2012 (11) TMI 299 - AT - Central Excise

Cenvat credit alleged that capital goods, on which appellant availed modvat credit, were exclusively used for manufacture of non dutiable intermediate product Held that - In case where capital goods/inputs were used in the process of manufacture of intermediate exempted products, which is further used in the manufacture of dutiable final products, cannot be denied

Issues Involved:
1. Disallowance of Cenvat credit on capital goods used for manufacturing non-dutiable intermediate products.
2. Confirmation of interest and imposition of penalty.
3. Whether the process of manufacturing denatured spirit qualifies for Cenvat credit.
4. Validity of demand based on limitation.

Issue-wise Detailed Analysis:

1. Disallowance of Cenvat Credit on Capital Goods:
The primary issue revolves around the disallowance of Cenvat credit amounting to Rs. 1,77,10,796/- on the grounds that the capital goods were used exclusively for the manufacture of non-dutiable intermediate products, specifically spirit, which is non-excisable. The appellants are engaged in manufacturing both ethyl alcohol (spirit) and denatured spirit, with the latter being an excisable product. The Revenue's stance, supported by an expert opinion, was that the machinery used for manufacturing spirit (98% of which is sold as non-dutiable) did not contribute to the manufacture of the final excisable product, denatured spirit, which involves a simple mixing process.

2. Confirmation of Interest and Imposition of Penalty:
Alongside the disallowance of Cenvat credit, the Commissioner (Appeals) also confirmed interest and imposed a penalty equivalent to the disallowed credit amount, based on the premise that the capital goods were not used for manufacturing excisable goods.

3. Process of Manufacturing Denatured Spirit:
The appellants argued that the manufacture of denatured spirit begins with the production of spirit, which is an intermediate stage. They contended that the capital goods used in producing spirit are inherently part of the process leading to the final excisable product, denatured spirit. They cited a Board's circular and various tribunal decisions to support their claim that Cenvat credit should be admissible even if exempted goods come into existence at an intermediate stage.

4. Validity of Demand Based on Limitation:
The appellants also contested the demand on the grounds of limitation, asserting that the entire manufacturing process was within the knowledge of the Revenue, and there was no evidence of misstatement or suppression on their part. They argued that the demand was time-barred.

Judgment Analysis:

Disallowance of Cenvat Credit:
The tribunal found that the process of manufacturing denatured spirit indeed starts from the fermentation of molasses and food grains, leading to the production of spirit, which is subsequently converted into denatured spirit. The tribunal emphasized that without first producing spirit, denatured spirit cannot come into existence. Therefore, the capital goods used in manufacturing spirit are also used in the manufacture of denatured spirit. The tribunal drew an analogy with the preparation of dosa, illustrating that the process cannot be artificially split to deny credit for the mixer-grinder used in making the batter, even if only a small percentage is used for the final product.

Confirmation of Interest and Penalty:
Given the tribunal's finding that the capital goods were indeed used in the manufacture of denatured spirit, the confirmation of interest and imposition of penalty were also set aside.

Process of Manufacturing Denatured Spirit:
The tribunal rejected the Revenue's argument that the machinery was used exclusively for non-dutiable spirit. It held that the entire process, including the intermediate production of spirit, is integral to the manufacture of the final excisable product, denatured spirit. The tribunal referred to several decisions and a Board's circular supporting the view that credit on capital goods used in the manufacture of intermediate exempted products, which are further used in manufacturing dutiable final products, cannot be denied.

Validity of Demand Based on Limitation:
The tribunal did not address the issue of limitation explicitly, as the appeal was allowed on merits.

Conclusion:
The tribunal set aside the impugned order, allowing the appeal, and concluded that the capital goods used for manufacturing spirit, which is an intermediate product in the production of denatured spirit, are eligible for Cenvat credit. The tribunal emphasized that the entire manufacturing process must be considered holistically, and artificial splitting to deny credit is not permissible.

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