CENVAT credit on captive power plant capital goods cannot be denied when electricity is also used in manufacturing

CENVAT credit on capital goods used in a captive power plant cannot be denied merely because part of the electricity generated is sold outside, where the same plant also supplies power used in manufacturing final products in the factory. Rule 6(4) of the CENVAT Credit Rules, 2004 bars credit only when capital goods are used exclusively for exempted goods, so mixed use for captive consumption and external sale does not attract the bar. On the remaining dispute concerning items treated as not capital goods, the deposit already made and reversals with interest were treated as sufficient. Pre-deposit of duty, interest and penalty was therefore waived and recovery stayed pending appeal.

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Issues: (i) Whether CENVAT credit on capital goods used in a captive power plant could be denied when the electricity generated was partly used in the factory and partly sold outside; (ii) Whether the amount already deposited was sufficient for hearing the dispute relating to items treated as not capital goods.

Issue (i): Whether CENVAT credit on capital goods used in a captive power plant could be denied when the electricity generated was partly used in the factory and partly sold outside.

Analysis: Rule 6(4) of the CENVAT Credit Rules, 2004 bars credit only where capital goods are used exclusively in the manufacture of exempted goods. The admitted facts showed that the capital goods in the captive power plant were also used for generation of electricity consumed in the manufacture of final products in the factory. The fact that some electricity was sold outside did not make the capital goods exclusively used for exempted goods. The cited High Court view supported this interpretation.

Conclusion: Credit could not be denied on this ground, and the appellant made out a prima facie case for waiver of pre-deposit on this component.

Issue (ii): Whether the amount already deposited was sufficient for hearing the dispute relating to items treated as not capital goods.

Analysis: For the remaining demand, a part of the disputed credit had already been reversed with interest. In the circumstances, the deposit already made was treated as adequate to proceed with the appeal on that issue as well.

Conclusion: The existing deposit was held sufficient for hearing of the appeal on the remaining demand also.

Final Conclusion: Pre-deposit of duty, interest and penalty was waived and recovery was stayed during the pendency of the appeal.

Ratio Decidendi: CENVAT credit on capital goods is barred only when such goods are used exclusively in the manufacture of exempted goods; if they are also used for manufacture of dutiable final products, the credit cannot be denied on that ground.

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