Proportionate CENVAT credit for captive power plant inputs and capital goods survives where only eligible credit is taken.

CENVAT credit is available on capital goods used in a captive power plant when the plant is used partly for captive consumption in dutiable manufacture and partly for wheeling out electricity, because the restriction turns on exclusive use for exempted goods. Proportionate credit on input services is also admissible where only the share relatable to captive consumption is taken and no excess credit is claimed for electricity sold outside. Rule 6(3)(i) cannot be invoked without proof of ineligible credit actually availed in relation to exempted clearances. On that basis, the denial of credit and reversal demand were set aside.

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Issues: (i) Whether CENVAT credit on capital goods used in a captive power plant was deniable merely because part of the electricity generated was wheeled out and sold; (ii) Whether proportionate CENVAT credit on input services used in generation of electricity was admissible where only the portion relatable to captive consumption was taken; (iii) Whether the demand under Rule 6(3)(i) of the Cenvat Credit Rules, 2004 could be sustained when credit was taken only to the extent eligible and no ineligible credit was shown to have been availed.

Issue (i): Whether CENVAT credit on capital goods used in a captive power plant was deniable merely because part of the electricity generated was wheeled out and sold.

Analysis: Capital goods credit is barred only where the goods are used exclusively in the manufacture of exempted goods. The power plant was used both for generating electricity consumed captively in the manufacture of dutiable final products and for generating electricity wheeled out. On that footing, the goods were not used exclusively for exempted goods, and the restriction in Rule 6(4) did not apply. The conclusion was supported by the principle that the test is exclusive use, not partial or mixed use.

Conclusion: CENVAT credit on the capital goods was admissible and the denial was unsustainable.

Issue (ii): Whether proportionate CENVAT credit on input services used in generation of electricity was admissible where only the portion relatable to captive consumption was taken.

Analysis: The credit taken on input services was restricted to the proportion corresponding to electricity consumed within the factory for dutiable manufacture. The common CENVAT scheme permits such proportionate availment where only part of the electricity generated is used captively and the balance is cleared outside. Since the assessee did not avail full credit on the services attributable to the electricity sold, the objection based on Rule 6(1) could not survive.

Conclusion: Proportionate credit on input services was admissible and the demand was set aside.

Issue (iii): Whether the demand under Rule 6(3)(i) of the Cenvat Credit Rules, 2004 could be sustained when credit was taken only to the extent eligible and no ineligible credit was shown to have been availed.

Analysis: The mechanism under Rule 6(3)(i) is attracted only when the assessee fails to comply with the scheme governing credit on common inputs or input services and is found to have availed credit attributable to exempted clearances. Here, the assessee followed a proportionate method from the outset and the Revenue did not establish excess or wrongful availment of credit. In the absence of ineligible credit, the demand of an amount linked to the value of electricity sold could not be sustained.

Conclusion: The demand under Rule 6(3)(i) was not maintainable.

Final Conclusion: The orders denying credit and raising reversal demands were set aside, and all the appeals were allowed, leaving the assessee entitled to the disputed credits.

Ratio Decidendi: Rule 6 of the Cenvat Credit Rules, 2004 applies only to credit actually availed in relation to exempted clearances, and CENVAT credit cannot be denied where capital goods or input services are used partly for dutiable captive consumption and the credit is confined to the eligible proportion.

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