Cenvat credit on captive power generation allowed only for factory use; wheeled-out electricity needs proportional reversal.

Cenvat credit on common inputs and input services used for captive power generation is available only to the extent the resulting electricity is consumed within the factory for manufacture. Credit attributable to electricity wheeled out or sold outside the factory is not admissible because the nexus with manufacture is broken for that portion. The decision also states that non-compliance with the prescribed Rule 6 mechanism does not, by itself, defeat the substantive entitlement to proportionate reversal. Any demand and penalty must be based on the actual credit relatable to the disputed electricity, not on a flat percentage of the value of wheeled-out electricity; the correct reversable amount must be determined first.

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Issues: (i) Whether Cenvat credit taken on common inputs and input services used for generation of electricity is admissible to the extent electricity is consumed captively and inadmissible to the extent electricity is wheeled out or sold outside the factory; (ii) Whether penalty and the demand quantified by applying a flat percentage on the value of wheeled out electricity could be sustained without determining the correct amount relatable to the credit actually required to be reversed.

Issue (i): Whether Cenvat credit taken on common inputs and input services used for generation of electricity is admissible to the extent electricity is consumed captively and inadmissible to the extent electricity is wheeled out or sold outside the factory.

Analysis: The relevant test is whether the input-use nexus continues with manufacture. Inputs and input services used for captive power generation remain connected with manufacture only to the extent the electricity is used within the factory for production. To the extent electricity is cleared outside the factory for a price, the nexus is broken and credit is not admissible for that portion. The reasoning also accepts that a mere procedural lapse in not following the prescribed Rule 6 mechanism does not, by itself, defeat the substantive entitlement to proportionate reversal.

Conclusion: Credit is admissible for electricity captively consumed, but not for the portion wheeled out or sold outside the factory; the issue is answered partly in favour of the assessee.

Issue (ii): Whether penalty and the demand quantified by applying a flat percentage on the value of wheeled out electricity could be sustained without determining the correct amount relatable to the credit actually required to be reversed.

Analysis: The order did not record a determination of the actual credit amount attributable to the disputed electricity and instead proceeded on a percentage-based computation. As the assessee had already reversed a substantial amount before notice, the correct reversal, if any, had to be ascertained first. In these circumstances, penalty was not to be mechanically upheld and the matter required reconsideration by the Original Authority on the correct quantification.

Conclusion: The demand and penalty could not be finally sustained on the existing computation and the matter required remand for fresh quantification; this issue is in favour of the assessee.

Final Conclusion: The appeal succeeds to the extent that the matter is sent back for fresh determination of the correct reversible credit, and the adjudication based on a flat percentage approach does not survive as final.

Ratio Decidendi: Cenvat credit on inputs and input services used for electricity generation is allowable only to the extent the electricity is captively consumed within the factory, while the portion of electricity wheeled out or sold outside the factory is outside the credit entitlement, and the correct reversal must be determined on that basis rather than by a blanket percentage computation.

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