2006 (4) TMI 451 - AT - Central Excise

Cenvat/Modvat - Input - Fuel for electricity generation - Input used in exempted goods - Excisability/Exempted goods - Electricity - Precedent - High Court and decision of CESTAT Larger Bench available

Issues Involved
1. Eligibility of Modvat credit on naphtha used as fuel for electricity generation.
2. Requirement of reversal of credit on naphtha used for electricity wheeled out to sister concerns.
3. Applicability of Rule 57AD(1) and Rule 6(1) of Cenvat Credit Rules.
4. Interpretation of the definition of 'input' under Rule 57AA(d) and Rule 2(f) of Cenvat Credit Rules, 2000.
5. Relevance of CBEC Circulars and judicial precedents in determining credit eligibility.
6. Imposition of penalties on the appellants.

Detailed Analysis

1. Eligibility of Modvat Credit on Naphtha Used as Fuel for Electricity Generation
The appellants argued that naphtha used as fuel in the gas turbine qualifies as an 'input' under Rule 57AA(d) and Rule 2(f) of Cenvat Credit Rules, 2000. The Tribunal held that naphtha used as fuel is covered by the inclusive definition of 'input' and there is no need to prove its use in or in relation to the manufacture of final products. The Tribunal cited various precedents, including the decisions in National Engineering Ind. Ltd. v. CCE and Hindustan Zinc v. CCE, to support this view.

2. Requirement of Reversal of Credit on Naphtha Used for Electricity Wheeled Out to Sister Concerns
The appellants had reversed the credit on naphtha used for generating electricity wheeled out to their sister concern but later reclaimed it. The Tribunal found that the definition of 'input' does not require the fuel to be used within the factory of production. Therefore, the credit on naphtha used as fuel for electricity generation, even if part of the electricity is wheeled out, is permissible. This view was supported by the decision in M/s. SRF Ltd. v. CCE, Chennai-I.

3. Applicability of Rule 57AD(1) and Rule 6(1) of Cenvat Credit Rules
The Tribunal analyzed Rule 57AD(1) and Rule 6(1), which deny credit on inputs used for manufacturing exempted goods. Since electricity is not excisable and not covered by the definition of 'exempted goods,' these rules do not apply to naphtha used for electricity generation. The Tribunal referenced the Supreme Court's decision in Commissioner of Sales Tax v. MPEB, Jabalpur, to emphasize that electricity is not considered exempted goods under the Central Excise Tariff Act, 1985.

4. Interpretation of the Definition of 'Input' under Rule 57AA(d) and Rule 2(f) of Cenvat Credit Rules, 2000
The Tribunal found that the inclusive part of the definition of 'input' covers goods used as fuel or for generating electricity or steam. The term "within the factory of production" applies only to goods used for generating electricity or steam, not to fuel. Therefore, naphtha used as fuel qualifies for credit irrespective of the electricity being wheeled out. This interpretation was supported by the decision in Ballarpur Industries v. CCE, Belgaum.

5. Relevance of CBEC Circulars and Judicial Precedents in Determining Credit Eligibility
The Tribunal noted that CBEC Circulars dated 8-5-2002 and 1-10-2004, which restrict credit to inputs used within the factory, do not bind the assessee when judicial precedents support a broader interpretation. The Tribunal cited the Gujarat High Court decision in Gujarat Narmada Valley Fertilizers Co. Ltd. and the Larger Bench decision in the same case, which allowed credit on inputs used for generating electricity supplied outside the factory.

6. Imposition of Penalties on the Appellants
The Tribunal found no grounds for imposing penalties on the appellants, as the legal interpretation of the provisions was involved. The orders of the lower authorities were set aside, and the appeals were allowed.

Separate Judgments
Member (Technical)
The Member (Technical) concluded that the appellants are entitled to full credit on naphtha used as fuel, without restriction under Rule 6(1) of the Cenvat Credit Rules or Rule 57AD(1) of Central Excise Rules, 1944. The orders of the lower authorities were set aside, and the appeals were allowed.

Member (Judicial)
The Member (Judicial) disagreed, holding that the excess quantity of fuel used for generating electricity supplied to sister concerns is not entitled to Modvat credit. However, the penalty was set aside.

Third Member (Judicial)
The Third Member (Judicial) agreed with the Member (Technical), citing the Gujarat High Court and Larger Bench decisions in Gujarat Narmada Valley Fertilizers Co. Ltd., and concluded that the appellants are entitled to full credit on naphtha used as fuel. The impugned order was set aside, and the appeals were allowed.

Final Order
In view of the majority decision, the impugned order was set aside, and the appeals were allowed with consequential relief to the appellant.

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