2015 (6) TMI 404 - AT - Central Excise

Electricity sent for synchronization & returned for manufacturing not subject to CENVAT credit reversal under Rule 4(5)(a).

The Tribunal held that the electricity sent to the power grid for synchronization and returned to the factory for manufacturing did not require reversal ... CENVAT credit on inputs used in generation of electricity - captive consumption and synchronisation with the grid - ineligibility of credit where excess electricity is sold or cleared at a price - application of Rule 4(5)(a) of the CENVAT Credit Rules, 2004 to job work/synchronisation - no requirement of one to one correlation between input and final product under the CENVAT schemeCENVAT credit on inputs used in generation of electricity - ineligibility of credit where excess electricity is sold or cleared at a price - Whether CENVAT credit on fuel used to generate electricity sent to the grid for synchronisation must be reversed on the ground that the electricity was cleared outside the factory - HELD THAT: - The Tribunal found on the facts that the captive power plant operated in parallel with the grid under an agreement which expressly prohibited sale of energy to the Nigam and provided that some energy would flow in either direction for synchronisation, with wheeling charges of 10% applied. It accepted the appellant's case that the quantity of electricity injected into the grid was equal to the quantity received back and was ultimately used in manufacture of dutiable final goods. The Supreme Court decisions establish that credit is not allowable to the extent electricity is sold or cleared at a price; however, those authorities apply where excess electricity is actually sold/cleared for consideration. Since there was no sale to the grid in the present case and the electricity was returned and consumed in manufacture, the Tribunal held that the principle requiring reversal on sale/clearance at a price did not apply. The Tribunal therefore rejected the Revenue's contention that mere wheeling out of electricity severs the nexus with manufacture and mandates reversal. [Paras 4, 5, 8, 9]CENVAT credit on the fuel used to generate electricity sent to the grid for synchronisation need not be reversed where the electricity was not sold/cleared at a price but was returned and used in manufacture.Application of Rule 4(5)(a) of the CENVAT Credit Rules, 2004 to job work/synchronisation - no requirement of one to one correlation between input and final product under the CENVAT scheme - Whether sending electricity to the grid for synchronisation can be treated as sending inputs to a job worker under Rule 4(5)(a), thereby preserving entitlement to CENVAT credit when the electricity is received back and used in manufacture - HELD THAT: - The Tribunal examined Rule 2(k) and Rule 4(5)(a) and concluded there is no requirement of a one to one correlation between a particular input and the final product under the CENVAT scheme. Rule 4(5)(a) permits allowance of credit where inputs or capital goods are sent outside the factory for further processing or any other purpose and are thereafter received back. The Tribunal treated the synchronisation arrangement with the grid as analogous to sending inputs to a job worker: the injected electricity (and the fuel used to generate it) was received back and used in manufacture. Reliance was placed on earlier tribunal authority (Sanghi Industries) applying Rule 4(5)(a) in a similar factual matrix. On that basis the Tribunal held that the appellant had substantially complied with the rule and was entitled to the credit. [Paras 10, 11, 12, 13]The electricity sent for synchronisation may be treated as analogous to inputs sent to a job worker under Rule 4(5)(a); where the electricity/fuel is returned and used in manufacture, CENVAT credit is allowable.Final Conclusion: The impugned order disallowing CENVAT credit and imposing penalty was set aside; the appeal is allowed and CENVAT credit claimed for the period 01.01.2005 to 30.06.2005 is restored, the Tribunal holding that no reversal was required where electricity injected for synchronisation was not sold but returned and used in manufacture and that Rule 4(5)(a) permits treatment of such transfer as job work for credit purposes. Issues Involved:1. Eligibility of CENVAT Credit on inputs used for generating electricity sent to the power grid.2. Applicability of Rule 4(5)(a) of the CENVAT Credit Rules, 2004.3. Relevance of the Supreme Court decisions in M/s Maruti Suzuki Ltd and M/s Ultratech Cement Ltd cases.Detailed Analysis:1. Eligibility of CENVAT Credit on Inputs Used for Generating Electricity Sent to the Power Grid:The Appellant, engaged in manufacturing steel products, set up a captive power plant and used part of the generated electricity within the factory while sending a portion to the power grid for synchronization. The electricity sent to the grid was returned to the factory for use in manufacturing. A show cause notice demanded reversal of CENVAT Credit on inputs used for generating electricity sent to the grid, amounting to Rs. 54,38,492.00, along with interest and a penalty of equal amount under Rule 15 of CENVAT Credit Rules, 2004 read with Section 11AC of Central Excise Act, 1944.The Appellant argued that the electricity sent to the power grid was not sold but returned and used in manufacturing, thus not warranting reversal of CENVAT Credit. They cited a previous Tribunal order in their favor and distinguished their case from the Supreme Court decision in M/s Maruti Suzuki Ltd, where excess electricity was sold.The Tribunal found that the electricity sent to the grid was not sold but returned to the factory and used in manufacturing. The power grid charged 10% of the electricity value for synchronization, and the arrangement was to maintain uniform frequency of electricity. The Tribunal concluded that the demand for reversal of CENVAT Credit was unsustainable as the electricity was not sold but used in manufacturing.2. Applicability of Rule 4(5)(a) of the CENVAT Credit Rules, 2004:The Appellant contended that under Rule 4(5)(a), inputs or capital goods sent outside the factory for further processing and returned should be eligible for CENVAT Credit. They argued that the power grid acted as a job worker, and the electricity sent for synchronization and returned fell within the purview of Rule 4(5)(a).The Tribunal agreed with the Appellant, noting that Rule 4(5)(a) allows CENVAT Credit for inputs sent to a job worker and returned to the factory. The electricity sent for synchronization and returned was considered within the scope of Rule 4(5)(a), supporting the Appellant's claim for CENVAT Credit.3. Relevance of the Supreme Court Decisions in M/s Maruti Suzuki Ltd and M/s Ultratech Cement Ltd Cases:The Revenue relied on the Supreme Court decision in M/s Maruti Suzuki Ltd, which held that CENVAT Credit is not admissible for inputs used in generating electricity sold outside the factory. However, the Tribunal distinguished the present case, noting that the electricity was not sold but returned and used in manufacturing.The Tribunal also considered the Supreme Court decision in M/s Ultratech Cement Ltd, which remanded the matter to determine if excess electricity was cleared at a price. In the present case, there was no sale of electricity, and it was returned to the factory for use in manufacturing, making the Supreme Court decisions inapplicable.Conclusion:The Tribunal concluded that the electricity sent to the power grid for synchronization and returned to the factory for use in manufacturing did not warrant reversal of CENVAT Credit. The arrangement was within the scope of Rule 4(5)(a) of the CENVAT Credit Rules, 2004. The impugned order demanding reversal of CENVAT Credit was set aside, and the appeal was allowed with consequential relief.