2024 (3) TMI 1499 - AT - Central Excise

Appeal allows reversal of demand for 6% of electricity value from bagasse under Rule 6(3)(i) CENVAT Credit Rules

CESTAT, Bangalore (AT) allowed the appeal and set aside the impugned order, holding that the department's demand of 6% of the value of electricity ... CENVAT Credit - demand of 6% of the value of the electricity sold, generated out of by-product/waste product, bagasse, u/r 6(3)(i) of the CENVAT Credit Rules, 2004 - HELD THAT:- This Tribunal in the case of Shree Doodhganga Krishna Sahakari Sakkare Karkhane Niyamit [2024 (3) TMI 176 - CESTAT BANGALORE] has considered the issue and taking note of the judgment of the Hon'ble Supreme Court in the case of UOI Vs. DSCL Sugars Ltd. [2015 (10) TMI 566 - SUPREME COURT] and the Board's Circular No. 1084/05/2022-CX dt. 07/07/2022, held that demand of 6% of the value of electricity sold cannot be sustained. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether Rule 6(3)(i) of the CENVAT Credit Rules, 2004 permits the demand of 6% of the value of electricity sold where the electricity is generated from a by-product/waste (bagasse) arising incidentally in the manufacture of dutiable goods. 2. Whether cenvat credit availed on inputs, input services and GTA services used in the manufacture of dutiable goods is liable to reversal under Rule 6(3)(i) when such inputs/input-services relate to generation of electricity from a by-product/waste and a portion of that electricity is sold to external purchasers. 3. Whether reversal already made by the manufacturer/assessee and not disputed by Revenue affects the sustainment of any demand under Rule 6(3)(i). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Rule 6(3)(i) to electricity generated from a by-product/waste (legal framework) Legal framework: Rule 6(3)(i) of the CENVAT Credit Rules, 2004 prescribes, inter alia, conditions for reversal of cenvat credit where inputs/input services are used partly for manufacture of dutiable goods and partly for manufacture of non-taxable or exempt goods/activities; a formulaic reversal of 6% of the value of electricity sold has been applied in practice in cases where electricity generated in a factory is sold to third parties. Precedent treatment: The Court treats prior higher court authority (a Supreme Court decision) and subsequent Tribunal and High Court rulings as binding context. A departmental Board Circular addressing the same factual/legal matrix has also been considered. Interpretation and reasoning: The Court analysed whether the electricity sold was a product of the manufacturing process or instead derived from bagasse, which is generated as a by-product/waste during manufacture of sugar/molasses. It was reasoned that where the fuel (bagasse) used to generate electricity is itself an incidental by-product/waste of the primary manufacturing activity, the electricity produced cannot be treated for the purposes of Rule 6(3)(i) as an independent output triggering the prescriptive 6% reversal. The Court relied on the approach in the higher authority and consistent Tribunal/High Court decisions and the Board Circular to interpret Rule 6(3)(i) as not applicable to electricity generated from such by-products/waste. Ratio vs. Obiter: The holding that Rule 6(3)(i) does not apply to electricity generated out of a manufacturing by-product/waste is treated as ratio where the facts show electricity produced from bagasse incidental to manufacture of dutiable goods. Conclusion: Rule 6(3)(i) cannot be invoked to demand 6% of the value of electricity sold where the electricity is generated from a by-product/waste (bagasse) arising in manufacture of dutiable goods. Issue 2 - Liability to reverse cenvat credit on inputs and input-services where electricity from by-product is partly sold (legal framework) Legal framework: CENVAT Credit Rules allow taking credit on inputs, capital goods and input services used in manufacture of dutiable goods; reversal provisions apply where inputs/input services are used for taxable and non-taxable activities. Rule 6/associated provisions govern proportionate reversal where common inputs/services are used for taxable and non-taxable/chargeable supplies. Precedent treatment: Earlier authorities addressed whether common inputs/services used in manufacture and in generation of electricity (when electricity is sold) attract proportionate reversal. The Court followed the line of authorities holding that where electricity is produced from by-product/waste, the statutory reversal under Rule 6(3)(i) (the 6% demand) is not sustainable. Interpretation and reasoning: The Court distinguished use of common inputs/input services in ordinary cases (where Rule 6 may operate) from the present facts where the fuel was a by-product/waste of the primary manufacturing process. Given that bagasse is generated in the manufacture of sugar/molasses and is used as fuel within the captive plant, the incidental production of electricity does not convert the usage into an activity attracting the 6% imposition. The Court also noted the appellants had reversed the proportionate cenvat credit attributable to common inputs/input services used in generation of electricity and had declared the same to the range superintendent. Ratio vs. Obiter: The conclusion that proportionate reversal already effected by the assessee (and not disputed by Revenue) removes any basis for sustaining a separate Rule 6(3)(i) demand is ratio in relation to appeals where reversal was made; more general observations on treatment of common inputs in different factual matrices are persuasive obiter where not directly tested. Conclusion: Where electricity is generated from a by-product/waste and the assessee has reversed the proportionate cenvat credit attributable to common inputs/input services (and such reversal is not disputed by Revenue), no additional demand under Rule 6(3)(i) for 6% of electricity value can be sustained. Issue 3 - Effect of Revenue not disputing reversal and interplay with earlier authoritative rulings (legal framework) Legal framework: Administrative practice and adjudication require that where reversal of credit has been effected and recorded, any further departmental demand must be founded on legal grounds; precedents and Board guidance inform such assessments. Precedent treatment: The Court relied on Tribunal and High Court decisions and a Board Circular interpreting the scope of Rule 6 in cases involving electricity produced from by-products/waste; these authorities were treated as determinative for the present appeals. Interpretation and reasoning: The Tribunal observed that Revenue did not contest the fact of reversal made by the appellants; combined with the legal position established by higher authority and consistent Tribunal/High Court rulings, the impugned demands could not be maintained. The Court therefore set aside the demands and allowed appeals with consequential reliefs as per law. Ratio vs. Obiter: The determination that the appeals must be allowed where reversal has been effected and Revenue does not dispute it is ratio for the facts before the Tribunal. References to administrative circulars and prior decisions are applied as binding interpretive aids. Conclusion: In the factual matrix where (a) electricity is generated from a manufacturing by-product/waste, (b) the assessee has reversed the proportionate cenvat credit attributable to common inputs/input services, and (c) Revenue does not contest such reversal, any demand of 6% of the value of electricity sold under Rule 6(3)(i) is unsustainable; impugned orders are set aside and appeals allowed with consequential reliefs.