2016 (6) TMI 402 - AT - Central Excise

Tribunal allows Cenvat credit for electricity used in manufacturing

The Tribunal found in favor of the appellant, allowing their appeals regarding the entitlement to Cenvat credit on input services used in generating ... Eligibility of Cenvat credit on input services - input services used in generation of electricity - clearance of electricity to sister units of the same manufacturer - input service distribution (ISD) procedure - application of Maruti Suzuki Ltd. ratio - reversal of credit attributable to sale of electricity to third party utility companiesEligibility of Cenvat credit on input services - input services used in generation of electricity - clearance of electricity to sister units of the same manufacturer - input service distribution (ISD) procedure - Whether Cenvat credit on input services used in generating electricity is admissible when the electricity is partly cleared to other units of the same manufacturer engaged in production of dutiable goods. - HELD THAT: - The Tribunal accepted that input service credit is admissible where the electricity is used in the manufacture of dutiable final products. The decisive question was whether clearance of electricity to the appellant's sister units (which are also manufacturing dutiable products) defeats credit eligibility. The appellate member found that where all units belong to the same manufacturer and the electricity generated is used in manufacture of dutiable products, denial of credit is not justified. The order notes that, had the appellant followed the ISD procedure, the credit could properly be distributed to the consuming unit or retained by the appellant; the absence of ISD compliance alone cannot be the basis to deny credit in the factual matrix before the Tribunal. On that basis the impugned orders rejecting credit for the portion cleared to sister units were set aside.Credits allowed in respect of input services used for electricity cleared to the appellant's sister units; impugned orders disallowed to that extent.Application of Maruti Suzuki Ltd. ratio - reversal of credit attributable to sale of electricity to third party utility companies - Whether the ratio of Maruti Suzuki Ltd. applies to deny input service credit in the present factual context and treatment of credits attributable to electricity sold to outside utility companies. - HELD THAT: - The Tribunal held that the Supreme Court decision in Maruti Suzuki Ltd. (which concerned sale of electricity to outside parties not engaged in manufacture of excisable goods) was inapposite to the facts where electricity was cleared to the manufacturer's own sister units. The member observed that the revenue relied on Maruti Suzuki incorrectly despite recording factual differences. Separately, the Tribunal noted that input service credit attributable to electricity sold to external utility companies is not available; the appellant had already reversed that portion and did not contest that reversal. Consequently, the Maruti Suzuki ratio was not applied to disallow credits for supplies to sister units, and the denial of such credits was set aside; penalties related to those disallowances were also vacated.Maruti Suzuki ratio held inapplicable to electricity cleared to sister units; credits relating to electricity sold to outside utilities remain non admissible (already reversed by appellant); penalties set aside to the extent credits were allowed.Final Conclusion: Appeals allowed in part: impugned orders set aside insofar as they disallowed Cenvat credit on input services used in generation of electricity cleared to the appellant's sister units (and related penalties vacated); credits attributable to electricity sold to external utilities remain non admissible and have been reversed by the appellant. Issues:- Entitlement to Cenvat credit on input services used in the generation of electricity cleared to sister units engaged in the manufacture of dutiable final products.Analysis:1. The appeals addressed a common issue concerning the entitlement of the appellant to Cenvat credit on input services used in generating electricity cleared to sister units involved in manufacturing dutiable final products. The appellant, engaged in zinc production, availed Cenvat credit on inputs and services, including GTA services for coal/LDO transportation to their power plant. A dispute arose regarding the eligibility of full credit amount due to the sale of electricity to utility companies and sister units. The Revenue demanded recovery of input service credit, leading to multiple show cause notices and penalties imposed upon confirmation of demands by the Commissioner (Appeals), prompting the appellant to file appeals against these decisions.2. The appellant's counsel argued that while they accepted the need to reverse input service credit proportionate to electricity sales to utility companies, they contested the denial of credit for electricity cleared to their other manufacturing units. They highlighted that all units were engaged in producing dutiable final products, justifying the credit's availability for generating electricity used in their plants. The counsel criticized the lower Authorities for misapplying the Supreme Court's decision in Maruti Suzuki Ltd. vs. CCE, Delhi III, emphasizing the procedural aspect of input service distribution and citing relevant tribunal and high court precedents supporting their position.3. The authorized representative for the Revenue reiterated the lower Authorities' stance, emphasizing Rule 2(l) of the Cenvat Credit Rules, 2004, which specifies that input services must be used in manufacturing dutiable final products within the manufacturer's unit to qualify for credit. The contention was that electricity cleared to the appellant's sister units did not contribute to the dutiable final products at the appellant's unit, justifying the denial of credit.4. Upon reviewing the arguments and records, the Tribunal deliberated on whether the appellant could avail credit for input services used in generating electricity cleared to sister units engaged in manufacturing dutiable final products. The Tribunal acknowledged the eligibility of Cenvat credit for power generation as long as the electricity contributed to manufacturing dutiable final products. It noted that the denial of credit hinged on whether the electricity was used within the generation plant or outside by the same manufacturer. Given that the electricity was utilized for dutiable final products across all units owned by the appellant, the Tribunal deemed the denial of credit unjustified. It emphasized that following the input service distribution procedure would have legitimized the credit for electricity cleared to sister units, rendering the impugned orders unsustainable.5. In conclusion, the Tribunal found the impugned orders unsustainable concerning electricity cleared to other units of the appellant, setting them aside along with the imposed penalties. The appeals were allowed in this regard, emphasizing the factual distinctions from the Supreme Court precedent cited and the procedural validity of credit distribution within the appellant's manufacturing units.