SC

INTERESTING CASE

Poor drafting of Cenvat credit Rules leading to litigations and conflicting decisions by various benches: SC

The Supreme Court has said the CENVAT Credit Rules were not properly drafted causing huge rise in litigations and conflicting decisions by various benches of Custom Excise & Service Tax Appellate Tribunal (CESTAT). The apex court said that repeated amendments in the CENVAT Credit Rules has given a further fillip in rising number of litigations in the country.
A bench comprising Justice SH Kapadia and Justice Aftab Alam on Monday made the observations in two separate rulings.

“Litigation on interpretation of CENVAT Credit Rules has arisen on account of various conflicting decisions given by the various Benches of CESTAT, the reason being that the Rules have not been properly drafted”, bench said in an appeal involving Maruti Suzuki.

In another judgment involving M/s Gujarat Narmada Fertilizers, a bench headed by Justice Kapadia said, “it may be clarified that on account of repeated amendments in the CENVAT Credit Rules, huge litigation in the country stands generated”. The court ruled that an assessee would not 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. It dismissed the appeal of Maruti Suzuki Ltd. The assessee had claimed CENVAT credit on ‘input’ used for manufacture of cars in accordance with CENVAT Credit Rules, 2002. It had installed three gas turbines in its factory for generation of electricity. Till June 2002, assessee was using natural gas as fuel for running the turbines. No excise duty was leviable on natural gas and, therefore, there was no question of availing CENVAT credit on natural gas.

During July 2002 to December 2002, assessee started using diesel as fuel to run the three turbines. In view of the prevalent Rules barring availment of credit on diesel, the assessee did not avail any CENVAT Credit on diesel procured by it. From January 2003 onwards, it used naphtha as fuel to run the gas turbines and availed CENVAT Credit on naphtha used for generation of electricity in gas turbines. The assessee also used diesel generating set (DG set) for generation of electricity with the use of diesel for which it had not availed any credit. In its factory, the assessee had a common distribution point for electricity generated in turbines as well as DG set.

During the period, assessee cleared a part of electricity generated in the factory to its joint ventures, vendors etc. Even the joint ventures, vendors etc. to whom excess electricity was wheeled out in turn manufacture final products. The court allowing the plea of Central Excise Department, however, noted the changes made in the provisions of CENVAT Credit Rules, 2004 from the earlier CENVAT Credit Credit Rules, 2002. It, however, restrained the department from imposing penalty on Maruti Suzuki.