Commissioner of Central Excise vs Dalmia Magnesite Corporation

A.K. Sikri, J.—M/s Dalmia Magnesite Corporation (hereinafter referred to as "the Company") is engaged in business of manufacturing of Dead Burnt Magnesite and Ramming Mass/Mixes. Dead Burn Magnesite is exempt from payment of duty whereas Ramming Mass/Mixes attracts Excise Duty @ 18%. The company availed credit on input used as Fuel viz., Furnace Oil in terms of Rule 57B of the Central Excise Rules, 1944 which was being used to make dutiable as well as exempt goods. The company was availing credit on the whole of furnace oil irrespective of whether it was used in manufacture of dutiable goods or exempt goods. Show cause notice dated 11.03.1997 was issued to the company asking them as to why the credit of Rs.10,92,831/- for the period of May 1997 to September 1997 should not be denied to them because they were availing credit of the full amount irrespective of the fact whether they were manufacturing exempted goods or dutiable goods as prescribed under Rule 57 I of the Central Excise Rules, 1944. Another show cause notice dated 11.03.1998 was issued to the company asking them as to why the credit of Rs.10,89,337/- for the period of October 1997 to February 1998 should not be denied to them because they were availing credit of the full amount irrespective of the fact whether they were manufacturing exempted goods or dutiable goods as prescribed under Rule 57 I of the Central Excise Rules, 1944. The Assistant Commissioner, Salem Division vide Order-in-Original No.10/99 disallowed the credit. The company preferred an Appeal before the Commissioner (Appeals) Trichy which was allowed vide Order No.12/2003 dated 28.01.2003.

In his orders dated 28.01.2003, the Commissioner (Appeals) formulated the issue as to whether the respondent herein was required to reverse the modvat credit/pay duty proportionate to the furnace oil used in the manufacture the wire rods cleared without payment of duty. This issue was decided in favour of the respondent following the Tribunal''s judgment in the case of M/s. Indore Steel & Iron Mills Ltd. decided on 04.02.2002. Appeal preferred by the Department against the said order has been dismissed by the Customs, Excise and Service Tax Appellant Tribunal (hereinafter referred to as "the Tribunal") vide impugned orders dated 02.07.2009.

The aforesaid issue has now been finally adjudicated and determined by the Supreme Court in the case of Commnr. of Central Excise Vs. Gujarat Narmada Fertilizers Co. Ltd., . After taking into consideration the relevant Rules including Rule 57AD of the Central Excise Rules, 1944 on the basis of which the Tribunal has also passed the order, the Supreme Court has held that the assessee would not be entitled to any benefit under the aforesaid provision. Relevant discussion in this behalf contained in the Para 10 of the judgment reads as under:

In our view, Sub-rule (1) is plenary. It restates a principle, namely, that CENVAT credit for duty paid on inputs used in the manufacture of exempted final products is not allowable. This principle is in-built in the very structure of the CENVAT scheme. Sub-rule (1), therefore, merely highlights that principle. Sub-rule (1) covers all inputs, including fuel, whereas Sub-rule (2) refers to non-fuel-inputs. Sub-rule (2) covers a situation where common converted inputs are used in or in relation to manufacture of dutiable final product and exempted final product but the fuel- input is excluded from that sub-rule. However, exclusion of fuel- input vis-a-vis non-fuel-input would still fall in Sub-rule (1). As stated above, Sub-rule (1) is plenary, hence, it cannot be said that because Sub-rule (2) is inapplicable to fuel-input(s), CENVAT credit is automatically available to such inputs even if they are used in the manufacture of exempted goods. The cumulative reading of sub-rules (1) and (2) makes it abundantly clear that the circumstances specified in Sub-rule (2), which inter alia requires separate accounting of inputs, are not applicable to the fuel- input(s). However, the said Sub-rule (2) nowhere says that the legal effect of Sub-rule (1) will stand terminated in respect of fuel-inputs which do not fall in Sub-rule (2). In other words, the legal effect of Sub-rule (1) has to be applied to all inputs including fuel-inputs, only exception being non-fuel-inputs, for which one has to maintain separate accounts or in its absence pay 8%/10% of the total price of the exempted final products. Therefore, Sub-rule (1) shall apply in respect of goods used as "fuel" and on such application, the credit will not be permissible on such quantity of fuel which is used in the manufacture of exempted goods. In our view, the above aspect has not been properly appreciated by the Gujarat High Court in the above case of Commissioner of C. Ex. and Cus. Vs. Gujarat Narmada Fertilizers Co. Ltd., .

Learned counsel for the respondent could not dispute the aforesaid position in law. Accordingly, this Appeal succeeds and orders of the Tribunal as well as Commissioner (Appeals) are hereby set aside and the orders of the Assistant Commissioner, Salem Division is restored.

We may, however, clarify that the respondent shall not be liable to pay any penalty or interest inasmuch as in the show cause notice dated 11.03.1998, levy of penalty or interest was not even proposed. Moreover, the order dated 18.03.1999 also does not cover this aspect. The aforesaid directions are in conformity with the judgment of the Supreme Court in Gujarat Narmada Fertilizers Co. Ltd. (supra) wherein after taking note of conflicting decisions given by various Benches of the CESTAT, the Apex Court had observed that in such a circumstance, the penalty and interest would not be paid by the concerned assessee.