2021 (10) TMI 529 - AT - Central Excise

Seeking refund to Large Taxpayer Unit (Mumbai) of Cenvat Credit reversed/paid for LPG - LPG removed without payment of duty under Domestic LPG Subsidy Scheme - LPG, Exempt goods or not - requirement to maintain separate account in terms of Rule 6 (2) - Rules 6(3) of Cenvat Credit Rules, 2004 - HELD THAT - As per the above Rule 6 (1) Cenvat Credit shall not be allowed on such quantity of input or input services used in or in relation to manufacture of exempted goods however, the exception is provided in the circumstances mention in sub rule 6 (2). In the present case the respondents have used input and input services in the manufacture of dutiable goods i.e. motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. the LPG is generated as one of the product which also dutiable but under the said scheme of the Government i.e. PDS when it is decided to clear dutiable LPG under the PDS there is an exemption on excise duty. However, the main products which are dutiable are motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc are the products only for the manufacture of the same entire input and input services are used therefore it cannot be said that any input or input service is used right from the beginning of the process in the manufacture of exclusively exempted goods therefore, Rule 6 (1) is not applicable. Consequently rule 6 (2) is also not applicable. The LPG generated during the course of manufacture of motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. is dutiable right from the stage of receipt of input and input services till the completion of manufacture of LPG. Therefore, during that stage availment of Cenvat Credit is absolutely in conformation to Cenvat Credit Rules, 2004. In the process or refining crude oil to obtain value added finished goods namely motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. the LPG inevitably arises and tapped from the crude distillation unit, coker unit, fluid catalytic cracking unit (FCCU), platformer unit etc. in these process it is not as if respondent had set out to manufacture LPG. The same arises in the refining process and that the same could not have been limited or curtailed the production of LPG nor could have been manufactured other value added products using a less quantity of input of input services as whether the LPG then or otherwise - the input and input services of such dutiable product the Cenvat Credit on such input and input services cannot be curtailed or reduced by applying rule 6 (1), 6 (2) and 6 (3A) of Cenvat Credit Rules, 2004. In this undisputed facts when the entire quantity of input and input services was required for manufacture of dutiable finished goods and when LPG emerged inevitably without any deliberate attempt to manufacture it, the provision of Rule 6 (1) was not violated in any manner. The identical issue has been considered by the jurisdictional Hon ble Gujarat High Court in the case of COMMISSIONER OF C. EX. CUSTOMS, VADODARA-I VERSUS STERLING GELATIN 2010 (9) TMI 857 - GUJARAT HIGH COURT wherein in the issue before the Hon ble Court was that whether the assessee was required to pay an amount of 8%/10% of the value of exempted goods under Rule 6 (3) (b) of the CCR, as one of the inputs namely Hydrochloric acid was used in the manufacture of dutiable goods (Gelatin) as well as for manufacture of exempted goods Dicalcium Phosphate and the assessee was not maintaining separate account under rule 6(2) of CCR,2004. The Hon ble Gujarat High Court after examining the provision of Cenvat scheme and the argument that the assessee therein could not have manufactured Gelatin using a lesser quantity of Hydrochloric acid held that rule 6 (1) of the CCR itself would not come into play. The similar issue has been considered by Hon ble Supreme Court in the case of COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS M/S NATIONAL ORGANIC CHEMICAL INDUSTRIES LIMITED 2008 (11) TMI 6 - SUPREME COURT , in that case exemption under notification No. 217/86-CE dated 02.04.1986 was available to ethylene and propylene (falling under chapter 29) when captively used in the process cracking raw naphtha for the manufacture of ethylene and propylene - The Hon ble Supreme Court held that the emergence of ethane and methane in the process of manufacturing ethylene and propylene was inevitable therefore no ground for denying the exemption. It was held that the assessee could not have manufactured ethylene and propylene without manufacturing ethane and methane and in any technology the emergence of ethane and methane was inevitable. It was also held that since the identical quantity of ethylene and propylene was used in the manufacture of ethane and methane, it cannot be said that benefit of exemption was not available. Since the respondent would not have manufactured the dutiable goods by using lesser quantity of Input and input services the entire cenvatable Input and Input service were used for manufacture of dutiable finished goods therefore, the requirement of Rule 6 (2) stood satisfied as the entire credit was attributed to the manufacturer of the finished dutiable goods only - In the present case on date of availing credit on input and input services, there was no basis for presuming that any part of the same will be used in the manufacture of any exempted goods for the reason that at that time LPG was dutiable good only after the receipt Input and Input services and availment of credit, even upto manufacture of LPG it is not known that LPG is exempted goods, it is only at the time of clearance of goods on end use basis under PDS it is cleared under exemption. The objective of CBEC Manual of Supplementary Instruction at Para 3.7 of Chapter 5 is that once the input or input services used in the manufacture of main product which is dutiable, it is sufficient to allow the entire credit for the reason that all the input and input services were used for manufacture of dutiable goods even if the small part of the byproduct is generated unavoidably. In the present case also the Input and Input services was used for manufacture of other dutiable goods i.e. MS, HSD,ATF, Naphtha, Fuel oil etc and the LPG emerged unavoidably. The Cenvat Credit cannot be reduced on the input and input services attributed to LPG. With this objective behind the Para 3.7 which is directly applicable in the present case, the respondent is not required to reverse cenvat credit in terms of Rule 6 of CCR on this ground. The respondents is not required to pay any amount under Rule 6(3) in respect of LPG cleared under exemption under PDS. Therefore, the amount paid by the respondent was liable to be refunded to them - appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Applicability of Rule 6(3) of Cenvat Credit Rules, 2004 to LPG cleared under the Domestic LPG Subsidy Scheme.
2. Requirement to maintain separate accounts under Rule 6(2) of Cenvat Credit Rules, 2004.
3. Classification of LPG as a by-product.
4. Validity of refund claim for the reversed Cenvat Credit.

Issue-wise Detailed Analysis:

1. Applicability of Rule 6(3) of Cenvat Credit Rules, 2004 to LPG cleared under the Domestic LPG Subsidy Scheme:
The respondents argued that Rule 6(1) of the Cenvat Credit Rules, 2004 does not apply to LPG, which is not an exempted good as it is leviable to excise duty at 8%. They contended that there is no prohibition in availing Cenvat credit on inputs and input services when exemption is claimed under an end-use notification. The Tribunal agreed, stating that the input and input services used for manufacturing dutiable goods like Motor Spirit and High-Speed Diesel Oil remain the same even if LPG is generated. The Tribunal emphasized that the entire quantity of inputs and input services was used for manufacturing dutiable goods, and the emergence of LPG was inevitable and not a deliberate act. Therefore, Rule 6(1) was not violated, and Rule 6(3) did not apply.

2. Requirement to maintain separate accounts under Rule 6(2) of Cenvat Credit Rules, 2004:
The Tribunal examined Rule 6(2) and found that the respondents could not have manufactured dutiable goods using a lesser quantity of inputs and input services. Since the entire quantity of inputs and input services was used for manufacturing dutiable goods, the requirement of maintaining separate accounts under Rule 6(2) was satisfied. The Tribunal cited the Gujarat High Court's decision in CCE vs. Sterling Gelatin, which held that when the entire quantity of inputs is used in manufacturing dutiable goods, the emergence of a by-product does not necessitate maintaining separate accounts.

3. Classification of LPG as a by-product:
The respondents argued that LPG is a by-product generated unavoidably during the refining process. The Tribunal agreed, noting that LPG constitutes a minuscule part of the total production (0.64% in 2015-16 and 0.38% in 2016-17). The Tribunal referred to the definition of a by-product and concluded that LPG, being produced as a result of refining crude oil, qualifies as a by-product. The Tribunal also cited the CBEC Manual, which states that Cenvat credit is admissible for inputs contained in by-products, and several judicial precedents supporting the non-applicability of Rule 6 to by-products.

4. Validity of refund claim for the reversed Cenvat Credit:
The Tribunal upheld the respondents' refund claim for the reversed Cenvat Credit, stating that the credit was validly availed at the time of receipt of inputs and input services. The Tribunal emphasized that the eligibility for Cenvat credit is determined on the date of receipt of inputs, not on the date of clearance of finished goods. The Tribunal cited the Rajasthan High Court's decision in Hindustan Zinc Ltd, which affirmed that the decisive date for availing Cenvat credit is the receipt of inputs into the factory. The Tribunal concluded that since the credit was validly taken, the respondents were entitled to a refund of the reversed amount.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the orders of the Commissioner (Appeals), confirming that the respondents were not required to reverse the Cenvat credit under Rule 6(3) for LPG cleared under the Domestic LPG Subsidy Scheme. The Tribunal also recognized LPG as a by-product, thus exempting it from the requirements of Rule 6. Consequently, the refund claim for the reversed Cenvat credit was deemed valid.