CENVAT credit for windmill maintenance services affirmed; re-credit upheld and SCN proceedings rightly dropped, demand dismissed

CENVAT credit for service tax on maintenance and repair of windmills located outside factory premises is admissible because such services bear an integral nexus to manufacturing activity, and denial based on geographical distance or wheeling of electricity through the grid does not sever that nexus; consequence: credit is permitted. Re-credit taken in January 2017 is valid where credit was earlier reversed under protest and the taxpayer subsequently prevailed, restoring the credit automatically; consequence: re-credit upheld. Continuation of show-cause proceedings was unnecessary once identical legal position was settled in favour of the assessee; consequence: demand, interest and penalty set aside.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether CENVAT credit is admissible under Rule 2(l) of the CENVAT Credit Rules, 2004 on service tax paid for maintenance and repair of windmills located outside the factory premises, where the electricity generated is wheeled through the State grid and equivalent units are consumed in manufacture.

(ii) Whether suo motu re-credit taken in January 2017 of CENVAT credit earlier reversed under protest is legally sustainable when the substantive dispute on eligibility of such credit has been decided in favour of the assessee and there was no stay of the appellate order.

(iii) Whether, in view of binding precedent settling the credit entitlement, the adjudicating authority was justified in dropping the demand, and consequently whether interest and penalty proposals could survive.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Admissibility of credit on maintenance/repair services for off-site windmills

Legal framework: The Court examined Rule 2(l) of the CENVAT Credit Rules, 2004 defining "input service", which includes services used "directly or indirectly, in or in relation to manufacture".

Interpretation and reasoning: The Court rejected the Department's objection based on geographical distance of the windmills and the fact that electricity is first fed into the grid. It accepted that Rule 2(l) does not impose a condition that the input service must be received within factory premises. The Court applied the principle that inputs/services need not be used within the factory so long as they are integrally connected with manufacturing activity. It also held that wheeling through the electricity board grid does not sever nexus when equivalent electricity is drawn and used in the manufacture, and the fact of such equivalent consumption was undisputed.

Conclusions: Credit of service tax paid on maintenance and repair of windmills located outside the factory premises is admissible as "input service" under Rule 2(l) of the CENVAT Credit Rules, 2004, notwithstanding grid wheeling of the generated electricity.

Issue (ii): Validity of suo motu re-credit of amounts earlier reversed under protest

Interpretation and reasoning: The Court found that the assessee had reversed the credit under protest during pendency of litigation, and that once the Tribunal decided the eligibility issue in favour of the assessee, the right to restoration/re-credit accrued as a natural consequence. It held that restoration follows when reversal was under protest and the assessee succeeds on merits, and that pendency of departmental appeal does not dilute the binding nature of the Tribunal's order in the absence of any stay.

Conclusions: The suo motu re-credit taken in January 2017 of credit earlier reversed under protest was held lawful and sustainable on merits.

Issue (iii): Propriety of dropping the demand; effect on interest and penalty

Interpretation and reasoning: The Court held that the adjudicating authority was justified in relying on binding decisions to drop proceedings, and that quasi-judicial authorities are bound by appellate decisions and cannot insist on "independent findings" to take a contrary view once the legal issue is settled. Applying the settled position that such windmill-related maintenance services qualify as input services where the electricity forms part of the manufacturing unit's energy requirement and grid wheeling does not break nexus, the Court found continuation of the recovery proceedings to be futile.

Conclusions: Dropping of the demand was upheld. Since the credit itself was found admissible, recovery did not arise; consequently, interest under Rule 14 and penalty under Rule 15 read with Section 11AC also failed and were held unsustainable.

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