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The Commissioner of Central Excise, Vadodara-II v. Gujarat Narmada Valley Fertilizers Co. Ltd. (with connected SLP)

Civil Appeal · 2019 INSC 1308Decided 3 Dec 2019
Civil Appeal Nos. 4189-4196 of 2010
Justice Rohinton Fali Nariman · Justice Aniruddha Bose · Justice V. Ramasubramanian

Background

The respondent company used duty-paid fuel (Low Sulphur Heavy Stock, or "LSHS") to generate steam and electricity, which it then used to manufacture fertilizer: a product exempt from excise duty. The company claimed CENVAT tax credit on the duty it had paid for this fuel, arguing it was entitled to the credit even though the end product was tax-exempt; the tax department disputed this and sought to recover the credit, along with interest and penalty. After conflicting rulings by tribunals and the Gujarat High Court, and recognising a conflict between two of its own earlier Supreme Court decisions on the same point, a two-judge Bench referred the matter to this larger Bench to resolve which earlier ruling should prevail.

Decision Breakdown

The Court examined the CENVAT Credit Rules, 2002, in particular Rule 6, which generally disallows credit on inputs used to manufacture exempt goods but carves out an exception for most other inputs, except fuel, when dutiable and exempt goods are both produced. After closely analysing this structure and the earlier precedents cited by both sides, the Court held there was in fact no real conflict between the two earlier Supreme Court decisions, and confirmed that the correct legal position is that CENVAT credit on fuel-type inputs (like the LSHS here) cannot be claimed when the fuel is used, even indirectly via generated steam/electricity, to manufacture an exempt final product. It allowed the tax department's appeals, set aside the order permitting the credit (except for a portion already remanded for other reasons), and answered the connected Special Leave Petition in the same terms.

Lesson Learnt

Businesses cannot claim CENVAT (now GST-predecessor) tax credit on inputs, including fuel used to generate power, that are ultimately consumed in producing a tax-exempt product; the "fuel exception" in the credit rules is narrower than it might first appear and does not create a blanket exemption from this general rule.

Official source (sci.gov.in)View Judgment (PDF)

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