2026 (2) TMI 231 - AT - Central Excise

Entitlement to Cenvat credit for electricity supplied to grid: credit denied for exported power, demand and penalties set aside.

Supply of electricity to the grid constituted a sale for consideration; electricity generated using inputs on which Cenvat credit was taken but ... Entitlement to credit on the eligible inputs utilized in the generation of electricity - used in or in relation to manufacture of final products within the factory of production - Res judicata in tax matters - reversal of CENVAT credit for electricity wheeled out/cleared to the grid - sale/supply/barter as transfer of possession for valuable consideration - extended period of limitation and penalty for suppression/fraud - HELD THAT:- A reading of the provisions of the Electricity Act and the correspondence entered in to by the appellants with the HSEB/DHBVNL, gives to understand that the appellants were forbidden to sell the electricity to others. It does not in any way conclude that the supply to grid does not amount to sale under any other Act. We are of the considered opinion that the term ‘sale’ is to be understood in the context of the Central Excise Act or Sale Tax Act, GST Act etc. as applicable to goods. It is not denied that Electricity is goods. As per our discussion as above, transfer of goods for a consideration constitutes a sale. Having found that the supply of the entire electricity generated by the appellant to the grid of HSEB/DHBVNL constitutes a sale, we now turn our attention to the admissibility of Cenvat Credit. We find that the legal position as far as the definition of inputs is concerned, the same was as follows over the years. We find that though the appellants contend that the appellant that the credit has been availed on the goods “used as fuel” “within the factory of production”, there is no denying that the same are not “used in the manufacture of final products”. It is a settled proposition of the scheme of Modvat/Cenvat that the credit is always associated with the goods which suffered duty. Having concluded that the appellants have sold the entire electricity produced by them to the grid and that the electricity produced/ generated by them using inputs on which credit was availed was not utilised by them in the factory for production of excisable goods, we conclude that the appellants are not entitled to the Cenvat credit on the fuel used in the generation of such electricity which was entirely exported/ supplied/ fed to the grid of State Electricity Board, notwithstanding the averment that similar or more quantity of stable power was obtained from the Grid of HSEB/DHBVNL. We are of the considered opinion that the underlying principle enunciated by the Hon’ble Apex Court, in the case of Maruti Suzuki & ors [2009 (8) TMI 14 - SUPREME COURT], is that the inputs should be used in the factory of production. We find that otherwise, Hon’ble Supreme Court could not have held that the appellants therein, are not eligible to avail CENVAT credit, on the inputs contained in the amount of electricity that was transferred/sold to other units, colony or to the grid. Therefore, the only logical conclusion that one can arrive, in view of the judgments mentioned above, is that credit on inputs is available only to the extent the electricity produced and utilized in the factory of production and not on the portion of electricity transferred/sold to the grid. Limitation - HELD THAT:- We find that the appellants submit that the demand in respect of the Show Cause Notice dated 30.12.2003 is time-barred as all the relevant facts were known to the department, and the assessee acted under a bona fide interpretation of the law, the extended limitation cannot be invoked. We are of the considered opinion that there were reasons for the appellants to entertain a bona fide belief. Moreover, we find that no reliable evidence of suppression of facts, willful misstatement, fraud, or collusion with an intent to evade duty, is present in the case. We find that in similar set of circumstances, Hon’ble apex Court, deciding the case of Gujarat Narmada Fertilizers [2009 (8) TMI 15 - SUPREME COURT] remanded the case back to the tribunal holding that litigation on interpretation of CENVAT Credit Rules has arisen on account of various conflicting decisions given by the various Benches of CESTAT, the reason being that the Rules have not been properly drafted. In the circumstances, we are of the view that in this batch of cases no penalty is leviable. Therefore, we conclude that in the present case, the invocation of the extended period of limitation period is not sustainable. Thus, demand raised by Show Cause Notice is set aside; all penalties are also set aside; Rest of the order is upheld. Thus, the appeal is partly allowed. Issues: (i) Whether electricity generated in the captive plant and injected into the State grid (and reconciled/returned) constituted a sale/supply or captive use for purposes of CENVAT credit eligibility; (ii) Whether CENVAT credit on inputs (fuel) used to generate such electricity is admissible where the electricity was exported to the grid; (iii) Whether extended period of limitation and penalties are sustainable.Issue (i): Whether the electricity injected into the grid under the wheeling/synchronization arrangement amounted to sale/supply (including barter/exchange) or constituted captive use within the factory of production.Analysis: The statutory definition of 'sale' under the Central Excise Act requires transfer of possession for cash, deferred payment or other valuable consideration. Supply forms such as barter/exchange constitute transfer for consideration under the GST concept of supply. The factual matrix showed injection of generated unstable electricity into the grid and receipt of usable electricity back, reconciliation and billing by the State utility with differential/wheeling charges, and contractual/feasibility records confirming the generated electricity was unsuitable for direct use. These facts indicate transfer of property in goods for consideration by way of exchange/barter and regular reconciliation and billing by the utility.Conclusion: The electricity injected into the grid under the wheeling arrangement, with reconciliation and consideration (including differential billing and wheeling charges), constituted a sale/supply (including barter/exchange) for purposes of excise/CENVAT law and was not purely captive use within the factory.Issue (ii): Whether CENVAT credit on inputs (fuel) used in generation of electricity is admissible where the generated electricity was exported/supplied to the grid.Analysis: The statutory scheme of Modvat/CENVAT requires that inputs be used 'in or in relation to the manufacture of final products or for any other purpose, within the factory of production' to qualify as eligible inputs. Binding precedents establish that credit is available only to the extent electricity is consumed within the factory for manufacture; credit is not available for the portion of electricity wheeled out/cleared to the grid or sold/transferred outside the factory. The record showed the generated electricity was not used in manufacture within the factory but was exported to the grid; therefore the inputs used for generation of that exported electricity do not meet the statutory requirement for input usage within the factory.Conclusion: CENVAT credit on fuel used to generate electricity that was exported/supplied to the grid is not admissible; credit is available only to the extent electricity is actually used within the factory of production for manufacture.Issue (iii): Whether invocation of the extended period of limitation and imposition of penalties is justified.Analysis: The matter involved interpretation of CENVAT rules with conflicting precedent history, earlier Tribunal decisions in favour of the appellant, and documented disclosures to the department including declarations under Rule 57G and departmental enquiries/audits. There was no reliable evidence of suppression, willful misstatement, fraud or collusion to evade duty. Principles in precedent addressing inconsistent judicial decisions and bona fide belief in law were applicable.Conclusion: Invocation of the extended period of limitation was not sustainable and penalties were not leviable in the absence of suppression/fraud.Final Conclusion: The electricity injected into the grid constituted a supply/sale (including barter/exchange) and consequently CENVAT credit on inputs used for generation of electricity exported to the grid is not admissible; however, the extended limitation and penalties are not sustainable on the facts and law, resulting in partial relief to the appellant.Ratio Decidendi: Inputs used to generate electricity qualify for CENVAT credit only to the extent the generated electricity is used in or in relation to manufacture of final products within the factory of production; electricity exported/ transferred outside the factory (including wheeled-out electricity) is a supply for consideration and disqualifies corresponding input credit for the exported portion.