2009 (8) TMI 14 - SC - Central Excise

CENVAT credit on naphtha allowed only for captive power use; no penalty due to interpretation conflicts

SC held that naphtha used to generate electricity qualifies as 'input' only to the extent the resulting electricity is used within the factory for ... Entitlement to CENVAT credit on naphtha used for generating electricity - a part of electricity supplied to its sister units, vendors, joint ventures - Scope of word 'input' under Rule 2(g) - Imposition of penalty - Held That:- Electricity generation is a separate and distinct activity. It is an independent activity. It has its own economics. It does not form part of the process in which 'inputs' are transformed into separate identifiable commodity, though it may stand connected to such processes. It may not have any concern with the manufacture of the finished product. However, it is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression 'used in relation to manufacture' that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product. It may be noted from the CENVAT Credit Rules of 2004 vis-a vis CENVAT Credit Rules of 2002 that the word 'for' in the inclusive part after the words 'steam used' is substituted by the words 'used in or in relation to the manufacture of final products'. In some of the cases in batch before us the show cause notice goes right up to January 2005, hence, CENVAT Credit Rules, 2004 also apply to those cases. In short, an item would fall within the category of 'inputs' as defined only on compliance with all the three parts of the definition clause. We hold that the definition of 'input' brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted is that, in the present case, excess electricity has been cleared by the assessee at the agreed rate from time to time in favour of its joint ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. We are of the view that penalty is not leviable on appellant/assessee, particularly when in large number of other cases, on account of conflict of views expressed by various Tribunals/High Court, the assessees have also succeeded. Hence, although M/s. Maruti Suzuki Ltd. (appellant) has failed in their civil appeals the Department will not impose penalty. Issues: (i) Whether CENVAT credit is admissible on inputs (fuel) used to generate electricity when a portion of the generated electricity is wheeled out/sold outside the factory to joint ventures, vendors or the grid.Analysis: The statutory definition of 'input' contains (i) a specific part requiring goods to be 'used in or in relation to the manufacture of final products whether directly or indirectly', (ii) an inclusive part listing categories (for example goods used as fuel or for generation of electricity or steam) and (iii) a place-of-use qualification requiring such use 'within the factory of production.' All three parts must be satisfied for goods to qualify as eligible inputs. Ancillary activities such as captive electricity generation qualify as part of manufacture only when the process and the use are integrally connected and the electricity is used within the factory for manufacture. Where excess electricity is wheeled out or cleared for a price to third parties (including joint ventures, vendors or the grid), the process-and-use nexus is severed and the place-of-use requirement is not satisfied. Rules concerning CENVAT credit entitlement and reversal (including Rule 3 and Rule 6) operate accordingly, and amendments in the 2004 Rules reiterate the requirement that generation/use be in relation to manufacture within the factory.Conclusion: CENVAT credit on inputs used to generate electricity is admissible only to the extent the produced electricity is used within the factory for manufacture (captive consumption). To the extent excess electricity is wheeled out or sold outside the factory, credit is not admissible and proportionate credit must be reversed.