MODVAT Credit On Furnace Oil Cannot Be Denied For Exempt Intermediate Goods: Madras High Court

The Madras High Court has held that MODVAT credit availed on furnace oil used to manufacture exempt intermediate goods need not be reversed where such goods are captively consumed or transferred within the same company for manufacturing dutiable final products.

A Division Bench of Justices Dr. G. Jayachandran and R. Sakthivel upheld Tata Refractories Ltd.'s claim for MODVAT credit on furnace oil used in manufacturing Dead Burnt Magnesite (DBM), holding that the credit could not be denied merely because DBM was an exempt intermediate product, as it was used for manufacturing dutiable refractory products. It observed:

“When the final products manufactured from such D.B.M. are all completely excisable, then there is no bar to claim MODVAT input credit for the fuel - furnace oil, provided that the fuel - furnace oil is either (i) used solely in the production of such D.B.M. or (ii) used in the production of such D.B.M., along with any other dutiable final products with or without any intermediate products within the same entity.”

The dispute arose after the Central Excise Department sought reversal of MODVAT credit on furnace oil used in producing DBM, contending that DBM was an exempt product and the credit was therefore inadmissible. The Department also imposed a penalty on the company. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed Tata Refractories' appeal and held that reversal of credit was not required, leading to the reference before the High Court.

The Court noted that Tata Refractories used DBM partly within its Salem unit and transferred the remaining quantity to its Belpahar unit, where it was used to manufacture dutiable final products. Since DBM was not sold but used within the same entity for manufacturing dutiable goods, it held that it retained the character of an intermediate product and could not be treated as an exempt final product.

Further, it held that Rule 57CC of the erstwhile Central Excise Rules, which required reversal of credit or maintenance of separate accounts where inputs were used for exempt and dutiable products, specifically excluded inputs used as fuel from its adjustment mechanism. Therefore, the requirement to reverse credit did not apply to furnace oil used as fuel. The Bench held:

“all the final products being dutiable in nature and so long as duty is paid on the final product, Rule 57CC would not come into picture at all, as Rule 57CC is concerned only with input utilised for the manufacture of either (i) exempted / nil-rated final product, or (ii) dutiable final product along with exempted / nil-rated final product.”

Relying on the Supreme Court's ruling in Escorts Ltd. v. Commissioner of Central Excise, the Bench held that credit cannot be denied merely because an intermediate product is exempt, when duty is ultimately paid on the final product. The judges noted:

“C.E.G.A.T. is legal and correct in upholding the impugned order that the credit availed in respect of the fuel - furnace oil used in the factory for the manufacture of D.B.M., an exempted good, need not be reversed, due to the fact that no sale is involved in their transactions and as per erstwhile Rule 57CC(1) & 57CC(8) reversal of credit is not required.”

Accordingly, the High Court upheld the order passed by the CESTAT, allowing the MODVAT credit and held that reversal of credit on furnace oil was not required where exempt intermediate goods were used for manufacturing dutiable final products.

For Petitioner: Mr.M.Santhanaraman, S.S.C. for GST & Customs

For Respondent: Mr.Raghavan Ramabadhran, Advocate