2016 (4) TMI 1189 - AT - Central Excise

CENVAT credit - duty paid on molasses - recovery of credit utilized for clearance of denatured rectified spirit - Held that - denatured alcohol is acknowledged as an excisable goods and output in terms of CCR, 2004. There cannot be discriminatory treatment in the treatment accorded to two manufacturers of the same product merely on the ground that one uses captively produced molasses and the other procures from external sources. The rectified spirit is an exempt goods and as the appellants do manufacture dutiable goods also, Cenvat Credit Rules does permit them to take credit of duty paid on molasses subject to compliance with Rule 6 of CCR, 2004. There is no finding that they have not reversed the Cenvat credit taken on inputs that have gone into the exempt goods. This is sufficient compliance of Rule 6. They are, consequently, not required to be subject to recovery of duty on goods cleared by utilization of Cenvat credit and not required to make good the credit taken on inputs. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Utilization of Cenvat credit on inputs used in the manufacture of exempted goods.
2. Compliance with Rule 6 of Cenvat Credit Rules, 2004.
3. Classification and excisability of rectified spirit and denatured spirit.
4. Validity of reversal of proportional Cenvat credit.
5. Imposition of penalties.

Issue-wise Detailed Analysis:

1. Utilization of Cenvat Credit on Inputs Used in the Manufacture of Exempted Goods:
The appellants, being distilleries, sourced molasses on which they took Cenvat credit under the Cenvat Credit Rules, 2004. The credit was reversed proportionately upon the clearance of rectified spirit, which is chargeable to State excise duty. The manufacturing process involves the conversion of molasses into raw ethyl alcohol and carbon dioxide, followed by distillation to produce rectified spirit and waste water. The rectified spirit is used for producing alcohol for human consumption, which is outside the purview of excise duty, while denatured spirit is subject to Central Excise duties. The core issue was whether the credit taken on molasses could be utilized for the clearance of denatured spirit, given that rectified spirit is considered an exempt good.

2. Compliance with Rule 6 of Cenvat Credit Rules, 2004:
Rule 6(1) of the Cenvat Credit Rules, 2004, prohibits the use of credit on inputs used in the manufacture of exempted goods unless separate accounts are maintained. Rule 6(2) allows credit for excisable goods if separate accounts are maintained, and Rule 6(3) provides options if separate accounts are not maintained. The appellants followed the procedure laid down in Rule 6, reversing credit taken on inputs at the time of clearance of rectified spirit, which was considered sufficient compliance.

3. Classification and Excisability of Rectified Spirit and Denatured Spirit:
The Seventh Schedule to the Constitution of India, Entry 84 in List I, and Entry 51 in List II, demarcate the jurisdiction of Union and State for excise duties. The Central Excise Tariff Act, 1985, classifies ethyl alcohol and denatured spirits under Heading No. 22.04 and later 2207. Notification No. 3/2005-C.E. extended exemption from excise duty to all spirits other than denatured ethyl alcohol. The Tribunal consistently held that compliance with Rule 6 is sufficient for allowing credit on molasses used for both rectified spirit and denatured alcohol.

4. Validity of Reversal of Proportional Cenvat Credit:
The appellants reversed proportional credit in accordance with Rule 6(3)(a) till 31st March 2008, and thereafter followed the option of paying an amount as determined by Rule 6(3A). The original authority found that rectified spirit was non-excisable post-28th February 2005 and disallowed credit on molasses, considering the final product as non-excisable. However, the Tribunal ruled that rectified spirit is an exempt good and the appellants, manufacturing both exempted and dutiable goods, are permitted to take credit on molasses subject to compliance with Rule 6.

5. Imposition of Penalties:
The appellants challenged the imposition of penalties, arguing that no evidence of mens rea was adduced. The Tribunal observed that there was no finding of non-compliance with Rule 6 and that the reversal of credit taken on inputs used in exempt goods was sufficient compliance. Consequently, the penalties imposed were not upheld.

Conclusion:
The Tribunal set aside the impugned orders and allowed the appeals, concluding that the appellants complied with Rule 6 of the Cenvat Credit Rules, 2004, and were entitled to utilize the credit on molasses for the clearance of denatured spirit. The reversal of proportional credit was deemed sufficient, and the imposition of penalties was not justified.