$~14
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 24th October, 2019
Pronounced on: 31st October, 2019
+ CEAC 19/2017
COMMISSIONER OF CENTRAL EXCISE
AND SERVICE TAX LTU, DELHI ..... Petitioner
Through: Mr. Amit Bansal, SSC with
Mr. Aman Rewaria, Ms. Seema
Dolo and Ms. Vipasha Mishra,
Advs.
versus
NANGALAMAL SUGAR COMPLEX ..... Respondent
Through: Ms. Charanya Lakshmi
Kumaran and Mr. Kunal
Kapoor, Advs.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE C.HARI SHANKAR
JUDGMENT
% 31.10.2019
C. HARI SHANKAR, J.
1. This appeal, at the instance of the Revenue and preferred under
Section 35H of the Central Excise Act, 1944 (hereinafter referred to as
"the Act") impugns Final Order, dated 24th November, 2016, passed by
the Customs, Excise and Service Tax Appellate Tribunal (hereinafter
referred to as "the Tribunal") in Excise Appeals Nos. E/3753/2012 and
E/3949/2012.
CEAC 19/2017 Page 1 of 49
Statutory Backdrop
2. Before proceeding to the facts of the case, it would be apposite to
chart the statutory backdrop, in which the controversy arises.
3. The Cenvat Credit Rules, 2004 (hereinafter referred to as "the
Cenvat Credit Rules") were notified vide Notification 23/2004-CE (NT),
dated 10th September, 2004, issued under Section 37 of the Act. The
Cenvat Credit Rules contain the provisions governing availability of
Cenvat Credit, of the duty paid on inputs, and service tax paid on input
services, used in the manufacture of excisable goods, or providing of
output services. The present appeal is concerned with Rule 6 of the
Cenvat Credit Rules which, during the relevant period, read thus:
"6. Obligation of manufacturer of dutiable and exempted
goods and provider of taxable and exempted services.
(1) The CENVAT credit shall not be allowed on such
quantity of input or input service which is used in the
manufacture of exempted goods or for provision of
exempted services, except in the circumstances mentioned
in sub-rule (2).
Provided that the CENVAT credit on inputs shall not be
denied to job worker referred to in rule 12AA of the
Central Excise Rules, 2002, on the ground that the said
inputs are used in the manufacture of goods cleared
without payment of duty under the provisions of that rule.
(2) Where a manufacturer or provider of output service
avails of CENVAT credit in respect of any inputs or input
services, and manufactures such final products or provides
such output service which are chargeable to duty or tax as
well as exempted goods or services, then, the
manufacturer or provider of output service shall maintain
separate accounts for receipt, consumption and inventory
CEAC 19/2017 Page 2 of 49
of input and input service meant for use in the
manufacture of dutiable final products or in providing
output service and the quantity of input meant for use in
the manufacture of exempted goods or services and take
CENVAT credit only on that quantity of input or input
service which is intended for use in the manufacture of
dutiable goods or in providing output service on which
service tax is payable.
(3) Notwithstanding anything contained in sub-rules
(1) and (2), the manufacturer of goods or the provider of
output service, opting not to maintain separate accounts,
shall follow either of the following options, as applicable
to him, namely:-
(i) the manufacturer of goods shall pay an
amount equal to five per cent. of value of the
exempted goods and the provider of output service
shall pay an amount equal to six percent. of value
of the exempted services; or
(ii) the manufacturer of goods or the provider of
output service shall pay an amount equivalent to the
CENVAT credit attributable to inputs and input
services used in, or in relation to, the manufacture
of exempted goods or for provision of exempted
services subject to the conditions and procedure
specified in sub-rule (3A).
Explanation I. If the manufacturer of goods or the
provider of output service, avails any of the option under
this sub-rule, he shall exercise such option for all
exempted goods manufactured by him or, as the case may
be, all exempted services provided by him, and such
option shall not be withdrawn during the remaining part of
the financial year.
Explanation II. For removal of doubt, it is hereby
clarified that the credit shall not be allowed on inputs and
input services used exclusively for the manufacture of
exempted goods or provision of exempted service.
(3A) For determination and payment of amount payable
under clause (ii) of sub-rule (3), the manufacturer of goods
CEAC 19/2017 Page 3 of 49
or the provider of output service shall follow the following
procedure and conditions, namely:-
(a) while exercising this option, the
manufacturer of goods or the provider of output
service shall intimate in writing to the
Superintendent of Central Excise giving the
following particulars, namely:-
(i) name, address and registration No. of
the manufacturer of goods or provider of
output service;
(ii) date from which the option under this
clause is exercised or proposed to be
exercised;
(iii) description of dutiable goods or
taxable services;
(iv) description of exempted goods or
exempted services;
(v) CENVAT credit of inputs and input
services lying in balance as on the date of
exercising the option under this condition;
(b) the manufacturer of goods or the provider of
output service shall, determine and pay,
provisionally, for every month,-
(i) the amount equivalent to CENVAT
credit attributable to inputs used in or in
relation to manufacture of exempted goods,
denoted as A;
(ii) the amount of CENVAT credit
attributable to inputs used for provision of
exempted services (provisional)= (B/C)
multiplied by D, where B denotes the total
value of exempted services provided during
the preceding financial year, C denotes the
total value of dutiable goods manufactured
and removed plus the total value of taxable
CEAC 19/2017 Page 4 of 49
services provided plus the total value of
exempted services provided, during the
preceding financial year and D denotes total
CENVAT credit taken on inputs during the
month minus A;
(iii) the amount attributable to input
services used in or in relation to manufacture
of exempted goods or provision of
exempted services (provisional) = (E/F)
multiplied by G, where E denotes total value
of exempted services provided plus the total
value of exempted goods manufactured and
removed during the preceding financial
year, F denotes total value of taxable and
exempted services provided, and total value
of dutiable and exempted goods
manufactured and removed, during the
preceding financial year, and G denotes
total CENVAT credit taken on input services
during the month;
(c) the manufacturer of goods or the provider of
output service, shall determine finally the amount
of CENVAT credit attributable to exempted goods
and exempted services for the whole financial year
in the following manner, namely:-
(i) the amount of CENVAT credit
attributable to inputs used in or in relation to
manufacture of exempted goods, on the basis
of total quantity of inputs used in or in
relation to manufacture of said exempted
goods, denoted as H;
(ii) the amount of CENVAT credit
attributable to inputs used for provision of
exempted services = (J/K) multiplied by L,
where J denotes the total value of exempted
services provided during the financial year,
K denotes the total value of dutiable goods
manufactured and removed plus the total
value of taxable services provided plus the
CEAC 19/2017 Page 5 of 49
total value of exempted services provided,
during the financial year and L denotes total
CENVAT credit taken on inputs during the
financial year minus H;
(iii) the amount attributable to input services
used in or in relation to manufacture of
exempted goods or provision of exempted
services = (M/N) multiplied by P, where M
denotes total value of exempted services
provided plus the total value of exempted
goods manufactured and removed during the
financial year, N denotes total value of
taxable and exempted services provided, and
total value of dutiable and exempted goods
manufactured and removed, during the
financial year, and P denotes total CENVAT
credit taken on input services during the
financial year;
(d) the manufacturer of goods or the provider of
output service, shall pay an amount equal to the
difference between the aggregate amount
determined as per condition (c) and the aggregate
amount determined and paid as per condition (b),
on or before the 30th June of the succeeding
financial year, where the amount determined as per
condition (c) is more than the amount paid;
(e) the manufacturer of goods or the provider of
output service, shall, in addition to the amount
short-paid, be liable to pay interest at the rate of
twenty-four per cent. per annum from the due date,
i.e., 30th June till the date of payment, where the
amount short-paid is not paid within the said due
date;
(f) where the amount determined as per
condition (c) is less than the amount determined
and paid as per condition (b), the said manufacturer
of goods or the provider of output service may
adjust the excess amount on his own, by taking
credit of such amount;
CEAC 19/2017 Page 6 of 49
(g) the manufacturer of goods or the provider of
output service shall intimate to the jurisdictional
Superintendent of Central Excise, within a period
of fifteen days from the date of payment or
adjustment, as per condition (d) and (f)
respectively, the following particulars, namely:-
(i) details of CENVAT credit attributable
to exempted goods and exempted services,
month wise, for the whole financial year,
determined provisionally as per condition
(b),
(ii) CENVAT credit attributable to
exempted goods and exempted services for
the whole financial year, determined as per
condition (c),
(iii) amount short paid determined as per
condition (d), along with the date of
payment of the amount short-paid,
(iv) interest payable and paid, if any, on
the amount short-paid, determined as per
condition (e), and
(v) credit taken on account of excess
payment, if any, determined as per condition
(f);
(h) where the amount equivalent to CENVAT
credit attributable to exempted goods or exempted
services cannot be determined provisionally, as
prescribed in condition (b), due to reasons that no
dutiable goods were manufactured and no taxable
service was provided in the preceding financial
year, then the manufacturer of goods or the
provider of output service is not required to
determine and pay such amount provisionally for
each month, but shall determine the CENVAT
credit attributable to exempted goods or exempted
services for the whole year as prescribed in
condition (c) and pay the amount so calculated on
or before 30th June of the succeeding financial year.
CEAC 19/2017 Page 7 of 49
where the amount determined under condition (h) is
not paid within the said due date, i.e., the 30th June,
the manufacturer of goods or the provider of output
service shall, in addition to the said amount, be
liable to pay interest at the rate of twenty four per
cent. per annum from the due date till the date of
payment.
Explanation I. "Value" for the purpose of sub-
rules (3) and (3A) shall have the same
meaning assigned to it under section 67 of the
Finance Act, 1994 read with rules made thereunder
or, as the case may be, the value determined under
section 4 or 4A of the Central Excise Act, 1944
read with rules made thereunder.
Explanation II. The amount mentioned in sub-
rules (3) and (3A), unless specified otherwise, shall
be paid by the manufacturer of goods or the
provider of output service by debiting the
CENVAT credit or otherwise on or before the 5th
day of the following month except for the month of
March, when such payment shall be made on or
before the 31st day of the month of March.
Explanation III. If the manufacturer of goods or
the provider of output service fails to pay the
amount payable under sub-rule (3) or as the case
may be sub-rule (3A), it shall be recovered, in the
manner as provided in rule 14, for recovery of
CENVAT credit wrongly taken.
(4) No CENVAT credit shall be allowed on capital
goods which are used exclusively in the manufacture of
exempted goods or in providing exempted services, other
than the final products which are exempt from the whole
of the duty of excise leviable thereon under any
notification where exemption is granted based upon the
value or quantity of clearances made in a financial year.
(5) Notwithstanding anything contained in sub-rules (1),
(2) and (3), credit of the whole of service tax paid on
taxable service as specified in sub-clause (g), (p), (q), (r),
CEAC 19/2017 Page 8 of 49
(v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi),
(zzk), (zzq) and (zzr) of clause (105) of section 65 of the
Finance Act shall be allowed unless such service is used
exclusively in or in relation to the manufacture of
exempted goods or providing exempted services.
(6) The provisions of sub-rules (1), (2), (3) and (4)
shall not be applicable in case the excisable goods
removed without payment of duty are either
(i) cleared to a unit in a special economic zone; or
to a developer of a special economic zone for their
authorized operations ; or
(ii) cleared to a hundred per cent. export-oriented
undertaking; or
(iii) cleared to a unit in an Electronic Hardware
Technology Park or Software Technology Park; or
(iv) supplied to the United Nations or an
international organization for their official use or
supplied to projects funded by them, on which
exemption of duty is available under notification of
the Government of India in the Ministry of Finance
(Department of Revenue) No. 108/95-Central
Excise, dated the 28th August, 1995, number G. S
R. 602 (E), dated the 28th August, 1995; or
(v) cleared for export under bond in terms of the
provisions of the Central Excise Rules, 2002; or
(vi) gold or silver falling within Chapter 71 of the
said First Schedule, arising in the course of
manufacture of copper or zinc by smelting; or.
(vii) all goods which are exempt from the duties of
customs leviable under the First Schedule to the
Customs Tariff Act, 1975 (51 of 1975) and the
additional duty leviable under sub-section (1) of
section 3 of the said Customs Tariff Act when
imported into India and are supplied,-
CEAC 19/2017 Page 9 of 49
(a) against International Competitive
Bidding; or
(b) to a power project from which power
supply has been tied up through tariff based
competitive bidding; or
(c) to a power project awarded to a
developer through tariff based competitive
bidding,
in terms of notification No. 6/2006-Central Excise, dated the 1st March,
2006."
4. The provisions of Rule 6 of the Cenvat Credit Rules, as extracted
hereinabove, are clear and categorical, and no paraphrasing, thereof is,
therefore, necessary. Suffice it to state that, in a case in which common
inputs, or input services, of the duty, or service tax, paid whereon Cenvat
Credit has been taken, are used in the manufacture of dutiable, and
exempted goods, or taxable, and exempted, services, the manufacturer, or
service provider has, before him, three options, viz. either
(i) to maintain separate accounts for receipt, consumption and
inventory of the quantity of inputs, and input services, meant for
use in the manufacture of dutiable, and exempted goods, or
providing of taxable, and exempted output services, and take
Cenvat credit only of the duty, or service tax, paid on that quantity
of input, or input service, which is intended for use in the
manufacture of dutiable goods, or in providing output service on
which service tax is payable [Rule 6 (2)], or
(ii) if the manufacturer of goods, or provider of output service,
opts not to maintain separate accounts, then, either
CEAC 19/2017 Page 10 of 49
(a) to pay an amount equivalent to the Cenvat credit
attributable to inputs, and input services used in, or in
relation to, the manufacture of exempted goods, or providing
of exempted services, subject to the conditions and
procedures stipulated in Rule 6 (3A) [Rule 6(3)(ii)], or
(b) to pay an amount equal to a percentage of the value of
the exempted goods, or value of the exempted services, as
prescribed by Rule 6(3)(ii).
5. During the period spanned by the dispute in the present appeal (1st
January, 2007 to 31st March, 2011), the percentage stipulated in Rule
6(3)(ii) of the Cenvat Credit rules was 10%, till 6th July, 2009, and 5%
thereafter.
6. "Exempted goods" are defined, in clause (d) of Rule 2 [hereinafter
referred to as "Rule 2(d)"] of the Cenvat Credit Rules as meaning
"excisable goods which are exempt from the whole of the duty of excise
leviable thereon, and includes goods which are chargeable to ,,nil rate of
duty".
7. Rule 2(t) of the Cenvat Credit Rules is the standard provision,
contained in similar definition clauses in other subordinate statutes,
clarifying that words and expressions, used in the Cenvat Credit Rules,
and not defined therein, but defined in the Act, would have the meanings
respectively assigned to them in the Act.
8. The expression "excisable goods" is not defined in the Cenvat
Credit Rules, but finds definition in Section 2(d) of the Act. By virtue of
CEAC 19/2017 Page 11 of 49
Rule 2(t) of the Cenvat Credit Rules, the definition of "excisable goods",
as contained in Section 2(d) of the Act, would also apply to the said
expression, as it finds place in the Cenvat Credit Rules. Section 2(d) of
the Act defines "excisable goods" thus:
"(d) ,,excisable goods means goods specified in the 1st
Schedule and the 2nd Schedule to the Central Excise Tariff Act,
1985 (5 of 1986) as being subject to a duty of excise and includes
salt;
Explanation. For the purposes of this clause, "goods" includes
any article, material or substance which is be capable of being
bought and sold for consideration and such goods shall be deemed
to be marketable."
The Explanation to Section 2(d) of the Act, as extracted hereinabove, was
inserted, w.e.f. 10th May, 2006, by Section 28 of the Finance Act, 2008,
and deemed goods, which were capable of being bought and sold, to be
marketable. The insertion of this Explanation was obviously intended to
cater to situations in which goods, which were otherwise regarded as
worthless or, to borrow the expression employed by the Supreme Court
in U.O.I. v. Indian Aluminium Co. Ltd.1 and Collector of Central
Excise v. Tata Iron & Steel Co. Ltd2, "rubbish" were, nevertheless,
capable of being bought and sold. Classically, goods have been regarded
as "excisable" only if they are usable, movable, saleable and marketable.
[Refer Moti Laminates Pvt. Ltd. v. Collector of Central Excise3]
"Saleability" and "marketability" were, therefore, recognised as distinct,
and different concepts, which were cumulatively required to be fulfilled,
in order for an article to be excisable. This principle was reiterated in
several decisions of the Supreme Court, of which the afore-cited
1
1995 (77) ELT 268 (SC)
2
2004 (165) ELT 386 (SC)
3
1995 (76) ELT 241 (SC)
CEAC 19/2017 Page 12 of 49
decisions in Indian Aluminium Co. Ltd.1 and Tata Iron & Steel Co. Ltd2
underscored the position by ruling that, though even rubbish could be
bought and sold, it would, nevertheless, not be a "marketable"
commodity, so as to be exigible to duty under the Act. This argument is,
however, no longer available to an assessee, after the insertion, in Section
2(d) of the Act, of the Explanation thereto, which deems any article,
material or substance, which is capable of being bought and sold, to be
marketable. The distinction between "saleability" and "marketability",
which prevailed prior to the insertion of the said Explanation has,
therefore, been eviscerated.
9. Two conditions, alone, therefore, are required to be fulfilled, in
order for goods to be regarded as "excisable", for the purposes of the Act
or, therefore, for the purposes of the Cenvat Credit Rules viz. (i) that
they are specified in the first, or the second, Schedule to the Central
Excise Tariff Act, 1985, and (ii) that they are capable of being bought
and sold for a consideration.
10. The process of production, undertaken by the respondent, results in
the emergence of four products, namely sugar, molasses, bagasse and
electricity. These are classifiable under Sub-Headings 1701 1190, 1703
1000, 2303 2000 and 2716 0000 of the first Schedule to the Central Excise
Tariff Act, 1985 (hereinafter referred to as "the Tariff"), respectively.
Under these Sub-Headings, sugar is exigible to duty @ 12.5% ad
valorem, molasses are exigible to duty @ 1000 per tonne, and bagasse
is exigible to duty at nil rate.
CEAC 19/2017 Page 13 of 49
11. In the case of electrical energy/electricity, no rate of duty is
prescribed against SH 2716 0000. This, by itself, may not, however,
serve to except electrical energy/electricity from the ambit of the
expression "excisable goods", in view of the following Additional Note
to the General Rule of Interpretation of the Schedule, in respect of the
Central Excise Tariff (Amendment) Act, 2004, whereby "electrical
energy" was introduced in Chapter 27 of the Tariff:
"(c) "tariff item" means a description of goods in the list of tariff
provisions accompanying either eight-digit number and the rate
of the duty of excise or eight-digit number with blank in the
column of the rate of duty."
(Emphasis supplied)
12. As we would have occasion to respectfully observe hereinafter, the
High Court of Allahabad thinks otherwise. This difference in perception,
however, does not impact the outcome of these proceedings, as would be
apparent from the reasoning that follows.
13. In the above statutory background, we proceed to reconnoitre the
facts.
Facts
14. The respondent Nangalamal Sugar Complex was engaged in the
manufacture of cane sugar and molasses, on which appropriate duty,
under the Act, was paid, and the goods were sold in the open market.
Bagasse was generated during the process of manufacture. The bagasse
was either captively consumed by the respondent, or was used to generate
electricity. The electricity, too, was, in part, captively consumed by the
CEAC 19/2017 Page 14 of 49
respondent, and sold, in part, to M/s Uttar Pradesh Power Corporation
Limited (UPPCL). Para 4(d) of the present appeal, filed by the Revenue,
acknowledges this position, by the following recital:
"That during the course of audit of records of the Respondent
Unit it was observed that in the course of manufacture of
sugar, waste/residue in the form of Bagasse arisis, which was
further used by the Respondent in the generation of electricity
from the power plant installed in their own factory premises
and some part of the electricity generated was also sold to M/s
UPPCL outside the factory premises of the assessee without
payment of duty."
(Italics supplied; underscored in original)
15. Cenvat credit, on the duty paid on inputs, capital goods and input
services, commonly utilized by the respondent in the manufacture of the
above goods, was availed by it.
16. The proceedings, in the present case commenced with the issuance,
to the respondents, of Show Cause Notice dated 20th December, 2011.
The Show Cause Notice alleged that, as the respondent was
manufacturing dutiable goods (sugar and molasses) as well as exempted
goods (bagasse and electricity), using common inputs and input services,
the duty/service tax paid whereon Cenvat Credit had been availed; and
was neither maintaining separate accounts and inventory, in respect of the
inputs, and input services, used in the manufacture of the dutiable, and
exempted goods; nor reversing the Cenvat Credit of the duty, and service
tax, paid on the manufacture of the exempted goods (bagasse and
electricity), in accordance with the procedure stipulated in Rule 6 (3A) of
the Cenvat Credit Rules, the respondent was liable to pay an amount
equal to 10% of the value of the exempted goods, for the period prior to
CEAC 19/2017 Page 15 of 49
6th July, 2009, and 5% of the value of the exempted goods, for the period
after 7th July, 2009. As bagasse was not sold by the respondent, the Show
Cause Notice demanded, from the respondent, 10%/5% of the price at
which it was selling electricity. Observing that, during the periods 2006-
2007, 2007-2008, 2008-2009 and 2009-2010, the respondent had sold
electricity valued at 111.44 Lakhs, 964.25 Lakhs, 522.63 Lakhs and
1062.28 lakhs respectively, the Show Cause Notice alleged that, for the
period of dispute, an amount of, was payable by the respondent
2,81,82,486/-.
17. Though the Show Cause Notice also proposed other demands, the
said demands do not constitute subject matter of controversy in the
present appeal. Insofar as these proceedings are concerned, the Show
Cause Notice required the respondent to show cause as to why
2,81,82,486/-, be not recovered from it under Section 11(A)(1) of the
Act read with Rule 14 of the Cenvat Credit Rules, along with interest, and
as to why penalty be not imposed on it.
18. The respondent showed cause, and was heard, following
whereupon Order-in-Original dated 28th August, 2012, was passed by the
Commissioner of Central Excise (hereinafter referred to as "the
Commissioner"), confirming the aforesaid demand of 2,81,82,486/ -,
representing 10%/5% of the price at which the respondent had sold
electricity, to UPPCL, during the period 1st January, 2007 to 31st March,
2011, along with penalty and interest.
CEAC 19/2017 Page 16 of 49
19. In so directing, the Commissioner upheld the allegation that the
respondent was using common inputs and input services in the
manufacture of dutiable and exemptible products, and was not
maintaining any separate accounts for receipt, consumption and inventory
of inputs/input services so used, as required by Rule 6(2) of the Cenvat
Credit Rules. Neither, it was noted, was the respondent paying an amount
equivalent to Cenvat Credit attributable to the inputs and input services
used in relation to the manufacture of exempted goods, in accordance
with the procedure stipulated in Rule 6(3A), as contemplated by Rule 6
(3)(ii) of the said Rules.
20. The Commissioner also noted the contention, of the respondent,
that it had reversed proportionate Cenvat Credit, of the inputs and input
services used by it, in the manufacture of the electricity sold by it, which
had been worked out, by the respondent, as 3,12,722/-, along with
interest. Regarding this contention, however, the Commissioner observed
that the respondent had not furnished the details of the value of the
exempted electricity, the common inputs/input services used in the
manufacture of the dutiable and exempted products, or the amount of
Cenvat Credit availed in respect of such common inputs/input services
and had also not followed the procedure stipulated in Rule 6(3A). In such
a situation, the Commissioner observed that he was unable to verify the
veracity of the respondents contention regarding reversal, by it, of
"proportionate" Cenvat Credit.
21. We may observe, here, that we have been unable to find, either in
Rule 6 of the Cenvat Credit Rules, or elsewhere in the panoply of the Act
CEAC 19/2017 Page 17 of 49
or any Rules framed thereunder, any provision providing for reversal of
"proportionate" Cenvat Credit. In fact, it was in order to mitigate the
hardship, faced by assessees, who were using common inputs/input
services, in the manufacture of exempted, as well as dutiable goods, and
were not in a position to identify the exact quantum of Cenvat Credit
relatable to the inputs/input services used in the manufacture of the
exempted goods, that the facility of reversal, in accordance with the
formula set out in sub-Rule (3A), read with sub-Rule (3)(ii) of Rule 6 of
the Cenvat Credit Rules, was introduced, by way of the Cenvat Credit
(Amendment) Rules, 2008, notified vide Notification No 10/2008-CE
(NT) dated 1st March, 2008. If, therefore, an assessee desires to reverse
the Cenvat Credit, availed by it and relatable to inputs/input services used
in the manufacture of exempted goods, but is unable to quantify the exact
amount of Cenvat Credit so used, it has necessarily to follow the
procedure prescribed in Rule 6(3)(i), read with Rule 6 (3A), of the Cenvat
Credit Rules. No other manner of reversal of proportionate credit is
permissible. This follows from the time-tested principle, enunciated as far
back as in Taylor v. Taylor4and famously followed by the Privy Council
in Nazir Ahmed v. King Emperor5 as well as by the Supreme Court in a
veritable deluge of pronouncements, of which State of Uttar Pradesh v.
Singhara Singh6 is probably the most frequently quoted, that if a statute
has conferred a power to do an act, and has laid down the method in
which that power has to be exercised, it necessarily prohibits the doing of
the act in any other manner than that which has been prescribed.
4
(1875) 1 Ch D 426
5
AIR 1936 PC 253
6
AIR 1964 SC 358
CEAC 19/2017 Page 18 of 49
22. Inasmuch as the respondent had neither maintained separate
inventory and accounts, of the inputs and input services, of the
duty/service tax paid whereon it had availed Cenvat Credit, and which
had been used in the manufacture of dutiable, and exempted, goods, nor
reversed "proportionate" Cenvat Credit in accordance with the formula
and procedure prescribed in Rule 6(3A) of the Cenvat Credit Rules, the
Commissioner, vide Order-in-Original dated 28th August, 2012,
confirmed the demand of 2,81,82,486/-, proposed against the
respondent, and also imposed penalty of an equivalent amount. The said
Order-in-Original also disallowed Cenvat Credit, availed by the
respondent, of 1,41,096/, relatable to Cenvat Credit of service tax paid
on insurance premia, but the said demand is not subject matter of
controversy in the present appeal.
23. Appeals were preferred, by the respondent as well as the appellant,
before the Tribunal, against the aforesaid Order-in-Original, dated 28th
August, 2012. While the respondent challenged (vide Appeal No.
E/3753/2012), the amounts confirmed against it by the Commissioner, the
appeal of the Revenue (Appeal No. E/3949/2012) was an appeal merely
in form, as it only sought to support the findings of the Commissioner. In
effect, therefore, the only appeal, before the Tribunal, was Appeal No.
E/3753/2012, filed by the respondent.
24. By the impugned Final Order No. A/55843-55844/2016-EX [DB],
dated 24th November, 2016, the Tribunal has allowed Appeal No.
E/3753/2012, of the respondent. In doing so, the Tribunal merely
followed its earlier decision in DSM Sugar Mills Ltd. v. Commissioner
CEAC 19/2017 Page 19 of 49
of Central Excise7, which, in turn, relied on the judgment of the High
Court of Allahabad in Gularia Chini Mills v. UOI8. Para 7 of the
impugned Final Order passed by the Tribunal reads thus:
"An identical issue has come up in Appeal No.58262/2013-
EX(DB) in the case of DSM Sugar Mills Ltd.7, where the
Tribunal vide Final Order No.A/51042/2014-EX(DB) dated
24.02.2014 has observed as under:-
"The point of dispute in the case is that when there is a co-
generation plant in the appellants sugar mill and the
power generated, besides being used in the sugar mills for
manufacture of dutiable final products (sugar and
molasses), is also supplied to U.P. Power Corporation,
whether in respect of the power sold to U.P. Power
Corporation an amount equal to 5%/10% of the sale value
of the electricity would be payable in terms of Rule 6(3)
read with Rule 6(2) of the Cenvat Credit Rules, 2004, as
according to the Department, certain common cenvat
credit availed inputs such as lubricants, grease, chemicals,
etc. had been used in or in relation to the generation of
electricity. The crucial question to be decided in this case
is as to whether electricity is an excisable goods and only
if the electricity can be treated as excisable goods, the
provisions of Rule 6(2) read with Rule 6(3) of Cenvat
Credit Rules, 2004 would be applicable. This question
stands decided by judgement dated 13.08.2013 of Honble
Allahabad High Court in respect of writ petitions filed by
Gularia Chini Mills & Others (judgement dated
13.08.2013)8, wherein it was held that electricity is not an
excisable goods and, hence, the provisions of Rule 6(2)
read with Rule 6(3) are not applicable in respect of
electricity sold by the sugar mill to U.P. Power
Corporation. It is seen that for this reason only, the matter
had been disposed of finally, as there is no dispute about
the applicability about the judgement of Honble
Allahabad High Court to this case. Since in this case, as
per the order sheet and as per the records of the Court
Master, by the order pronounced, the stay application as
well as appeal had been allowed, while as per the
7
2014 (304) ELT 582
8
2014 (34) STR 175 (All)
CEAC 19/2017 Page 20 of 49
operative portion of the order para 7 of the order only
the stay application has been allowed, there is a mistake
apparent from the record in para 7 of the order. The
application for Rectification of Mistake is, therefore,
allowed. Para-7 of the order No.51042/2014 dated
24.02.2014 is substituted by the following para:-
"The impugned order is, therefore, not sustainable.
Though the matter was listed for hearing of the stay
application only, since, the issue in this case stands
decided in favour of the applicant by judgement of
Hon'ble Allahabad High Court in the case of
Gularia Chini Mills Gularia and others
(judgement dated 13.08.2013)8, there is no point in
keeping the appeal pending. Accordingly, the
impugned order is set aside and the appeal as well
as stay application is allowed"."
Following the ratio contained in the above passage from its earlier
decision in DSM Sugar Mills Ltd.7, the Tribunal allowed the appeal of
the respondent.
25. Aggrieved thereby, the Revenue is in appeal before this Court, in
the present proceedings.
Substantial Question of Law
26. Vide order dated 3rd December, 2018, the present appeal was
admitted, on the following substantial question of law:
"Is the CESTAT correct in holding that as electricity is not
excisable, Rules 6(2) & (3) of the CENVAT Credit Rules, 2004
are not applicable and consequently input credit is admissible in
the facts and circumstances of the case?"
CEAC 19/2017 Page 21 of 49
Rival Submissions
27. Detailed arguments were addressed, on the appeal, by Mr. Amit
Bansal, learned Senior Standing Counsel appearing on behalf of the
appellant, and by Ms. Charanya Lakshmikumaran, learned Counsel
appearing for the respondent.
28. The Revenue, in its appeal, adopts the reasoning of the
Commissioner, in his Order-in-Original dated 28th August, 2012 supra
and submits, further, thus:
(i) The electricity, which was sold outside the factory to
UPPCL, was not used in, or in relation to, the manufacture of final
product (sugar) by the respondent. Consequently, the inputs and
input services, used in the production of such electricity, which
was sold outside, would not be eligible for credit, as they fell
outside the ambit of "input and input services", as defined by the
Cenvat Credit Rules.
(ii) The Supreme Court had held, in Maruti Suzuki Ltd. v.
Commissioner of Central Excise9, that Cenvat Credit of the duty
paid on inputs, used in the production of electricity, sold outside
the factory for consideration, was not admissible to the assessee.
Reliance was specifically placed on paras 19 and 20 of the report.
9
2009 (240) ELT 641 (SC)
CEAC 19/2017 Page 22 of 49
(iii) Cenvat Credit was admissible, only on final products, on
which duty was paid. As the respondent did not pay duty on the
electricity sold to UPPCL, it was not entitled to avail Cenvat Credit
of the duty paid on the inputs, or service tax paid on the input
services, used in the production thereof. Reversal of the said credit
was, therefore, imperative.
29. Additionally, Mr. Amit Bansal submitted, apropos the judgment of
the High Court of Allahabad in Gularia Chini Mills8, that the position in
the Tariff, to which the High Court alluded was, apparently, different
from the tariff position which obtained during the period of dispute in the
present case. He drew attention to the finding, of the High Court, that
electrical energy, obtained out of bagasse, was not excisable, and
highlighted that Chapter 23 of the Tariff did not distinguish, in any
manner, between electrical energy obtained from bagasse, and obtained
otherwise. He submitted that, by virtue of the definition of "excisable
goods", as contained in Section 2(d) of the Act, electricity, or electrical
energy, was, unquestionably, "excisable goods". In fact, he points out that
the respondent has, in its counter-affidavit filed before this Court,
specifically admitted that electricity satisfied the definition of "exempted
goods". In fact, submits Mr. Bansal, the Tribunal proceeded on a ground
which the respondent never urged. Mr. Bansal submits that it was never
the case of the respondent that electricity was not "excisable goods",
which is what the Tribunal has proceeded to hold in the impugned Final
Order. Rather, the defence of the respondent, before the Tribunal, Mr.
Bansal emphasises, was that it had reversed Cenvat Credit,
"proportionate" to that utilised by it in production of the electricity sold to
CEAC 19/2017 Page 23 of 49
UPPCL. This submission, points out Mr. Bansal, was rejected by the
Commissioner, in the passage to which reference is contained in para 20
supra. Resultantly, he submits, the appeal of the respondent ought to
have been dismissed by the Tribunal.
30. In its counter-affidavit, filed in response to the appeal of the
Revenue, the respondent has, on the other hand, contended thus:
(i) In view of the judgment of the High Court of Allahabad in
Gularia Chini Mills8, which stood affirmed by the Supreme Court
in U.O.I. v. D. S. C. L. Sugar Ltd.10¸ electricity could not be
regarded as "excisable goods". Gularia Chini Mills8, moreover,
had been followed, by the Tribunal, in DSM Sugar Mills Ltd.7, the
Civil Appeal, against which, stood dismissed by the Supreme
Court11. Reliance has also been placed, in the counter-affidavit
though no reference, to the said decisions, was made during the
course of arguments on the judgments of the Supreme Court in
Collector of Central Excise v. Solaris Chemtech Ltd.12 and of the
High Court of Allahabad in Balrampur Chini Mills v. U.O.I.13.
(ii) Of the total Cenvat credit on inputs and input services,
availed by it, the respondent had reversed credit, proportionate to
the quantity of inputs and input services used in the production of
electricity which was sold outside the factory. No further demand,
10
2015 (322) ELT 769 (SC)
11
As reported in 2015 (324) ELT (A 80) (SC).
12
2007 (214) ELT 481 (SC)
13
2014 (300) ELT 372 (All)
CEAC 19/2017 Page 24 of 49
therefore, could be raised against the respondent under Rule 6 of
the Cenvat Credit rules.
(iii) The Supreme Court had, in its judgment in Chandrapur
Magnet Wires Pvt. Ltd. v. C.C.E.14, held that, where the assessee
was unable to segregate the common inputs that went into the
dutiable and exempted products, and was reversing credit
accordingly, thereby restoring the credit availed by it, to the
Revenue when the exempted final product was cleared, the Credit
entry, for the duty paid on the inputs utilised in the manufacture of
the exempted final product would stand deleted, in which situation
it could not be said that the assessee had taken credit for the duty
paid on the inputs utilised in the manufacture of the exempted final
product. Copies of the challans, whereby the respondent has,
purportedly, reversed "proportionate" Cenvat credit, of the duty
paid on the inputs and input services which went into the
manufacture of the electricity which was sold, have also been
annexed to the counter-affidavit.
(iv) On the same issue, for the subsequent period, the
Commissioner held in favour of the respondents, vide Order-in-
Original dated 10th September, 2013. In the said case, even while
observing that the respondent had not complied with the procedure
stipulated in Rule 6(3A) of the Cenvat Credit Rules, the
Commissioner, following the judgment of the Supreme Court in
Chandrapur Magnet Wires Pvt. Ltd.14, held that, as proportionate
14
1996 (81) ELT 3 (SC)
CEAC 19/2017 Page 25 of 49
credit had been reversed by the assessee, the assessee had, in fact,
not taken credit at all, so that the demand, under Rule 6 (3)(i) of the
Cenvat Credit Rules was unsustainable. Reliance was also placed,
in the counter-affidavit, for this proposition, on the judgment of the
Supreme Court in C.C.E. v. Bombay Dyeing & Manufacturing
Ltd15 and of the High Court of Allahabad in Hello Minerals P Ltd
v. U.O.I.16
31. Supplementing the above submissions, Ms. Lakshmikumaran,
appearing for the respondent, drew our attention to the manufacturing
process, by which bagasse and electricity came into existence,
highlighting the position that electricity was produced from bagasse, and
not directly from the inputs, or input services, originally used by the
respondent. She submits that the only manufactured final product of the
respondent was sugar. The input used, for production of electricity was,
therefore, she submits, bagasse. She relies on para 20 of the judgment of
the Supreme Court in Swadeshi Polytex Ltd v. C.C.E.17, which reads
thus:
"On an analysis and comparison of aforesaid, it is clear that the
clarification in the form of trade notice issued by the Pune
Collectorate in respect of Rule 56A was as much applicable to
that rule as to Notification No. 201/79. In the premises, it is clear
that the Tribunal should have held that even though a part of the
ethylene glycol was contained in the by-product methanol, yet
the credit of duty could not be reduced to the extent of the
ethylene glycol contained in the methanol as ineligible. It is true
that when in a fiscal provision, if benefit of exemption is to be
considered, this should be strictly considered. But the strictness
of the construction of exemption notification does not mean that
15
2007 (215) ELT 3 (SC)
16
2004 (174) ELT 422 (All)
17
1989 (44) ELT 794 (SC)
CEAC 19/2017 Page 26 of 49
the full effect to the exemption notificaion should not be given by
any circuitous process of interpretation. After all, exemption
notifications are meant to be implemented and trade notices in
these matters clarify the stand of the Government for the trade. It
is clear, therefore, that the Tribunal failed to interpret the words
of the exemption notification No. 201/79 properly and fully. The
said notification exempted all excisable goods on which the duty
of excise was leviable and in the manufacture of which any
goods falling under Tariff Item 68 (i.e. inputs) had been used
from so much of the duty of excise leviable thereon as was
equivalent to the duty of excise already paid on the inputs. It is
clear, however, that ethylene glycol was used in the manufacture
of polyester fibre. It appears that methanol arises as a part and
parcel of the chemical reaction during the process of manufacture
when ethylene glycol interacts with DMT to produce polyester
fibre. It is not possible to use a lesser quantum of the ethylene
glycol to prevent methanol from arising for producing a certain
quantity of polyester fibre. Thus, the quantity of ethylene glycol
required to produce a certain quantum of polyester fibre is
determined by the chemical reaction. It may be mentioned herein
that it is not as if the appellants have used excess ethylene glycol
wantedly to produce the methanol. It is clear that the appellants
are not engaged in the production of methanol but in the
production of polyester fibre. That position is undisputed.
Therefore, it appears that the Tribunal erred when it held that the
appellants were not entitled to a part of the credit of duty since
ethylene glycol when it interacts with DMT also gives rise to
methanol. This construction would frustrate the object of
exemption if something which evidently arises out of the
interaction. Even prior to amendment to notification No. 201/79
with effect from 11-4-87, the only situation where the credit of
the duty paid on the inputs could be denied was only where the
final products were wholly exempt from the duty of excise or
chargeable to nil rate of duty. In the present case, the excisable
goods, namely, polyester fibre were not wholly exempt from duty
nor chargeable to nil rate of duty. It cannot be read in the
notification that the notification would not be available in case
non-excisable goods arise during the course of manufacture. In
fact, the Tribunal seems to have erred in not bearing in mind that
exemption notification was pressed in service in respect of
polyester fibre which is excisable goods and not in respect of
methanol which arises as a by-product as a part and parcel of
chemical reaction. It appears further on a comparison of the Rule
CEAC 19/2017 Page 27 of 49
56A and the Notifn. No. 201/79 that these deal with the identical
situation."
32. In fine, Ms. Lakshmikumaran submits that there is no merit in the
appeal of the Revenue, which deserves, therefore, to be dismissed.
Analysis
33. The Tribunal has proceeded on one solitary ground, i.e., that
electricity could not be regarded as "excisable goods". The sequitur
would, therefore, be that electricity would not be "exempted goods",
either, for the purposes of the Cenvat Credit Rules, "exempted goods"
being, per definition, excisable goods, which are either exempt from
duty, or on which duty is chargeable at nil rate.
34. Mr. Bansal has voiced a preliminary objection, to the impugned
Final Order of the Tribunal, to the effect that the excisability of
electricity, never having been contested by the respondent, the Tribunal
erred in allowing the respondents appeal on that ground. Mr. Bansal has
endeavoured to point out that the only ground, on which the respondent
premised its case, before the Tribunal, was that it had reversed
"proportionate" credit, vis-à-vis the total Cenvat Credit availed by it, of
the inputs and input services utilised in the manufacture of the goods
manufactured/produced by it. Mr. Bansal submitted that the said
contention, which was also advanced before the Commissioner, was
rejected by the Commissioner on the ground that the respondent had not
produced sufficient material, to enable him to verify the correctness of
the submission. The "excisability" of electricity, not having been
CEAC 19/2017 Page 28 of 49
disputed by the respondent, Mr. Bansal objected to the Tribunal having
held, in favour of the respondent, on that ground.
35. Juxtaposed with this submission, Mr. Bansal also drew attention to
the averments, in the counter-affidavit filed by the respondent, before this
Court, in response to the appeal of the Revenue, in which the excisability
of electricity was admitted. To this, the response of Ms. Lakshmikumaran
was that the litigant could not be bound by an admission, in law, even if
made before a Court. Admissions of fact bind, she submits, but not
admissions of law.
36. We are unable to accede to the submission, of Mr. Bansal, that the
Tribunal was limited by the stand taken by the parties before it. The
endeavour, of every judicial, and quasi-judicial authority, is, in the
ultimate analysis, the dispensation of justice to the litigants before it and,
in a larger perspective, in rem. In striving to achieve that end, the judicial
authority is required to apply the law, as is known to it. No judicial
authority can be constrained, insofar as application of the law is
concerned, by pleadings of parties, or by submissions urged at the bar.
The legal position, as it exists, is required to guide the judicial authority;
not the legal position as is urged before it. A point of law, which is
relevant to the adjudication of the lis before it, cannot be ignored by a
judicial authority, even if it is not urged by either party. No doubt, if a
judicial authority comes across a nice legal point, which has not been
urged by either litigant before it, but which could impact the outcome of
the proceedings, it may be appropriate, depending on the situation that
obtains, for the authority to place the point before the parties, before
CEAC 19/2017 Page 29 of 49
adjudicating on that basis. This is obviously for the reason that the
interests of justice would warrant that a party be not taken by surprise, as
it is quite possible that the litigant, against whom the point of law
operates, may have a satisfactory response thereto. That, however, would
be a call, to be taken by the judicial authority, depending on the facts of
the case, and the point involved, and no iron-cast rule, or principle, can
be postulated in this regard. Suffice it to state, at the cost of repetition
that, in the ultimate analysis, justice must be done, after grant of free and
fair opportunity to all parties before the court.
37. In the present case, however, the impugned Final Order was
dictated in open court. It cannot, therefore, be said that either party,
before the Tribunal, was taken by surprise. Moreover, no objection, by
the Departmental Representative, who represented the Revenue before
the Tribunal, to the effect that the Tribunal was deciding the appeal on a
point not urged by the respondent, was taken. We are not, therefore,
inclined to accept the preliminary objection, of Mr. Bansal, to the
Tribunal having proceeded on a point not urged by the respondent.
38. In any event, the point on which the learned Tribunal has decided
the appeal is a point of law, i.e., the excisability, or otherwise, of
electricity. It is required to be decided on the basis of the prevalent
statutory position, as reflected in the Act, read with the Tariff and the law
laid down on the point, and is not dependent on adjudication of any
disputed question of fact.
CEAC 19/2017 Page 30 of 49
39. We have already pointed out, hereinbefore, that the statutory
provisions, if read, clearly indicate that electrical energy/electricity fell
within the ambit of the expression "excisable goods", as defined in the
Act, as
(i) the twin criteria, requiring satisfaction in order for an item to
qualify as "excisable goods", within the meaning of the expression
as defined in Section 2(d) of the Act, are
(a) that the item finds place in the Tariffs, and
(b) that the item is marketable which would include
every case where the item is bought or sold for a
consideration, and
(ii) both these indicia stand satisfied in the case of
electricity/electrical energy, inasmuch as
(a) Sub-Heading 2716 0000 of the Tariff specifically
covers "electrical energy", and
(b) the respondent is, admittedly, selling the electricity, in
part, to UPPCL.
40. Statutorily, therefore, there is no escape from the position, in law,
that "electricity", or "electrical energy", is excisable.
Gularia Chini Mills
41. Adverting, now, to Gularia Chini Mills8, the fact-situation which
obtained, in the said case, is substantially similar to that which obtains in
the appeal before us. In Gularia Chini Mills8, too, the appellant
(hereinafter referred to as "Gularia") was engaged in the manufacture of
CEAC 19/2017 Page 31 of 49
sugar, out of sugarcane. As in the present case, molasses emerged as a
by-product. Sugar and molasses were cleared, by Gularia, on payment of
duty under the Act. However, bagasse also emerged as a residue/waste of
sugarcane. The bagasse so generated was used as fuel, to generate
electricity. As in the present case, a demand, under Rule 6(3)(i) of the
Cenvat Credit Rules was raised, against Gularia, on the sale price of the
electricity sold by it. Gularia contended, in opposition to the demand, that
electrical energy did not conform to the definition of "excisable goods",
as contained in Section 2(d) of the Act read with Section 2 of the Central
Excise Tariff Act. Reliance was placed, for this proposition, on Solaris
Chemtech Ltd12.
42. The High Court of Allahabad framed the issue, arising before it for
consideration, in para 22 of the report as "whether electrical energy
generated from bagasse and sold to U.P. Power Corporation Ltd is
excisable or not". It is immediately apparent that the facts, as wel l as the
issue, in Gularia Chini Mills8, are identical to those in the present appeal.
43. Before paraphrasing the grounds on which the High Court held in
favour of Gularia, the relevant passages, from the report, may be
reproduced thus:
"24. On perusal of the above judgment and order dated 18th
May, 2012, it is clear that Rule 6 of 2004 Rules will only apply
where a manufacturer manufactures both the excisable dutiable
final products and also manufactures excisable exempted goods.
Furthermore, for the applicability of Rule 6, manufacture of
dutiable goods and manufacture of exempted goods are condition
precedent. Thus, the law is well settled that bagasse is not
manufactured goods but is a waste product, which
emerges/comes into existence in the process of manufacture of
sugar. Hence, it is not manufacture of exempted goods. Similarly,
CEAC 19/2017 Page 32 of 49
electricity is not exempted excise goods as held by the Supreme
Court in Solaris Chemicals Ltd.12.
*****
26. Admittedly, none of these conditions are attracted in the
instant case insofar as electrical energy, which is mentioned in
Chapter 27 of the Central Excise Tariff Act, covers only those
electrical energy which are generated from mineral fuels,
mineral oils and products of their distillation, bituminous,
substances, mineral waxes, etc. The electrical energy generated
from Bagasse is not covered under Chapter 27. Similarly,
Chapter 27 does not cover electrical energy produced by solar
power, hydro power, wind power or from bagasse. Therefore, we
are of the view that electrical energy is not an excisable goods
nor it is exempted goods as defined in Rule 2(d) of the 2004
Rules.
*****
28. Hence, manufacture is referred to both dutiable/excisable
goods and exempted goods, which are final products. Only then,
it is necessary for the manufacturer to maintain separate
accounts. Rule 6 of the Cenvat Credit Rules, 2004, (which is pari
materia to the erstwhile Rule 57CC) provides that if Cenvat
credit has been taken on the inputs which are used for
manufacture of dutiable and exempted final products then the
assssee is required to reverse the proportionate credit or pay
10%/5% amount of the value of the exempted final products.
Electricity is not excisable goods under Section 2(d) of the Act,
hence Rule 6 of the Cenvat Credit Rules, 2004 is not applicable
as held by the Apex Court in the case of Solaris Chemtech Ltd.12
29. The above fact has been admitted even in the circular of
the Chief Commissioner, Central Excise dated 3-10-2009 that
bagasse is not a manufactured final product in view of the
judgment of the Honble Supreme Court. But the Chief
Commissioner, Central Excise has erred in law in holding that
because of the explanation added to Section 2(d) with effect from
13th May, 2008, the judgment of the Supreme Court stands
nullified. Since the Circular of Board and that of Chief
Commissioner dated 2-1-2010 is binding upon the assessing
authority, the petitioner has informed the jurisdictional Central
Excise Authority that even though Rule 6 is not applicable and
CEAC 19/2017 Page 33 of 49
the petitioner is not liable for payment of any Central Excise
Duty or reversal of 5% of the amount of bagasse sold, still the
petitioner has deposited the amount of duty under protest.
*****
32. The definition of ,,excisable goods given in Section 2(d)
means the goods, which are specified in the First or Second
Schedule and which are subjected to duty of excise, can only be
treated as excisable goods. A proposition has also been accepted
by the Commissioner in its findings. A perusal of Section 2(d) of
Central Excise Act shows that the excisable goods are only those
goods which are subjected to duty of excise as specified in the
First Schedule or Second Schedule of the Central Excise Tariff
Act. Since Column of rate of duty is blank, therefore, in view of
Section 2 of the Central Excise Tariff Act, 1985, electrical energy
is not being subjected to excise duty for the purposes of being
excisable goods under Section 2(d) of the Central Excise Act.
Furthermore, Rule 6 of the 2004 Rules, which is applicable only
to excisable goods, can alone be treated as exempted goods for
the purposes of Rule 6(3) of 2004 Rules, does not apply to
electrical energy.
33. At the cost of repetition, we may add that the electrical
energy generated from Naphtha, furnace oil, coal, etc., has been
included under Chapter 27 as excisable goods on which the
excise duty is being paid and the credit is taken in respect of the
excise duty paid on such inputs but in the instant case, no direct
inputs are involved nor any input services have been
availed/used and the Commissioner, Central Excise, without any
basis observed that the petitioners have admitted that they have
availed the Cenvat credit on inputs and input services used in
relation to generation of electricity. The petitioner has only used
bagasse as raw material which is a waste product, as already
held by this Court in writ petition No. 11791 of 2010 and no
other inputs or input services has ever been used by the
petitioner for generation of electricity which was only generated
from bagasse.
34. ... The bagasse, which emerges as a residue of sugarcane,
admittedly, is a waste product and this bagasse is used in boiler
as a fuel for generation of steam for running the turbine and for
boiling the juice for the manufacture of sugar. Turbine generates
electrical energy which is used for running the plant and
CEAC 19/2017 Page 34 of 49
machinery and surplus energy is sold to the U.P. Power
Corporation Ltd. Furthermore, bagasse is used as fuel in the
factory for manufacture of final product and no specific input is
used up to the stage of emerging of bagasse which is a waste and
which emerges on the crushing of sugarcane. Thus, we have no
hesitation to say that electrical energy emerges from the bagasse
and sold to U.P. Power Corporation Ltd. does not fall within the
ambit of excisable goods."
(Emphasis supplied)
44. The above passages, from Gularia Chini Mills8, reveal that the
High Court has held, in favour of Gularia, on the following grounds:
(i) Bagasse is not manufactured goods, but is a waste product,
which emerges/comes into existence in the process of manufacture
of sugar.
(ii) Electricity, too, could not be regarded as exempted excisable
goods, for the following reasons:
(a) The Supreme Court had held, in Solaris Chemtech
Ltd12, that electrical energy did not constitute "excisable
goods".
(b) Chapter 27 of the Tariff covered only electrical
energy generated from mineral fuels, mineral oils and
products of their distillation, bituminous substances, mineral
waxes, etc. Electrical energy generated from bagasse was
not covered by Chapter 27 of the Tariff.
CEAC 19/2017 Page 35 of 49
(c) This position was not altered by the explanation,
added to Section 2(d) of the Act, w.e.f. 13th May, 2008.
Neither did the said explanation nullify the judgment of the
Supreme Court in Solaris Chemtech Ltd12.
(d) Section 2(d) of the Act defines "excisable goods" as
goods subjected to a duty of excise as specified in the first
Schedule or the second Schedule of the Tariff. In the case of
electrical energy, the column, relating to the rate of duty
payable thereon, as contained in Chapter 27 of the Tariff,
was blank. Electrical energy did not, therefore, constitute
"excisable goods", as defined in Section 2(d) of the Act.
(iii) The only input, which went into the generation of electricity,
was bagasse. Bagasse was a waste product. The electrical energy,
which emerged from bagasse, and was sold to UPPCL could not,
therefore, be regarded as "excisable goods".
45. Before proceeding to examine the judgment of the High Court of
Allahabad in Gularia Chini Mills8, and to analyse the effect of the said
decision on the present appeal, it would be appropriate to refer to two
other judgments.
Solaris Chemtech Ltd.
46. The first decision, to which reference requires to be made, is the
judgment of the Supreme Court in Solaris Chemtech Ltd.12, on which
CEAC 19/2017 Page 36 of 49
extensive reliance has been placed by the High Court in Gularia Chini
Mills8, for the proposition that electricity/electrical energy did not
constitute "excisable goods". In Solaris Chemtech Ltd.12, the
respondent-assessee hereinafter referred to as "Solaris" was using
Low Sulphur Heavy Stock (LSHS) and furnace oil to generate electricity,
which was captively consumed for manufacture of final products such as
caustic soda and cement. Solaris desired to avail Modvat Credit, under
Rule 57A of the Central Excise Rules, 1944, of the duty paid on the
furnace oil and LSHS. For this purpose, reliance was placed, by Solaris,
on clause (c) in the Explanation to Rule 57A(1), which was inserted vide
Notification 4/1994, dated 1st March, 1994, which included, in "inputs",
"inputs used as fuel". Solaris contended that LSHS was eligible to be
regarded as "inputs used as fuel". The revenue contended, per contra,
that LSHS was used for manufacturing electricity, which was not
excisable and that, therefore, LSHS could not be treated as an input used
as fuel. It was also contended that, though LSHS generated electricity, it
could not be said that LSHS was used in, or in relation to, the
manufacture of the final products, namely caustic soda and cement.
Electricity, it was contended, was not the final product, and Modvat
Credit of the duty paid on LSHS was not admissible. Essentially,
therefore, the Revenue sought to contend that generation of electricity, by
heating of LSHS, was a process which was independent of the process of
manufacture of cement and caustic soda. The generation of electricity
from LSHS, according to the Revenue in that case, did not result in the
manufacture of cement and caustic soda and, consequently, Modvat
Credit, of the input used to generate electricity, could not be availed.
CEAC 19/2017 Page 37 of 49
47. Dealing with the contention, the Supreme Court, in para 8 of the
report, commenced with a clarification that "electricity is not an excisable
item". It went on to hold that "fuel either utilised directly or for
generating electricity, as an intermediary product, integrally connected
with several operations which resulted in the emergence of the final
product, namely cement/caustic soda". It was emphasised, by the
Supreme Court, that, "without utilisation of LSHS, it is not possible to
manufacture cement/caustic soda", inasmuch as "the electrolysis process
is dependent on continuous flow of electricity". As such, it was held,
LSHS came within the ambit of the expression "used in or in relation to
the manufacture of the final product". The utilisation of the captively
generated electricity, in the production of the final product, it was
observed, was crucial, and, therefore, Modvat Credit, on the LSHS used
in the production of electricity, could not be denied. The Supreme Court
went on to expound on the concept of usage "in or in relation to the
manufacture of final products", especially the expression "in relation to".
In view of the wide ambit of this expression, the Supreme Court held that
Modvat Credit, of the duty paid on LSHS, was available to Solaris.
48. Though the judgment of the Supreme Court in Solaris Chemtech
Ltd.12 does not set out the period, to which the demand in that case
pertained, it is obvious that it was prior to 1st April, 2000, as it dealt with
Modvat Credit, which was replaced by Cenvat Credit with effect from the
said date. The position in the Tariff, as it existed during the period to
which Solaris Chemtech Ltd.12 related is, therefore, not known. It is also
to be borne in mind that the Explanation, to Section 2(d) of the Act,
whereby goods which were bought and sold were, ipso facto, deemed to
CEAC 19/2017 Page 38 of 49
be marketable, was introduced only w.e.f. 10th May, 2008. Prior thereto,
it was necessary to establish, as an independent fact, the "marketability"
of any item, in order to regard it as "excisable". Inasmuch as the
judgment in Solaris Chemtech Ltd.12 was itself rendered prior to the
addition of the Explanation to Section 2(d) of the Act, and the period of
dispute, in the said case, was prior to 1st April, 2000, it is doubtful
whether the "clarification", in the opening sentence of para 8 of the report
in the said decision, that "electricity is not an excisable item" could
operate as a precedent, for all times to come, under Article 141 of the
Constitution of India.
49. We are, of course, aware of the fact that, in Gularia Chini Mills8,
the High Court expressly rejected the specific contention, advanced
before it, that the insertion of the Explanation to Section 2(d) of the Act
diluted the applicability of the judgment in Solaris Chemtech Ltd.12. We
are not, however, aware of the exact reason for such rejection, as it is not
forthcoming from the judgment. To us, it appears that, after the addition
of the Explanation to Section 2(d), in the Act, the declaration of the law,
in Solaris Chemtech Ltd.12, that electricity is not an excisable item,
would not continue to hold good, as (i) electrical energy finds specific
place in Sub-Heading 2716 0000 of the Tariff, and (ii) electricity was, in
fact, bought and sold by the respondent.
D. S. C. L. Sugar Ltd.
50. The judgment of the Supreme Court, in D.S.C.L. Sugar Ltd.10
assumes importance, as one of the Special Leave Petitions, dismissed
CEAC 19/2017 Page 39 of 49
vide the said judgment (as reported) was SLP (C) 3344 of 2014, which
was preferred against the judgment of the High Court of Allahabad in
Gularia Chini Mills8. In this comparatively short decision, the Supreme
Court noted the fact that the dispute, before it, pertained to a period prior
to the insertion, in Section 2(d) of the Act, of the Explanation thereto, in
2008. The Supreme Court noted the legal position that, after the addition
of the said Explanation in Section 2(d), a deeming fiction, whereby all
goods, which were capable of being bought and sold for consideration,
were deemed to be marketable, had been introduced. The Supreme Court
proceeded to hold, in the first instance, that bagasse was only agricultural
waste and residue, which was not the result of any process and could not,
therefore, be treated as the outcome of a process of "manufacture", as
defined in Section 2(f) of the Act. Not being the product of the process of
"manufacture", the Supreme Court held that bagasse would not be treated
as excisable. The following passages, from the judgment of the Supreme
Court, merit reproduction, in extenso:
"6. The aforesaid judgment was pronounced by this Court
related to the period before 2008. In the year 2008 there was an
amendment in Section 2(d) as well as in Section 2(f) of the Act
which defines ,,excisable goods and ,,manufacture respectively.
Section 2(d) with the said amendment reads as under :
Section 2(d) - "excisable goods" means goods specified in
The First Schedule and the Second Schedule to the Central
Excise Tariff Act, 1985 (5 of 1986 ) as being subject to a
duty of excise and includes salt;
Explanation - for the purposes of this clause, "goods"
includes any article, material or substance which is
capable of being bought and sold for a consideration and
such goods shall be deemed to be marketable."
7. As per the aforesaid explanation, "goods" would now
include any article, material or substance capable of being bought
CEAC 19/2017 Page 40 of 49
or sold for consideration and as such goods shall be deemed to be
marketable. Thus, it introduce the deeming fiction by which
certain kind of goods are treated as marketable and thus
excisable.
8. However, before the aforesaid fiction is to be applied, it is
necessary that the process should fall within the definition of
"manufacture" as contained in Section 2(f) of the Act. The
relevant portion of amended Section 2(f) reads as under :
Section 2(f) - "manufacture" includes any process -
(i) incidental or ancillary to be completion of a
manufactured product;
(ii) which is specified in relation to any goods in
the section or Chapter notes of The First Schedule
to the Central Excise Tariff Act, 1985 (5 of 1986)
as amounting to manufacture; or
(iii) which in relation to the goods specified in
the Third Schedule, involves packing or repacking
of such goods in a unit container or labelling or re-
labelling of containers including the declaration or
alteration of retail sale price on it or adoption of
any other treatment on the goods to render the
product marketable to the consumer;
and the word "manufacture" shall be construed
accordingly and shall include not only a person
who employs hired labour in the production or
manufacture of excisable goods, but also any
person who engages in their production of
manufacture on his own account;"
9. The Revenue sought to cover the case under sub-clause
(ii) as per which the process which is satisfied in relation to any
goods in the Section or Chapter notices of the First Schedule to
the Central Excise Tariff Act, 1985 would amount to
,,manufacture. Here again, fiction is created by including those
goods as amounting to manufacture in respect of which process
is specified in the Section or Chapter notices of the First
Schedule.
CEAC 19/2017 Page 41 of 49
10. In the present case it could not be pointed out as to
whether any process in respect of Bagasse has been specified
either in the Section or in the Chapter notice. In the absence
thereof this deeming provision cannot be attracted. Otherwise, it
is not in dispute that Bagasse is only an agricultural waste and
residue, which itself is not the result of any process. Therefore, it
cannot be treated as falling within the definition of Section 2(f)
of the Act and the absence of manufacture, there cannot be any
excise duty.
11. Since it is not a manufacture, obviously Rule 6 of the
Cenvat Rules, 2004, shall have no application as rightly held by
the High Court."
Proceeding therefrom, the Supreme Court went on to dismiss the Special
Leave Petition, preferred against the judgment of the High Court of
Allahabad in Gularia Chini Mill8, along with eight other Special Leave
Petitions/Civil Appeals, in the following words (in para 13 of the report):
"Cenvat Credit in respect of electricity was denied solely on the
premise that the Bagasse attracts excise duty and consequently
Rule 6 of the Cenvat Credit Rules is applicable. Since this action
of the appellant is found to be erroneous, all these appeals of the
Revenue also stands dismissed."
51. The dismissal, in the case of Gularia Chini Mills8, was of the
Special Leave Petition preferred against the said decision, before grant of
leave therein and, therefore, before conversion, of the SLP, into a Civil
Appeal, albeit with reasons, though brief. Dealing with the applicability
of the doctrine of merger, vis-à-vis Article 141 of the Constitution of
India, in the matter of an order dismissing a Special Leave Petition with
reasons, the Supreme Court, in its well-known decision in
Kunhaiyammed v. State of Kerala18 held thus (in para 27 of the report):
18
(2000) 6 SCC 359
CEAC 19/2017 Page 42 of 49
"A petition for leave to appeal to this Court may be dismissed by
a non-speaking order or by a speaking order. Whatever be the
phraseology employed in the order of dismissal, if it is a non-
speaking order, i.e., it does not assign reasons for dismissing the
special leave petition, it would neither attract the doctrine of
merger so as to stand substituted in place of the order put in issue
before it nor would it be a declaration of law by the Supreme
Court under Article 141 of the Constitution for there is no law
which has been declared. If the order of dismissal be supported
by reasons then also the doctrine of merger would not be
attracted because the jurisdiction exercised was not an appellate
jurisdiction but merely a discretionary jurisdiction refusing to
grant leave to appeal. We have already dealt with this aspect
earlier. Still the reasons stated by the Court would attract
applicability of Article 141 of the Constitution if there is a law
declared by the Supreme Court which obviously would be
binding on all the courts and tribunals in India and certainly the
parties thereto. The statement contained in the order other than
on points of law would be binding on the parties and the court or
tribunal, whose order was under challenge on the principle of
judicial discipline, this Court being the Apex Court of the
country. No court or tribunal or parties would have the liberty of
taking or canvassing any view contrary to the one expressed by
this Court. The order of Supreme Court would mean that it has
declared the law and in that light the case was considered not fit
for grant of leave. The declaration of law will be governed by
Article 141 but still, the case not being one where leave was
granted, the doctrine of merger does not apply."
(Emphasis and underscoring supplied)
52. Where, therefore, the Supreme Court dismisses a Special Leave
Petition , without granting leave but with reasons, there is no merger, but
the reasons adduced by the Supreme Court for dismissing the SLP,
nevertheless, constitute declaration of the law, within the meaning of
Article 141 of the Constitution of India, which would be binding on all
courts and Tribunals subordinate to the Supreme Court, and no such
CEAC 19/2017 Page 43 of 49
Court or Tribunal would be at liberty to take a view different from that of
the Supreme Court.
Returning to Gularia Chini Mills8
53. The facts, and the controversy, arising in Gularia Chini Mills8,
are, as already noted hereinbefore, identical to those in the present
appeal, before us.
54. Mr. Bansal has emphasised the fact that the observation, in paras
26 and 33 of the judgment of the High Court of Allahabad in Gularia
Chini Mills8, that Chapter 27 of the Tariff "covers only those electrical
energy which are generated from minerals fuels, mineral oils and
products of the distillation, bituminous substances, mineral waxes, etc.",
and did not cover electrical energy generated from bagasse, indicated that
the position of the Tariff, which was before the High Court, was different
from the Tariff position as it exists in the present case. He points out that
Chapter 27 of the Tariff, in the present case, does not limit "electrical
energy", as classifiable thereunder, to electrical energy generated from a
particular source or sources.
55. It is true that Sub-Heading 2716 0000, in the Tariff, does not
specify the source of "electrical energy", classifiable thereunder. It is also
true that there is no Chapter Note in Chapter 27, or Section Note in
Section V of the Tariff (which includes Chapter 27), limiting "electrical
energy", classifiable under Sub-Heading 2716 0000, in any manner.
However, we find that Chapter 27 is itself titled "Mineral Fuels, Mineral
CEAC 19/2017 Page 44 of 49
Oils and Products of their distillation; Bituminous substances; Mineral
Waxes". Apparently, therefore, the High Court of Allahabad, while
opining as it did in paras 26, and 33, of its judgment in Gularia Chini
Mills8, was interpreting Sub-Heading 2716 0000 in the light of the
Heading of Chapter 27. This answers the objection of Mr. Bansal,
regarding the observations of the High Court in paras 26 and 33 of
Gularia Chini Mills8.
56. The High Court, in Gularia Chini Mills8, proceeded on three
grounds, viz. that
(i) bagasse, being in the nature of waste, was not "excisable
goods", and, therefore, the sale of electricity, generated directly
from bagasse, could not justify a demand under Rule 6(3)(i) of the
Cenvat Credit Rules,
(ii) as no rate of duty was stipulated against Sub- Heading 2716
0000, applying Section 2(b) of the Central Excise Tariff Act, read
with Section 2(d) of the Central Excise Act, electricity could not be
regarded as "excisable goods" and
(iii) even otherwise, Chapter 27 of the Tariff covered electricity
only if it was generated from mineral fuels, mineral oils and
products of their distillation, bituminous substances, mineral
waxes, etc.
57. Regarding ground (ii), we reiterate our view that the non-
specification of any rate of duty, against a particular Sub-Heading of the
Tariff, would not result in the product becoming "non -excisable". To the
extent that the judgment of the High Court of Allahabad, in Gularia
CEAC 19/2017 Page 45 of 49
Chini Mills8 opines to the contrary, therefore, we respectfully record our
disagreement.
58. Our disagreement on this score does not, however, impact the
outcome of these proceedings, as the Supreme Court has, in its judgment
in D. S. C. L. Sugar Ltd.10, upheld dismissed the Special Leave Petition,
preferred against the judgment of the High Court of Allahabad in Gularia
Chini Mills8 by upholding ground (i). The Supreme Court has held that
bagasse was in the nature of non-marketable and, consequently, non-
excisable waste/residue and that, as the electricity, which was sold to
UPPCL, was entirely generated from such non-excisable bagasse, the
said sale could not constitute the basis for a demand under Rule 6(3)(i) of
the Cenvat Credit Rules. The said reasoning, as postulated by the
Supreme Court as the ground to dismiss the SLP, constitutes "law
declared", within the meaning of Article 141 of the Constitution of India,
and it is not open to us to depart, or differ, therefrom.
59. As the issue stands covered by Gularia Chini Mills8, we do not
deem it necessary to refer to the order of the Tribunal in DSM Sugar
Mills Ltd.7, on which the respondent has placed reliance. In any event,
the said order was passed on an application for waiver of pre-deposit, and
does not, therefore, have any real precedential value.
60. We would be failing in our duty if we do not take note of the
decision of the Supreme Court in Maruti Suzuki Ltd.9, as considerable
reliance was placed, by Mr. Amit Bansal, on the said decision. Particular
CEAC 19/2017 Page 46 of 49
emphasis was placed, by Mr. Bansal, on paras 19 and 20 of the report
which read thus :
"19. The question which still remains to be answered is :
whether an assessee would be entitled to claim CENVAT credit
in cases where it sells electricity outside the factory to the joint
ventures, vendors or gives it to the grid for distribution? In the
case of Collector of Central Excise v. Rajasthan State Chemical
Works19 the test laid down by this Court is whether the process
and the use are integrally connected. As stated above, electricity
generation is more of a process having its own economics.
Applying the said test, we hold that when the electricity
generation is a captive arrangement and the requirement is for
carrying out the manufacturing activity, the electricity generation
also forms part of the manufacturing activity and the "input" used
in that electricity generation is an "input used in the
manufacture" of final product. However, to the extent the excess
electricity is cleared to the grid for distribution or to the joint
ventures, vendors, and that too for a price (sale) the "process and
the use test" fails. In such a case, the nexus between the process
and the use gets disconnected. In such a case, it cannot be said
that electricity generated is "used in or in relation to the
manufacture of final product, within the factory". Therefore, to
the extent of the clearance of excess electricity outside the
factory to the joint ventures, vendors, grid etc. would not be
admissible for CENVAT credit as such wheeled out electricity,
cleared for a price. would not fall within the definition of "input"
in Rule 2(g) of the CENVAT Credit Rules, 2002. This view is
also expressed in para 9 of the judgment of this Court in the case
of Collector of Central Excise v. Solaris Chemtech Limited12.
Further, our view is supported by the observations of this Court
in the case of Vikram Cement v, Commnr of Central Excise,
Indore20 - which is quoted below :-
"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 as an
immediate product. The utilization of inputs in the
19 1991 (55) ELT 444 (SC)
20 2006 (194) ELT 3 (SC)
CEAC 19/2017 Page 47 of 49
generation of steam or electricity not being qualified
by the phrase "within the factory of production"
could be outside the factory. Therefore, whatever
goes into generation of electricity or steam which is
used within the factory would be an Input for the
purposes of obtaining credit on the duty payable
thereon."
20. To sum up, we hold that the definition of "input" brings
within its fold, inputs used for generation of electricity or steam,
provided such electricity or steam is used within the factory of
production for manufacture of final products or for any other
purpose. The important point to be noted is that, in the present
case, excess electricity has been cleared by the assessee at the
agreed rate from time to time in favour of its joint ventures,
vendors etc. for a price and has also cleared such electricity in
favour of the grid for distribution. To that extent, in our view,
assessee was not entitled to CENVAT credit. In short, assessee is
entitled to credit on the eligible inputs utilized in the generation
of electricity to the extent to which they are using the produced
electricity within their factory (for captive consumption). They
are not entitled to CENVAT credit to the extent of the excess
electricity cleared at the contractual rates in favour of joint
ventures, vendors etc., which is sold at a price."
61. From the discussion hereinabove, it is obvious that the decision in
Maruti Suzuki Ltd.9 cannot advance the case of the Revenue. Maruti
Suzuki Ltd.9, was not a case in which electricity was generated out of
bagasse, no issue regarding the applicability of Rule 6(3)(i) of the Cenvat
Credit Rules, in the context of electricity generated from bagasse and
sold by the assessee, arose in that case. The Supreme Court has, in
D.S.C.L. Sugar Ltd.10, clearly held that bagasse is not an excisable item
and, that, therefore, a demand under Rule 6 of the Cenvat Credit Rules,
on the ground of sale of electricity generated from bagasse, could not
sustain. Maruti Suzuki Ltd.9, does not affect this legal position in any
manner.
CEAC 19/2017 Page 48 of 49
62. The inevitable sequitur of the above discussion is that the decision
of the Tribunal, to allow the appeal of the respondent on the basis of the
judgment of the High Court of Allahabad in Gularia Chini Mills8, was
justified, albeit for the reason that, as the electricity sold by the
respondent was generated entirely from bagasse, and bagasse itself was
in the nature of non-excisable waste/residue, no demand, posited on Rule
6(3)(i) of the Cenvat Credit Rules, could sustain against the respondent.
63. In view thereof, it is not necessary for us to express any opinion on
the other contentions, advanced before us by either side.
Conclusion
64. Resultantly, the question of law, framed, in these proceedings on
3rd December, 2018, is answered in the affirmative, and against the
Revenue.
65. The appeal is, consequently, dismissed.
C.HARI SHANKAR, J.
CHIEF JUSTICE
OCTOBER 31, 2019/dsn
CEAC 19/2017 Page 49 of 49
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