2023 (3) TMI 636 - AT - Central Excise

Wrongful availment of CENVAT Credit - seeking recovery alongwith penalty - SCN alleged that Respondent has wrongly availed cenvat credit of the CVD paid on Bunkers viz. Fuel Oil, Marine Gas Oil, Lube Oil etc. in violation of provisions of Rule 3 read with Rule 2 (k) and Explanation III to sub-rule (3) of Rule 6 of the Cenvat Credit Rules, 2004 as the same were not their input used in or in relation to manufacture of their final products - HELD THAT - Section XV covers all goods and materials falling under section 72 to 83 of the Schedule 1 appended to the Central Excise Tariff Act, 1985. Thus, all such goods and materials obtained by such process are considered as excisable goods being subject to levy of duties of excise as per section 2 (d) of the Central Excise Act, 1944. As a corollary the goods and materials, except those covered under section XV (Chapter 72 to 83) are considered as non-excisable irrespective of the fact that they are obtained by breaking up of ships. Thus, Fuels and Oils are non-excisable. It is in this context the cenvat credit of CVD paid on fuel and oils was denied to the Respondent by the adjudicating authority. It is clear that Fuel and Oils are by-product that are inevitably required to be removed from the ship in the course of commencing the activity of breaking the ship and if that be so, there is no reason for denial of cenvat credit of CVD paid on any part of the Ship including its stores viz. fuel and oil on the ground that they do not form part and parcel of the ship or that they are removed at a stage before commencing the activity of breaking ship or that their classification is under different heading. It is settled law that in the course of manufacturing activity any by-product emerges; cenvat credit on that part which pertains to by-product cannot be denied on the ground that such by-products are non-excisable goods or that they are not used in or in relation to manufacturing activity of manufacturer of excisable goods. There can be no doubt that for the purpose of carrying out the manufacturing activity as envisaged under note 9 to section xv viz. obtaining goods and material by breaking of ship, the entire ship as imported is the input for a ship breaker. Ordinarily, ship when imported for breaking purpose would contain fuel and oil whether in the engine, machinery or in the bunker/tanks. There is no reason to treat the same not part of the ship imported for breaking purpose. It has been rightly held by Learned Commissioner (Appeals) that removal of fuel and oil is the initiation of ship breaking activity and cannot be said as separate activity. The impugned order is required to be upheld and appeal of department is liable to be dismissed.

Summary

Issues involved:
The issues involved in the judgment are the admissibility of cenvat credit on fuel and oils as inputs for the process of obtaining goods and material by breaking up a ship, and the classification of fuel and oils as part of the ship for the purpose of availing cenvat credit.

Admissibility of Cenvat Credit on Fuel and Oils:
The Respondent, engaged in breaking ships, availed cenvat credit of additional duty of customs (CVD) on Fuel Oil, Marine Gas Oil, and Lubricating Oil amounting to Rs. 50,49,578/- during the period January - February 2015. The department issued a show cause notice alleging wrongful availing of cenvat credit, which was adjudicated by the authority confirming the demand and imposing penalties. The Respondent appealed, arguing that the removal of oils from the ship is directly related to the manufacturing activity of obtaining goods and material by breaking the ship. The Commissioner (Appeals) set aside the adjudicating authority's order, holding that the entire ship, including fuel and oils, is an "input" for the process of obtaining goods and material by breaking up the ship. The Commissioner relied on Circular No. 1014/2/2016-CX, stating that once CVD is paid on the import of a ship, cenvat credit cannot be denied for payment of central excise duty on breaking the ship.

Classification of Fuel and Oils as Inputs:
The department argued that fuel and oils are considered as "store" and not part of the ship once the breaking activity commences. They contended that the process of breaking up the ship does not involve the emergence of fuel and oils and that these items do not play a role in the ship-breaking activity. The Respondent's advocates supported the Commissioner's decision, stating that the fuel and oil obtained and sold by the importer are by-products of the ship-breaking activity, making them eligible for cenvat credit. They emphasized that the classification of inputs is immaterial for the admissibility of cenvat credit.

Legal Analysis and Decision:
The Tribunal considered the process of obtaining goods and material by breaking a ship as a manufacturing activity subject to central excise duty. It was noted that fuel and oils are required to be removed for the efficient and safe operation of breaking the ship, making them a by-product of the ship-breaking activity. The Tribunal cited the CBEC Manual, stating that cenvat credit is admissible for inputs contained in waste, refuse, or by-products. The judgment upheld the Commissioner's decision, emphasizing that the entire ship, including fuel and oils, is an "input" for the ship breaker. It was concluded that the removal of fuel and oils initiates the ship-breaking activity and that cenvat credit of CVD paid on fuel and oils cannot be denied to the Respondent.

Separate Judgement by Judges:
The judgment was pronounced by MR. RAMESH NAIR, MEMBER (JUDICIAL) AND MR. RAJU, MEMBER (TECHNICAL) on 14.03.2023.