  cover  various  

situations  based  on  the  purpose  for  which  the  input  is  used.  

However, the specified input would become eligible for credit only  

when used in or in relation to the manufacture of final product.  

Hydrogen gas used in the manufacture of  sodium cyanide is an  

eligible  input,  since  it  has  a  significant  role  to  play  in  the  

manufacturing process and since the final product cannot emerge  

without  the  use  of  gas.  Similarly,  Heat  Transfer  Oil  used  as  a  

heating  medium in  the  manufacture  of  LAB is  an eligible  input  

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since it  has a persuasive role in the manufacturing process and  

without its use it is impossible to manufacture the final product.  

Therefore,  none  of  the  categories  in  the  inclusive  part  of  the  

definition  would  constitute  relevant  consideration  per  se.  They  

become relevant only when the above crucial requirement of being  

“used in or in relation to the manufacture” stands complied with. In  

our view, one has to therefore read the definition in its entirety.

17. As stated,  the definition  is  in  three  parts,  namely,  specific  

part,  inclusive  part  and  place  of  use.  All  the  three  parts  are  

required to be satisfied before an input becomes an eligible input.

18. It may be noted from the CENVAT Credit Rules of 2004 vis-à-

vis  CENVAT  Credit  Rules  of  2002  that  the  word  “for”  in  the  

inclusive part after the words “steam used” is substituted by the  

words “used in or in relation to the manufacture of final products”.  

In other words, the crucial requirement of the definition clause is  

restated by the Legislature. We may note that the CENVAT Credit  

Rules of 2004 came in force in September, 2004. In some of the  

cases in batch before us the show cause notice goes right up to  

January 2005, hence,  CENVAT Credit  Rules,  2004 also apply to  

those  cases.  In  short,  an item would  fall  within the  category  of  

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“inputs” as defined only on compliance with all the three parts of  

the definition clause.

19. The question which still remains to be answered is: whether  

an  assessee  would  be  entitled  to  claim CENVAT credit  in  cases  

where it sells electricity outside the factory to the joint ventures,  

vendors  or  gives  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  

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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 etc. would not be admissible for  

CENVAT credit as such wheeled out electricity, cleared for a price,  

would not fall within the definition of “input” in Rule 2(g) of the  

CENVAT Credit Rules, 2002.  This view is also expressed in para 9  

of the judgment of this Court in the case of  Collector of Central  

Excise v. Solaris Chemtech Limited – (2007) 214 ELT 481 (SC).  

Further, our view is supported by the observations of this Court in  

the  case  of  Vikram  Cement  v.  Commnr.  Of  Central  Excise,  

Indore – 2006 (194) ELT 3 (SC) which is quoted below:-

“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  immediate  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.”  

20. To  sum  up,  we  hold  that  the  definition  of  “input”  brings  

within its fold, inputs used for generation of electricity or steam,  

provided  such  electricity  or  steam is  used  within  the  factory  of  

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production  for  manufacture  of  final  products  or  for  any  other  

purpose. The important point to be noted is that, in the present  

case,  excess  electricity  has  been cleared  by  the  assessee  at  the  

agreed rate from time to time in favour of its joint ventures, vendors  

etc. for a price and has also cleared such electricity in favour of the  

grid for distribution. To that extent, in our view, assessee was not  

entitled to CENVAT credit. In short, assessee is entitled to credit on  

the  eligible  inputs  utilized  in  the generation  of  electricity  to  the  

extent to which they are using the produced electricity within their  

factory (for captive consumption). They are not entitled to CENVAT  

credit  to  the  extent  of  the  excess  electricity  cleared  at  the  

contractual rates in favour of joint ventures, vendors etc., which is  

sold at a price.

21. Before  concluding,  it  may  be  clarified  that  on  account  of  

repeated amendments in the CENVAT Credit Rules, huge litigation  

in the country stands generated.  In the circumstances, we are of  

the  view  that  penalty  is  not  leviable  on  appellant/assessee,  

particularly when in large number of other cases,  on account of  

conflict  of views expressed by various Tribunals/High Court,  the  

assessees  have  also  succeeded.   Hence,  although  M/s.  Maruti  

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Suzuki  Ltd.  (appellant) has  failed  in  their  civil  appeals  the  

Department will not impose penalty.

22. For  the  aforestated  reasons,  we  dismiss  Civil  Appeal  No.  

of  2009 –  (arising  out  of  S.L.P.  (C)  No.3826 of  2009)  -  M/s.  Maruti  

Suzuki Ltd. v. Commissioner of Central Excise, Delhi-III  and Civil  

Appeal No._              of 2009 -  (Arising out of S.L.P. (C) No.5362 of  

2009) with no order as to costs.

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

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

New Delhi; August 17, 2009.

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