Cenvat credit on power generation inputs upheld where surplus electricity flowed to the grid without violating the credit condition.

Cenvat credit on inputs used to generate electricity could not be denied merely because surplus electricity was supplied to the grid, since electricity was treated as neither excisable goods nor exempted goods for the purpose of Rule 57AD. The Tribunal also noted that the relevant credit notification did not require 100% captive consumption of the electricity and contemplated use of inputs for generation of electricity for any other purpose. As electricity cannot be stored and must be consumed as generated, incidental export of surplus power did not breach the notification. The demand, along with penalty and interest, was therefore held unsustainable.

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Issues: Whether Cenvat credit could be denied and penalty and interest sustained on inputs used in generating electricity, where most of the electricity was consumed captively and the surplus was sent to the grid.

Analysis: The credit demand was based on Rule 57AD of the erstwhile Central Excise Rules, 1944 and the related penalty and interest provisions. The decisive question was whether electricity fell within the scope of exempted goods or excisable goods so as to attract the restriction on credit. The Tribunal noted that electricity is neither excisable goods nor exempted goods for the purpose of the rule. It further found that the notification governing the credit regime did not require 100% captive consumption of electricity and even contemplated use of inputs for generation of electricity for any other purpose. Since electricity cannot be stored and must be consumed as generated, the incidental flow of surplus power to the grid did not amount to a violation of the notification.

Conclusion: The demand, penalty and interest were not sustainable, and the order of the Commissioner (Appeals) was set aside. The appeal was allowed in favour of the assessee.

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