2006 (11) TMI 497 - AT - Central Excise

Cenvat/Modvat - capital goods and inputs - Whether the Modvat credit availed in respect of the molasses used for manufacture of Rectified Spirit and Denatured Spirit, is in consonance with Rule 6 of Cenvat Credit Rules 2002 read with Notification No. 67/95-CX - reversed the Cenvat credit attributable to exempted product - HELD THAT - In the present case, Rule 6(3)(a)(i) specifically refers to goods falling under 22.04 of the First Schedule (presently 22 07 20). In other words, where the final product is ethyl alcohol and other spirits denature of any strength, it is sufficient if the Cenvat credit attributable to inputs in the exempted product is reversed or paid. This obligation from the records of the case appears to have been discharged in respect of all the appellants. Therefore, the appellants are entitled to the benefit of Notification No. 67/95 in respect of molasses used captively for manufacture of Rectified Spirit and Denatured Spirit. Therefore, the demand of duty in respect of the credit taken on molasses is not correct. In respect of the Appeal of M/s. GMR Industries, the Cenvat credit on capital goods and inputs used in the ethanol plant has been denied on the ground that on the date of passing the adjudication order, ethanol plant has been used only for production of exempted products. This finding is incorrect, as Para 7 of the Show Cause Notice concedes that the appellants are producing both Rectified Spirit and Denatured Spirit. In these circumstances, the demand in respect of the credit on capital goods, inputs and inputs services availed and utilized in ethanol plant cannot be sustained. They have already referred to the Show Cause Notice. In view of the above finding, the levy of penalties and demand of interest are also not sustainable. We set aside the above Orders-in- Original and allow these appeals with consequential relief.

Issues Involved:
1. Entitlement to Cenvat credit on molasses used in the manufacture of Rectified Spirit and Denatured Spirit.
2. Applicability of Notification No. 67/95-Central Excise dated 16-3-1995.
3. Reversal of Cenvat credit attributable to exempted products.
4. Denial of Cenvat credit on capital goods used in ethanol production.
5. Imposition of penalties and interest.

Detailed Analysis:

1. Entitlement to Cenvat Credit on Molasses:
The primary issue revolves around whether the appellants are entitled to avail Cenvat credit on molasses used for manufacturing Rectified Spirit (an exempted product) and Denatured Spirit (a dutiable product). The appellants argued that they reverse the credit attributable to the exempted Rectified Spirit and utilize the credit only for the dutiable Denatured Spirit, thereby complying with the Central Excise Rules. The department, however, contended that since Rectified Spirit is not excisable, the appellants are not entitled to the credit for molasses used in its production.

2. Applicability of Notification No. 67/95-Central Excise:
The appellants availed exemption under Notification No. 67/95-Central Excise, which exempts intermediary products (molasses) used in the manufacture of excisable goods. The department's stance was that since Rectified Spirit is not dutiable, the exemption does not apply. The appellants countered by stating that the molasses is also used to produce Denatured Spirit, a dutiable product, and thus they should be entitled to the exemption.

3. Reversal of Cenvat Credit:
The appellants maintained that they comply with Rule 6 of the Cenvat Credit Rules, 2002, which allows manufacturers to either maintain separate accounts for inputs used in exempted and dutiable products or pay an amount equal to 10% of the sale price of the exempted products. The appellants argued that they reverse the credit attributable to the exempted Rectified Spirit, satisfying the conditions of the rule and the notification.

4. Denial of Cenvat Credit on Capital Goods:
In the case of M/s. GMR Industries Limited, the Adjudicating Authority denied Cenvat credit on capital goods used in the ethanol plant, reasoning that the plant was used solely for producing exempted products at the time of adjudication. The appellants refuted this, pointing out that they also produce Denatured Spirit, a dutiable product, thereby entitling them to the credit.

5. Imposition of Penalties and Interest:
Given the appellants' compliance with the reversal of credit and the conditions of Notification No. 67/95, the penalties and interest imposed by the Adjudicating Authority were deemed unsustainable. The tribunal found that the appellants' practice did not result in any loss to revenue and that the interest of revenue was properly safeguarded.

Conclusion:
The tribunal concluded that the appellants are entitled to the benefit of Notification No. 67/95 in respect of molasses used captively for the manufacture of Rectified Spirit and Denatured Spirit. The reversal of Cenvat credit attributable to the exempted product was found to be in consonance with Rule 6 of the Cenvat Credit Rules, 2002. Consequently, the demands for duty, penalties, and interest were set aside, and the appeals were allowed with consequential relief.

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