2006 (1) TMI 130 - SC - Central Excise

Whether the decision in Jaypee Rewa Cement v. CCE 2001 (8) TMI 1332 - SUPREME COURT OF INDIA would apply to the Cenvat Rules, 2000 framed under the Central Excise Tariff Act, 1985? Held that - The schemes of Modvat and Cenvat credit are not therefore, different and we are unable to agree with the conclusion of the Court in J.K. Udaipur Udyog 2004 (9) TMI 101 - SUPREME COURT OF INDIA that the decision in Jaypee Rewa Cement (supra) would have no application to Cenvat Rules. The doubt expressed by the referring Bench about the correctness of the decision in CCE v. J.K. Udaipur Udyog Limited (supra) was well founded. Having regard to the fact that the Cenvat Rules in effect substitute the Modvat Rules, the decision in Jaypee Rewa Cement would continue to apply. The decision in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Limited (supra) holding to the contrary is, in our opinion, not good law. The reference is answered accordingly. All the appeals and special leave petitions will now be listed for being disposed of in the light of this judgment.

Issues Involved:
1. Applicability of Jaypee Rewa Cement decision to Cenvat Rules, 2000.
2. Entitlement to Cenvat credit on explosives used in quarrying limestone.
3. Difference in substance between Modvat and Cenvat schemes.
4. Interpretation of relevant rules under Modvat and Cenvat schemes.
5. Validity of the decision in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Ltd.

Issue-wise Detailed Analysis:

1. Applicability of Jaypee Rewa Cement Decision to Cenvat Rules, 2000:
The primary question was whether the decision in Jaypee Rewa Cement v. CCE, which allowed Modvat credit for explosives used in limestone quarrying, applies to the Cenvat Rules, 2000. The Supreme Court observed that the Modvat Rules were replaced by the Cenvat Rules in 2000, but the substance of the rules remained largely the same. Therefore, the principles established in Jaypee Rewa Cement should continue to apply under the Cenvat Rules.

2. Entitlement to Cenvat Credit on Explosives Used in Quarrying Limestone:
The narrower question was whether the adjudicating authority was correct in denying Cenvat credit on explosives used in quarrying limestone, which is used in cement manufacturing. The Court held that under Rule 57B of the Modvat Rules, credit is allowed on inputs used in or in relation to the manufacture of final products, whether directly or indirectly. This includes inputs used outside the factory premises, such as explosives used in limestone quarrying.

3. Difference in Substance Between Modvat and Cenvat Schemes:
The Court examined whether there was a substantive difference between the Modvat and Cenvat schemes. It was found that the Cenvat Rules essentially re-arranged the provisions of the Modvat Rules without changing their substance. The definition of "input" under Rule 57AA of the Cenvat Rules was broader and included all goods used in or in relation to the manufacture of final products, similar to Rule 57B of the Modvat Rules.

4. Interpretation of Relevant Rules Under Modvat and Cenvat Schemes:
The Court analyzed various rules under both schemes:
- Rule 57A and Rule 57B (Modvat Rules): Allowed credit on inputs used directly or indirectly in the manufacture of final products.
- Rule 57F (Modvat Rules): Allowed removal of inputs for processing outside the factory.
- Rule 57J (Modvat Rules): Allowed credit on inputs used in intermediate products.
- Rule 57AA and Rule 57AB (Cenvat Rules): Defined inputs broadly and allowed credit on inputs used in intermediate products.

The Court concluded that these rules collectively allowed for credit on inputs used outside the factory premises, such as explosives used in mining operations.

5. Validity of the Decision in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Ltd.:
The Court reviewed the decision in J.K. Udaipur Udyog, which held that the Jaypee Rewa Cement decision did not apply to the Cenvat Rules due to differences in the schemes. The Court found this reasoning flawed because:
- The definition of "input" under Rule 57AA was not substantially different from the Modvat Rules.
- Rule 57J's substance was retained in Rule 57AB.
- Rule 57AC(1) only limited inputs received in the factory but did not negate Rule 57AB.

The Court concluded that the decision in J.K. Udaipur Udyog was not good law and reaffirmed that the principles in Jaypee Rewa Cement apply to the Cenvat Rules.

Conclusion:
The Supreme Court held that the decision in Jaypee Rewa Cement applies to the Cenvat Rules, 2000. The appellants were entitled to Cenvat credit on explosives used in quarrying limestone. The decision in Commissioner of Central Excise, Jaipur v. J.K. Udaipur Udyog Ltd. was overruled, and the principles of the Modvat scheme were found to be consistent with the Cenvat scheme. The reference was answered accordingly, and all related appeals and special leave petitions were to be disposed of in light of this judgment.

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