2018 (9) TMI 822 - HC - Central Excise

Court allows full CENVAT credit for electricity used in captive power plant

The High Court of Rajasthan upheld the Tribunal's decision allowing full CENVAT credit for inputs and input services used in the captive power plant. The ... Cenvat credit on inputs/input services used for generation of electricity for captive consumption - nexus between input/input service and manufacture of final product - treatment of transfers to sister units as captive consumption where there is no sale - reversal on removal under Rule 3(5) of the Cenvat Credit Rules, 2004Cenvat credit on inputs/input services used for generation of electricity for captive consumption - treatment of transfers to sister units as captive consumption where there is no sale - nexus between input/input service and manufacture of final product - Entitlement to Cenvat credit on inputs and input services used in a captive power plant where part of the electricity generated is transferred/wheeled out to sister units - HELD THAT: - The Court considered the question whether Cenvat credit on inputs and input services used in generation of electricity at a captive power plant can be availed in full when a portion of the electricity is transferred to sister units. While recognising the Supreme Court's decision in Maruti Suzuki (which denies credit where electricity is sold to third parties), the Court held that Maruti Suzuki does not apply where the electricity is transferred to other units of the same company without there being a sale. The Court accepted the Tribunal's view and the precedents relied upon which treat such transfers as falling within a captive arrangement: where electricity generation is a captive arrangement made for the manufacturer's own use, the inputs/input services used for generation remain inputs used in or in relation to manufacture and credit is admissible. The Court therefore found no merit in the Department's contention that credit must be denied to the extent electricity is wheeled out to sister concerns when there is no sale, and endorsed the Tribunal's reasoning that denial was unjustified in the factual matrix before it. [Paras 16, 17]Issue answered in favour of the assessee; appeal dismissed.Final Conclusion: The High Court upheld the Tribunal's allowance of Cenvat credit on inputs and input services used in the captive power plant despite part of the electricity being transferred to sister units (where there was no sale), holding that Maruti Suzuki Ltd. is inapplicable to such captive transfers; the departmental appeal is dismissed. Issues Involved:1. Entitlement to full credit of Excise Duty/service tax on input/input services in a captive power plant when part of the power generated is supplied to other plants.Detailed Analysis:Issue 1: Entitlement to Full Credit of Excise Duty/Service Tax on Input/Input ServicesThe primary issue was whether the assessee was entitled to avail full CENVAT credit on input/input services used in their captive power plant when part of the power generated was supplied to other plants.Arguments by Appellant:- The appellant argued that the Tribunal erred in allowing full CENVAT credit for inputs and input services used in the captive power plant as the electricity generated was not entirely used for manufacturing finished goods within the factory but was also supplied to sister concerns.- The appellant cited the definition of 'input' under Rule 2(k) and 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004, emphasizing that inputs and input services should be directly used in the manufacturing process within the factory premises.- The appellant referenced several Supreme Court decisions, including Maruti Suzuki Ltd. vs. CCE, Delhi-III, which held that CENVAT credit is not available for inputs used to generate electricity supplied to other units or sold.Tribunal's Findings:- The Tribunal had allowed full CENVAT credit, reasoning that the inputs and input services were ultimately used in the manufacture of dutiable final products, either by the assessee or their sister concerns.- It was noted that if the assessee had followed the procedure for input service distribution, the credit eligibility for electricity cleared to sister units would not have been questioned.High Court's Observations:- The High Court examined the Tribunal's reliance on the definition of 'input' and 'input service' and previous decisions, including the Maruti Suzuki case.- The Court highlighted that the Supreme Court's judgment in Maruti Suzuki Ltd. clarified that CENVAT credit is only available for inputs used in the generation of electricity to the extent it is used within the factory for manufacturing final products.- The Court noted that the Tribunal's decision was consistent with the principle that electricity generation for captive use forms part of the manufacturing activity, and inputs used in such generation qualify for CENVAT credit.Conclusion:- The High Court upheld the Tribunal's decision, concluding that the captive power plant's electricity used within the factory for manufacturing final products entitles the assessee to full CENVAT credit.- The Court dismissed the appeal, affirming that the Tribunal's view was just and proper, and the issue was resolved in favor of the assessee.Summary:The High Court of Rajasthan upheld the Tribunal's decision allowing full CENVAT credit for inputs and input services used in the captive power plant. The Court concluded that electricity generated and used within the factory for manufacturing final products qualifies for CENVAT credit, even if part of the electricity is supplied to sister concerns. The appeal by the department was dismissed, and the issue was resolved in favor of the assessee.