Vikram Cement v. Commissioner Of Central Excise, Indore .

Ruma Pal, J.— The question whether the decision in Jaypee Rewa Cement v. CCE (2001) 8 SCC 586, (2001) 133 ELT 3 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 CCE v. J.K Udaipur Udyog Ltd. (2004) 7 SCC 344, (2004) 171 ELT 289 held that Jaypee Rewa Cement (2001) 8 SCC 586, (2001) 133 ELT 3 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-à-vis MODVAT Scheme reproduced hereinabove, we are of the view that the observations made in para 9 of the decision of the Division Bench, quoted above, in CCE v. J.K Udaipur Udyog Ltd. (2004) 7 SCC 344, (2004) 171 ELT 289 needs reconsideration.”

2. 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 CENVAT credit on the inputs.

3. On the broader question, namely, whether there is a difference in substance between 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 57-A to 57-J of the Central Excise Rules, 1944 (referred to as “the Rules”). We set out below the relevant extracts of these Rules:

“57-A. Applicability.—(1)-(3)***

(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.

57-B. Eligibility of credit of duty on certain inputs.—(1) Notwithstanding anything contained in Rule 57-A, 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 along with 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 57-A.”

(emphasis supplied)

4. We observe that Rule 57-B 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 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 utilisation 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 57-A. There is no dispute that both explosives and limestone are notified under Rule 57-A for manufacture of the final product viz. cement.

5. The next relevant rule is Rule 57-F. What we are concerned with is sub-rule (4) of Rule 57-F. This provides:

“57-F. (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, reconditioning 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.”

6. Therefore credit on inputs sent by a manufacturer from the factory to a job-worker for test, repair, etc. but ultimately utilised in the final product, is allowable.

7. Then comes Rule 57-J which, insofar as it is material, reads:

“57-J. Credit of duty in respect of inputs used in an intermediate product.—(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 Finance (Department of Revenue) No. 214/86-Central Excise, dated 25-3-1986 has been availed of.

(3)***”

(emphasis supplied)

8. 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.

9. It may be noted at this stage that Rule 57-J(2) was explained by Trade Notice No. 38/1999 dated 2-4-1991 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 57-J 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 CE 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-CE dated 25-3-1986 should have been availed in respect of them. Thus, it may be observed that Rule 57-J 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-CE. 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 57-J.”

10. We do not, for the purpose of this reference, discuss Rule 57-Q which deals with credit on capital goods used as inputs.

11. The question whether it was necessary for inputs to be used within the factory premises where the manufacture, as defined in Rule 57-AB, of final products takes place for the purposes of availing of credit, came up before a Bench of three Judges in Jaypee Rewa Cement v. CCE (2001) 8 SCC 586, (2001) 133 ELT 3. As in this case, in that case the input in question was explosives which were used in quarrying limestone used in the 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 57-A did not in any way specify that the inputs have to be utilised within the factory premises. The Tribunal had relied upon Rule 57-F 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 into 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 57-J, 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 57-J, 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. …

Explosives would fall under column (2) being a tariff item in Chapter 36; the intermediate product, namely, limestone 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 57-J 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, limestone which, in turn, was used for the manufacture of cement.”

12. The appeal of the manufacturer was accordingly allowed and it was held that 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.

13. In 2000 the MODVAT Rules were replaced by the CENVAT Rules by the Central Excise (Second Amendment) Rules, 2000. Basically there was a rearrangement of the earlier rules which in substance remained the same. Thus Rule 57-AA defined inputs as:

“57-AA. (d) ‘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 the final products, 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, and also includes lubricating oils, greases, cutting oils and coolants.”

(emphasis supplied)

14. Analysed, it is clear that sub-rule (d) of Rule 57-AA has merely reframed Rule 57-B 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”.

15. Rule 57-AC provides for the conditions for allowing CENVAT credit in respect of inputs received in the factory of the manufacturer. Sub-rule (1) of Rule 57-AC which was relied on in J.K Udaipur Udyog (2004) 7 SCC 344, (2004) 171 ELT 289 to differ from the conclusion in Jaypee Rewa Cement (2001) 8 SCC 586, (2001) 133 ELT 3 reads:

“57-AC. 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.”

16. Rule 57-J of the MODVAT Rules was deleted. This led to controversy and on 29-8-2000, 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 57-J read with Notification No. 214/86-CE as amended. Several associations have requested that similar provision may be made in the CENVAT Scheme. This request has been acceded to and Rule 57-AB(1) has been amended suitably for this purpose. The amended provisions of Rule 57-AB(1) apply to goods received in the factory on or after 1-4-2000. 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 57-AE(1) evidencing the payment of duty on such inputs of capital goods.”

(emphasis supplied)

17. Consequently, with the intention of reintroducing the benefit granted earlier under Rule 57-J, Rule 57-AB was introduced under the heading “CENVAT credit”. The material extracts of Rule 57-AB read as follows:

“57-AB. (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 Central Excise Tariff Act, 1985 (hereinafter referred to as the said First Schedule), leviable under the Act;

(ii)-(v)***

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 25-3-1986, published in the Gazette of India vide No. GSR 547(E), dated 25-3-1986, 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)

18. Rule 57-AB effectively duplicates the substance of Rules 57-J(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.

19. In this background, the question arose in CCE v. J.K Udaipur Udyog Ltd. (2004) 7 SCC 344, (2004) 171 ELT 289 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.

20. The Court answered the question in the negative and in ELT para 9 of the judgment as reported said:

“10. The schemes for MODVAT and CENVAT credits being different and in view of the definition of ‘input’ given in sub-rule (d) of Rule 57-AA of the Rules and the omission of a rule similar to Rule 57-J, the ratio of Jaypee Rewa Cement (2001) 8 SCC 586, (2001) 133 ELT 3 can have no application here.”

21. 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 57-AA was

entirely different from the manner in which the said word had been expounded in the Explanation to Rule 57-A of the MODVAT Rules.

We cannot agree with this reading of the Rule. As we have said, there was only a rearrangement of the several provisions of Rule 57-B in Rule 57-AA. Rule 57-AA is in fact more broadbased than Rule 57-B.

22. Second, the Court proceeded on the basis that under the CENVAT Scheme there was no provision similar to Rule 57-J of the MODVAT Scheme. As we have seen, Rule 57-J was replaced in substance by Rule 57-AB. This provision was overlooked.

23. The third reason given by the Court in J.K Udaipur Udyog (2004) 7 SCC 344, (2004) 171 ELT 289 for holding that the CENVAT Scheme was different from the MODVAT Scheme was Rule 57-AC(1). However, that Rule is limited to inputs received in the factory of the manufacturer and does not impinge on Rule 57-AB at all.

24. The schemes of MODVAT and CENVAT credit are not therefore different and we are unable to agree with the conclusion of the Court in J.K Udaipur Udyog (2004) 7 SCC 344, (2004) 171 ELT 289 that the decision in Jaypee Rewa Cement (2001) 8 SCC 586, (2001) 133 ELT 3 would have no application to the CENVAT Rules.

25. In our opinion the doubt expressed by the referring Bench about the correctness of the decision in CCE v. J.K Udaipur Udyog Ltd. (2004) 7 SCC 344, (2004) 171 ELT 289 was well founded. Having regard to the fact that the CENVAT Rules in effect substitute the MODVAT Rules, the decision in Jaypee Rewa Cement (2001) 8 SCC 586, (2001) 133 ELT 3 would continue to apply. The decision in CCE v. J.K Udaipur Udyog Ltd. (2004) 7 SCC 344, (2004) 171 ELT 289 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.