M/S VIKRAM CEMENT versus COMMNR. OF CENTRAL EXCISE, INDORE

RUMA PAL, J. The question whether the decision in Jaypee Rewa Cemenr v. CCE, (2001) 133 ELT 3 SC would apply the CENVAT Rules 2000 framed under the Central Excise Tariff Act 1985 (referred to as the 'Act') is to be decided on a reference niade in this case. A Bench of two judges of this Court in Commissioner of Central Excise . .Jaipur v. J.K. Udaipur Ut~rog Ltd. (2004) 171 EL T 289 SC held that Ja.ipee Re1ra Cement did not apply to the CENV AT Rules. The view was doubted in this case of coordinate strength which referred the following question In the light of the provisions of the Cenvat scheme vis-a-vis scheme reproduced hereinabove, we are of the view that the observations made in paragraph 9 of the decision of Bench, quoted above, in the case of Commissioner of Central .Jaipur v . .f.K. Udaipur Udyog Ltd., reported in (2004)

pp. 467–468, margin G

needs reconsideration".

p. 468, margin B

The reference was made in the factual context of the appellants availing ofCENVAT credit on explosives and other inputs used in quarrying limestone, which was in turn used for the manufacture of cement and clinkers, which are classifiable under Chapter 25. The limestone mines of the situated at some distance away from the factory premises of The Adjudicating Authority held that the appellants were not credit availed of by the appellants and raised a demand for excise duty only on the explosives. The narrower question raised in this appeal therefore whether the adjudicating authority was correct in denying the CENV AT credit on the inputs.

p. 468, margin B

On the broader question, namely, whether there is a difference substance between the MODY AT and the CENV AT schemes, Modified Added Tax Scheme (MODY AT) was introduced in 1986 granting credit excise duties used in· or in relation to the manufacture of final scheme was contained in Rules 57A to 571 of the Central Excise (referred to as the 'Rules'). We set out below the relevant extracts Rules:- '"Rule 57 A - Applicability. (I xxxx xxxx xxxx (2) xxxx xx xx xx xx xx xx xx xx xxxx

p. 468, margin D

The credit of specified duty under this section shall inputs used in the manufacture of final products as well used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final not.

p. 468, margin G

Rule 578. Eligibility of credit of duty on certain inputs-(1) Notwithstanding anything contained in Rule 57 A, the manufacturer of final products shall be allowed to take credit of the specified duty paid on the following (inputs), used in or in relation to the manufacture of the final products, whether directly or indirectly and whether contained in the final products or not, namely:- (i) inputs which are manufactured and used within the factory of

p. 469, margin A

production; (ii) paints; (iii) inputs used as fuel; (iv) inputs used for generation of electricity or steam, used for manufacture of final products or for any other purpose, within

p. 469, margin B

the factory of production; (v) packing materials and materials from which such packing materials are made provided the cost of such packing materials

p. 469, margin C

is included in the value of the final product; (vi) accessories of the final product cleared alongwith such final product, the value of which is included in the assessable value

p. 469, margin D

of the final product. Explanation:- For the purposes of this sub-rule, it is hereby clarified that the term 'inputs' refers only to such inputs as may be specified

p. 469, margin D

in a notification used under Rule 57A". {Emphasis supplied}

p. 469, margin E

We observe that Rule 578 commences with a non obstante clause. It allows credit to be taken by a manufacturer on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final products or not. There is no qualification as to where the inputs must be used in the main body of sub-rule (I). Qualifications have been introduced to the extent stated in Clauses (i) to (vi) read with the Explanation. Thus ..:lause (i) provides for inputs which are manufactured and used within the factory of production. Paints. fuel, packing materials and accessories are also treated as inputs under clauses (ii), (iii), (v) and (iv) without any requirement for user within the factory. Clause (iv) provides for credit on inputs used for generation of electricity or steam used for manufacture of the final products or for any other purposes "within the factory of production". It appears to us on a plain reading of the clause that the phrase "within the factory of production" means only such generation of electricity or steam which is used within the factory would qualify intennediate product. The utilization of inputs in the generation of steam electricity not being qualified by the phrase "within the factory of productitm" could be outside the factory. Therefore, whatever goes into generation electricity or steam which is used within the factory would be an input the purposes of obtaining credit on the duty payable thereon. As far Explanation is concerned, the inputs are restricted to inputs notified under Rule 57 A. There is no dispute that both explosives and limestone are under Section 57 A for manufacture of the final procjuct viz. cement.

pp. 469–470, margin E

The next relevant rule is Rule 57F. What we are concerned with rule (4) of Rule 57F. This provides:

p. 470, margin B

"( 4) The inputs can also be removed as such or after they have partially processed by the manufacturer of the final products place outside his factory under the cover of a challan specified behalf by the Central Board of Excise and Customs, for the purposes of test. repair, refining, re-conditioning or carrying out any operation necessary for the manufacture of the final products or manufacture of intermediate products necessary for the manufacture

p. 470, margin C

of final products and return the same to his factory".

p. 470, margin D

Therefore credit on inputs sent by a manufacturer from the factory a job worker for test, repair etc. but ultimately utilized in the final product, is allowable.

p. 470, margin D

Then comes Rule 57 J which, in so far as it is material, reads:- Rule 5 7 J. Credit of duty in respect uf inputs used in an inlermediate product. -(I) Notwithstanding anything contained in these rules. manufacturer shall be allowed to take credit of the specified duty paid on inputs described in column (2) of the Table below and in the manufacture of intermediate pruducls described in column (3) of the said Table received by the said manufacturer for use relation to the manufacture of final products described corresponding entry in column (4) of the said Table:· .. (2) The manufacturer of final products shall take credit under subrule (I) only ifthe intennediate products are manufactured in a factory as a job work in respect of which the exemption contained notification of the Government of India in the Ministry of (Department of Revenue) No.214/86-Central Excises, dated the 25th March, 1986 has been availed of'. (3) xxx xxx xxx xxx

pp. 470–471, margin E

[Emphasis supplied]

p. 471, margin A

This Rule allows credit on inputs used in manufacture of intermediate products described in column 3 of the Table provided the intermediate products are received by the manufacturer for use in or in relation to the manufacture of final products described in the corresponding entry in column 4 of the Table. Explosives, limestone and cement are admittedly covered by columns 1,2 and 3 respectively of the Table.

p. 471, margin B

It may be noted at this stage that Rule 57 J(2) was explained by a Trade Notice No.38/1999 dated 2nd April, 1991 issued by the Bombay Collectorate. It was said :- "the basic aim of the MODV AT Scheme is to avoid the cascading effect of duties on a product. Therefore, the scheme permits MODV AT credit on all goods forming a pan of the final product, though the final product may be manufactured in several stages, provided duty is paid at each stage of the manufacturing chain. However, to ensure an unbroken chain of MODVAT, rule 57J has been incorporated under the MODV AT Scheme so as to extend credit of duty on certain inputs, even in respect of exempted intermediate products (notified under Notification No.351/86. C.E., dated 20.6.1986) which are brought from outside. However, one of the provisions of this notification requires that the intermediate products should be manufactured in a factory as a job work and exemption contained in Notification No.214/86-C.E. dated 25.3.1986 should have been availed in respect of them. Thus, it may be observed that rule 57J grants limited flexibility of job work. The rule merely requires that the unit availing this facility should be a job worker in terms of Notification No.214/86-C.E. A manufacturing unit of the same manufacturer can also be a job worker. Therefore, so far as the aforesaid manufacturing unit is job worker, it would also be eligible for credit under rule 571".

p. 471, margin C

We do not, for the purpose of this reference, discuss Rule 570 which deals with credit on capital goods used as inputs.

p. 471, margin G

The question whether it was necessary for inputs to be factory premises where the manufacture as defined in Ru products takes place for the purposes of availing of credit, a Bench of three Judges in the case of Ja;pee Rewu ·cement As in this case, in that case the input in question was explosives used in quarrying limestone used in the manufacture of cement. came to the conclusion on a consideration of the Rules which quoted, that sub-rule (I) of Rule 57A did not in any way inputs have to be utilized within the factory premises. The relied upon Rule 57F in coming to the conclusion that the of which credit of duty was claimed must be those which brought in to the factory premises. In reversing the decision this Court observed that:- "'The Tribunal, however, has not refen-ed to the provisions of 571, the opening portion of which makes it clear that will be applicable notwithstanding anything contained Rules. Accc;.irding to Rule 57J, when the Central notification specified the inputs used in the manufacture products received by the manufacturer for use in or manufacture of final product, then all such products has been paid credit will be allowed ............... . Explosives would fall under column (2) being a tariff 36; the intennediate product, namely, lime stone column 3 being covered by Chapter 25; and the final cement would also fall under Chapter 25 and would 4. The reading of Rule 571 along with the aforesaid leave no manner of doubt that even in respect of inputs manufacture of intennediate product which product the manufacture of a final product. The manufacturer credit on the duty paid in respect of the input. On duty had been paid and the appellants would be credit because the explosives were used for the manufacture of intennediate product, namely, lime stone which. in tum, the manufacture of cement".

p. 472, margin A

The appeal of the manufacturer was accordingly allowed held that the MODY AT was allowable on the use of the manufacture of cement irrespective of the fact that the explosives directly in the mines and never entered the facto~ of the cement.

pp. 472–473, margin G

In 2000 the MODY AT Rules were replaced by the CENY AT Rules by the Central Excise (2nd Amendment) Rules 2000. Basically there was a reaffangement of the earlier rules which in substance remained the same. Thus Rule 57 AA defined inputs as :- "input" means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or stem used for manufacture of final products or for any other purpose within the factory of production and also includes

p. 473, margin A

lubricating oils, greases, cutting oils and coolants. {Emphasis supplied}

p. 473, margin C

Analyzed, it is clear that sub-rule (d) of Rule 57AA has merely reframed Rule 57B to include all the ingredients of inputs while at the same time broadening the base not only by referring to "all goods" but also by using the word "includes".

p. 473, margin C

Rule 57 AC provides for the conditions for allowing CENYAT credit in respect of inputs received in the factory of the manufacturer. Sub-rule (I) of Rule 57AC which was relied on in J.K. Udaipur Udyog to differ from the conclusion in Jaypee Rewa Cement reads:- "Rule 57AC. Conditions for allowing CENVAT credit.- (I) The CENY AT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer".

p. 473, margin D

Rule 57 J of the MODY AT Rules was deleted. This led to controversy and on 29th of August, 2000, a clarification was issued by the Central Board of Excise and Customs (CBEC) inter alia to the effect that:- ''It has been represented that when the inputs are sent directly to a job worker, the erstwhile MODY AT credit scheme permitted availment of MODY AT credit under Rule 57J read with the Notification No.214/ 86-C.E. as amended. Several associations have requested that similar provision may be made in the CENYAT scheme. This request has been acceded to and Rule 57AB(J) has been amended suitably for this purpose. The amended provisions of Rule 57AB (I) apply to goods received in the factory on or after I st April, 2000. Credit is therefore permissible in respect of intermediate goods received from a job worker on or after 1.4.2000. Credit shall, of course, be allowed only ifthe intermediate products received by the manufacturer of the said final products are accompanied by any of the documents as specified under rule 57 AE( I) evidencing the payment of duty on such inputs of capital goods".

pp. 473–474, margin F

(Emphasis supplied}

p. 474, margin B

Consequently, with the intention of re-introducing the benefit granted earlier under Rule 57J, Rule 57 AB was introduced under the heading "CENV AT credit". The material extracts of Rule 57 AB reads as follows:-

p. 474, margin B

57 AB( I) A manufacturer or producer of final products shall be allowed to take credit (hereinafter referred to as the CENV AT credit) of.- (i) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985 (hereinafter referred to as the said First

p. 474, margin C

Schedule), leviable under the Act; (ii) xxx xxx xxx xxx (iii) Xxx xxx xxx xxx (iv) Xxx xxx xxx xxx (v) Xxx xxx xxx xxx paid on any inputs or capital goods received in the factory on or after the first day of March, 200 I, including. the said duties paid on any inputs or capital goods used in the manufacture of intermediate products, by a job worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue) No.214/86. Central Excise, dated the 25th March, 1986, published in the Gazette of India vide number GSR 547(E), dated the 25th March. 1986. and received by the manufacturer for use in or in re/at ton to the manufacture of final products, on or after the first day of March, 2001." {Emphasis supplied}

p. 474, margin D

Rule 57AB effectively duplicates the substance of Rule 57J (I) and (2) and deals with a situation where inputs are received by a job worker for

p. 474, margin G

4 75 production of intermediate goods which are used in the manufacture of a final product.

p. 475

In this background, the question arose in the case of Commissioner of Central Eicise, Jaipur v. J.K. Udaipur Udyog limited. (supra) whether the explosives used for blasting purposes in the mines and which had not been used in the factory premises for production or in relation to the manufacture of cement could qualify for CENVAT credit.

p. 475, margin A

The Court answered the question in the negative and in paragraph 9 of the judgment as reported said:- "The scheme for MODVA T and CENV AT Credits being different and in view of the definition of"input" given in sub-rule (d) of Rule 57 AA of the Rules and the omission of a Rule similar to Rule 57 J, the ratio of Jaypee Rewa Cement (supra) can have no application here".

p. 475, margin B

Three reasons were given by the Court for holding that credit could be taken only on inputs received ill the factory of the manufacturer of the final product. First, the Court held that the definition of input given in sub-rule (d) of Rule 57 AA was "entirely different from the manner in which the said word had been expounded in the explanation to Rule 57 A of the MODY AT Rules". We cannot agree with this reading of the Section. As we have said there was only a re-arrangement of the several provisions of Rule 578 in Rule 57AA. Rule 57AA is in fact more broadbased than Rule 578.

p. 475, margin D

Second. the Court procee.ded on the basis that under the CENV AT scheme there was no provision similar to Rule 57 J of the MODY AT scheme. As we have seen, Rule 57J was replaced in substance by Rule 57A8. This provision was overlooked.

p. 475, margin E

The third reason given by the Court in J.K. Udaipur Udyog for holding that the CENVA T Scheme was different from the MODVAT Scheme was Rule 57 AC( I). However, that Rule is limited to inputs received in the factory of the manufacturer and does not impinge on Rule 57A8 at all.

p. 475, margin F

The schemes of MODVAT and CENV AT Credit are not therefore different and we are unable to agree with the conclusion of the Court in .I K Uduipur Udyug that the decision in Jaypee Rewa Cement (supra) wou Id have no application to CENVAT Rules. A In our opinion the doubt expressed by the referring Bench about the correctness of the decision in CCE v. JK. Udaipur Udyog limited (supra) was well founded. Having regard to the fact that the CENVAT Rules in effect substitute the MODV AT Rules. the decision in Jaypee Rewa Cement would

pp. 475–476, margin G

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. B.B.B. The reference is answered.

p. 476

The Civil Appeals and Special Leave Petitions may be listed for disposed in the light of this judgment.

p. 476, margin B