2012 (6) TMI 694 - AT - Central Excise

Applicability of Rule 57C(1)(ii) Assessee used naphtha for manufacture of steam, which in turn was used for generation of electricity and the electricity was supplied to 100% export oriented unit Held that - The order passed by the CESTAT is liable to be set aside as in case electricity was not used wholly in the factory of production, the question of availing modvat credit does not arise and it can be availed only proportionately - applicability of Rule 57C (1) (ii) has to be decided by the CESTAT on merits - Rule 57C(1) states that no credit of duty shall be allowed on such quantity of inputs which is used in the manufacture of final products which are exempt from duty or are chargeable to nil duty. However, one of the exceptions provided to Rule 57C (1) relates to cases where the final products are cleared to a 100% EOU - the matter is remanded to the original authority who shall cause the necessary verification and decide the matter afresh keeping in view the provisions of Rule 57C(1)(ii).

Summary

Issues:
1. Interpretation of Rule 57C(1)(ii) regarding the usage of inputs for generation of electricity supplied to a 100% export-oriented unit.
2. Application of the Supreme Court judgment in Maruti Suzuki regarding the eligibility of Modvat credit for inputs used in the generation of electricity.
3. Requirement for verification of the quantity of electricity supplied to the 100% EOU and remand to the original authority for necessary action.

Analysis:
1. The Hon'ble High Court remanded the matter to the Tribunal, emphasizing the need to consider the applicability of Rule 57C(1)(ii) in a case where naphtha was used for generating electricity supplied to a 100% export-oriented unit. The Court highlighted that the issue raised by the assessee regarding the application of this rule was not previously considered by the CESTAT. Therefore, the Tribunal was directed to address this contention on its merits.

2. The High Court referred to the Supreme Court judgment in Maruti Suzuki, clarifying that if electricity generated is not wholly used within the factory of production, Modvat credit can only be availed proportionately. The Court concluded that the CESTAT's order, which allowed Modvat credit for naphtha used in electricity generation without considering Rule 57C(1)(ii), needed to be set aside. Consequently, the matter was remanded for the Tribunal to determine the eligibility for credit based on the specific rule.

3. Rule 57C(1) prohibits credit on inputs used for duty-exempt or nil-duty final products, with an exception for supplies to a 100% EOU. The Tribunal noted that the claim regarding the portion of electricity supplied to the EOU was not previously raised. Therefore, the original authority was instructed to verify this aspect and decide the matter afresh in line with the High Court's decision and Rule 57C(1)(ii). The appellants were granted a hearing opportunity before a new decision was issued, leading to the allowance of the appeal through remand for further verification and consideration.