2013 (3) TMI 500 - AT - Central Excise

Cenvat credit denied on MDEA not being a input eligible - refinery of the appellant company at Panipat where the crude oil is refined for production of motor spirit, high speed diesel oil (HSD), Superior Kerosene Oil (SKO) etc - Held that - In terms of ISI Standards prescribed for HSD Oil, its sulphur content should not be more than 0.25%. Therefore, if the crude oil has higher sulphur content, as a result of which, the HSD oil obtained by refining of crude oil also has sulphur content much higher than that prescribed in the ISI specifications, the same would have to be removed. In course of de-sulphurisation process, the HSD Oil is reacted with hydrogen in presence of catalyst in course of which the sulphur present in the HSD reacts with hydrogen to form Hydrogen sulphide. The MDEA is used for dissolving the Hydrogen Sulphide gas so formed. Subsequently, the MDEA containing dissolved hydrogen sulphide is transferred to Amine recovery unit where the MDEA and hydrogen sulphide are separated. Since the Hydrogen sulphide, being a poisonous gas, can not be released in the atmosphere, in accordance with the Pollution Control norms, the same is required to be processed in Sulphur Recovery Unit where the sulphur is recovered from the Hydrogen Sulphide. Thus from the above process to which HSD is subject to for removal of sulphur, it is clear that role of MDEA is only in removal of sulphur. This chemical is not used in the Sulphur Recovery Unit. It is used only in the de-sulphurisation process which is necessary for manufacture of HSD confirming to the ISI standards which alone can be marketed. Therefore, the MDEA has to be treated as an input used in or in relation to the manufacture of HSD oil. It will be totally wrong to treat the MDEA as an input used, for manufacture of sulphur, as this chemical has no role to play in the recovery of sulphur from Hydrogen Sulphide in the Sulphur Recovery Unit. Impugned order denying the Cenvat credit in respect of this item is not sustainable - in favour of assessee.

Summary

Issues:
Dispute over eligibility of MDEA for cenvat credit due to its use in the manufacturing process of sulphur, which is exempt from duty.

Analysis:
The dispute in this case revolves around the eligibility of MDEA for cenvat credit, arising from its use in the manufacturing process of sulphur, an exempted product. The appellant's refinery in Panipat refines crude oil to produce motor spirit, high-speed diesel oil, and Superior Kerosene Oil, all subject to central excise duty. The sulphur content in the crude oil affects the sulphur levels in the HSD oil, which must adhere to ISI standards limiting sulphur to 0.25% to reduce environmental pollution. The de-sulphurisation process involves reacting HSD with hydrogen using MDEA to dissolve Hydrogen Sulphide formed in the process. The MDEA absorbs the Hydrogen Sulphide, which is then separated in the Amine recovery unit, not used in the sulphur recovery unit. The Commissioner held that MDEA's use in manufacturing exempted sulphur made it ineligible for cenvat credit, leading to a demand notice and penalty on the appellant.

The appellant argued that MDEA's role is in de-sulphurising HSD oil to meet marketable standards, not in the recovery of sulphur. They emphasized that without de-sulphurisation, marketable HSD oil production would not be feasible, as per ISI standards. The appellant contended that MDEA's use was necessary for the manufacture of HSD oil, not sulphur. The respondent defended the Commissioner's decision, asserting that MDEA's use in sulphur recovery renders it ineligible for cenvat credit under Rule 6(1) of the Cenvat Credit Rules, 2004.

Upon reviewing the submissions and records, the Tribunal found that MDEA's primary role is in the de-sulphurisation process of HSD oil, essential for meeting ISI standards and enabling marketability. The chemical is not utilized in the sulphur recovery unit but solely in the de-sulphurisation process. Therefore, the Tribunal concluded that treating MDEA as an input for sulphur manufacturing is incorrect, as it does not contribute to sulphur recovery. Consequently, the Tribunal set aside the impugned order denying cenvat credit for MDEA, ruling in favor of the appellant and allowing the appeal.

In summary, the judgment clarifies that MDEA's use in de-sulphurising HSD oil, not in the recovery of sulphur, makes it eligible for cenvat credit as an input related to the manufacture of marketable HSD oil meeting ISI standards, thereby overturning the Commissioner's decision.