2014 (2) TMI 278 - AT - Central Excise

Appeal outcome: CENVAT credit rulings on structural items, electricity supply, and penalties

The court rejected the appeal regarding CENVAT credit on structural items, electricity supplied to the DMW plant for the Gujarat Water Board, and ... CENVAT credit on inputs used in captive power generation - Job worker principle under Rule 4(5)(a) and Rule 4(6) of the CENVAT Credit Rules, 2004 - Factory/common factory doctrine and effect of separate central excise registrations - Revenue neutrality and procedural non-compliance - Inadmissibility of credit for electricity consumption of residential colonies - Inadmissibility of credit for structural items treated as construction/capital worksInadmissibility of credit for structural items treated as construction/capital works - CENVAT credit of Rs. 9,87,045/- claimed on angles, channels, CTD bars etc. used in construction inside the factory is admissible or not. - HELD THAT: - The Tribunal applied the Larger Bench holding in M/s Vandana Global Ltd. vs. CCE, Raipur, concluding that credit on structural items of the nature claimed is not admissible as input credit. The adjudicating authority's denial of this portion of credit was held to be correct and sustained. [Paras 15]Credit on the structural items is not admissible; appeal on this head rejected.CENVAT credit on inputs used in captive power generation - Job worker principle under Rule 4(5)(a) and Rule 4(6) of the CENVAT Credit Rules, 2004 - Revenue neutrality and procedural non-compliance - Admissibility of CENVAT credit for inputs/fuels sent by the Clinker unit to the captive power plant for generation of electricity supplied to the DMW plant and Administrative block situated within the Clinker unit. - HELD THAT: - The Tribunal held that the DMW unit and Administrative Block are situated within the Clinker unit and electricity consumption there is in connection with manufacture of clinker. The appellant's earlier decision in their own case (2006 (206) ELT 575) that the power plant can be a job worker was followed. Proportionate credit corresponding to electricity used in the DMW and Administrative Block is therefore eligible under the job-worker provisions. The Tribunal, however, excluded from admissibility those quantities used by the DMW plant for supplying demineralised water to the Gujarat Water Board (i.e., use not connected with manufacture of dutiable goods). [Paras 8]Proportionate CENVAT credit attributable to electricity used in the DMW plant and Administrative Block (except quantities used for supplies to Gujarat Water Board) is admissible.Inadmissibility of credit for electricity consumption of residential colonies - CENVAT credit on inputs used in captive power generation - Admissibility of CENVAT credit for inputs used at the power plant to generate electricity supplied to the residential colony of the Clinker unit. - HELD THAT: - Relying on the Supreme Court decision in Collector vs. Solaris Chemtech Ltd., the Tribunal held that credit of inputs used in generation of electricity consumed by residential colonies is not admissible. The adjudicating authority's denial of credit for electricity supplied to residential colonies was therefore upheld. [Paras 9]Credit attributable to electricity supplied to the residential colony is not admissible; appeal on this head rejected.Factory/common factory doctrine and effect of separate central excise registrations - CENVAT credit on inputs used in captive power generation - Job worker principle under Rule 4(5)(a) and Rule 4(6) of the CENVAT Credit Rules, 2004 - Revenue neutrality and procedural non-compliance - Admissibility of CENVAT credit for inputs/fuels sent by the Clinker unit to the captive power plant for generation of electricity supplied to the Grinding unit and the jetty situated about 14 km away. - HELD THAT: - The Tribunal considered the Revenue's reliance on precedents holding separate registered units at different premises cannot be treated as one factory. Noting those authorities, the Tribunal nonetheless observed that the Cenvat Credit Rules provide mechanisms (job-worker provisions and clearance from job-worker premises) and that where inputs on which credit is taken are in fact used in the manufacture of dutiable goods (revenue-neutral exercise), credit cannot be denied merely for procedural non-compliance. Applying this principle and accepting that the power plant had been treated as job worker of the Clinker unit, the Tribunal held that proportionate credit for inputs sent to the power plant for generation of electricity supplied to the Grinding unit (and by analogy its jetty) could not be denied, since diversion of inputs/electricity was not alleged and the situation was one of revenue neutrality. The Tribunal also observed the alternate remedy of reversal/sale and re-credit by the receiving unit but found denial improper where the substantive use for manufacture of dutiable goods was established. [Paras 10, 11, 13, 14]CENVAT credit attributable to inputs used to generate electricity supplied to the Grinding unit and jetty is admissible; appellant's appeal on this head allowed.Revenue neutrality and procedural non-compliance - Whether penalties should be imposed where admissibility of CENVAT credit was highly contentious and debatable. - HELD THAT: - Given that the issue of admissibility of credit in these proceedings was found to be highly contentious and debatable, and that credit was allowed in respect of electricity supplied to the grinding unit while other heads involved close questions of law, the Tribunal exercised its discretion to set aside penalties imposed in respect of amounts where credit was disallowed. [Paras 16]Penalties imposed in relation to disputed credit are set aside.Final Conclusion: The appeals are partly allowed and partly dismissed: credit on structural/ construction items and credit for electricity to residential colonies and quantities of DMW power used for external supply are rejected; proportionate CENVAT credit attributable to inputs used to generate electricity supplied to the Grinding unit and its jetty is allowed; proportionate credit for electricity to the DMW plant and Administrative Block (for manufacture-related use) is allowed; penalties in respect of the disputed credit are set aside. Issues Involved:1. Admissibility of CENVAT credit on structural items like angles, channels, CTD bars, etc.2. Admissibility of CENVAT credit on inputs/fuels/oils sent by the clinker unit to the captive power plant for generating electricity supplied to:a. DMW plant and administrative block within the clinker unit.b. Residential colony of the clinker unit.c. Grinding unit and jetty situated 14 km from the clinker unit.Detailed Analysis:1. Admissibility of CENVAT credit on structural items:The appellant availed CENVAT credit of Rs. 9,87,045/- on structural items like angles, channels, CTD bars, etc. used in construction inside the factory. The Larger Bench in the case of M/s Vandana Global Ltd vs. CCE, Raipur held that such credit is inadmissible. Thus, the credit was correctly denied to the appellant.2. Admissibility of CENVAT credit on inputs/fuels/oils:a. DMW plant and administrative block:The DMW plant and administrative block are situated within the clinker unit. The use of electricity in these units is considered as use in connection with the manufacture of clinker. Therefore, proportionate credit of inputs sent by the clinker unit to the power plant under Rule 4(5)(a) corresponding to electricity used in the DMW plant and administrative block is eligible as CENVAT credit. However, credit is not available for inputs used to supply electricity to the DMW plant for making de-mineralized water for the Gujarat Water Board.b. Residential colony:CENVAT credit of inputs used at the power plant for generating and supplying electricity to residential colonies within the clinker unit is not admissible, as per the Supreme Court decision in Collector Vs. Solaris Chemtech Limited.c. Grinding unit and jetty:The grinding unit and jetty, situated 14 km from the clinker unit, cannot be treated as part of the same factory. Despite the appellant's argument that all units should be treated as one factory due to common possession and control, the Supreme Court in M/s Rollatainers Ltd vs. CCE Delhi III held that separate registrations and separate management indicate separate factories. Thus, electricity supplied to the grinding unit and jetty does not qualify for CENVAT credit.Procedural Irregularities:The appellant argued that procedural irregularities should not deny admissible CENVAT credit, citing that the clinker unit could have sent clinker under job work to the grinding unit and cleared final goods on payment of duty. Rule 4(5)(a) and Rule 4(6) of the CENVAT Credit Rules 2004 allow credit for inputs sent to a job worker. The power plant was accepted as a job worker for the clinker unit. Similarly, the grinding unit could act as a job worker for the clinker unit, treating clinker and electricity as inputs supplied to the job worker. The appellant did not follow the prescribed procedures properly, but substantial benefits of CENVAT credit cannot be denied for procedural lapses when inputs are used to manufacture final products on which duty is payable. This is a case of revenue neutrality as the electricity was used within the group companies.Conclusion:The appeal regarding CENVAT credit on structural items, electricity supplied to the DMW plant for the Gujarat Water Board, and electricity supplied to residential colonies is rejected. The appeal concerning credit of inputs used for generating and supplying electricity to the grinding unit is allowed. No penalties are imposed on the appellant due to the contentious and debatable nature of the issues.