2026 (3) TMI 972 - AT - Central Excise

Proportionate CENVAT credit reversal satisfies Rule 6 obligations and precludes alternate percentage recovery; time bar defeats related demands.

Electricity wheeled out from a co-generation plant qualifies as exempted goods for the purposes of Rule 6, but Rule 6 liability attaches only where common ... CENVAT credit - treatment of electricity generated in the co-generation plant and cleared outside the factory - expression 'exempted goods' under Rule 2(d) - Reversal under Rule 6(3A) satisfies Rule 6 - Denial of the benefit of proportionate reversal on the ground that the option under Rule 6(3A) was not exercised within the prescribed time - demands barred by limitation under Section 11A - extended period not invoked. Electricity cleared outside factory - liability under Rule 6 dependent on use of common inputs or input services - Electricity generated in the co-generation plant and wheeled out to the grid falls within the expression 'exempted goods' but Rule 6 liability arises only where common inputs or input services have been used in the manufacture of both dutiable goods and such exempted electricity. - HELD THAT: - The Tribunal held that electricity is classifiable under Chapter 27 and is exempt from duty and therefore falls within 'exempted goods' under Rule 2(d); however, mere classification does not automatically trigger liability under Rule 6(3). Liability under Rule 6 arises only to the extent CENVAT credit has been availed on common inputs or input services used for both dutiable products and the exempted electricity, and incidental or inevitable by products arising from the manufacturing process are not to be treated as independent products for denying credit benefits. [Paras 8] Electricity cleared outside the factory is exempted goods, but Rule 6 liability arises only if common inputs/input services were used for both dutiable goods and that electricity. Reversal under Rule 6(3A) satisfies Rule 6 - alternative statutory options under Rule 6 - HELD THAT: - In JPP Mills Pvt. Ltd. vs Commissioner of GST & Central Excise, Salem [2019 (1) TMI 54 - CESTAT CHENNAI], the Tribunal held that once the assessee reverses proportionate credit attributable to exempted goods, the requirement of Rule 6 stands satisfied and the department cannot compel the assessee to adopt the option of paying a fixed percentage of the value of exempted goods. Relying on precedents and statutory scheme, the Tribunal held that Rule 6 offers alternative routes and that proportionate reversal in accordance with Rule 6(3A) achieves the object of Rule 6. Once proportionate credit attributable to exempted goods is reversed, a second recovery by demanding 5%/6% of value of exempted goods would produce an excessive recovery and defeat the CENVAT scheme; therefore, such demand is unsustainable on merits. [Paras 9] Proportionate reversal under Rule 6(3A) satisfies the requirements of Rule 6 and precludes a demand under Rule 6(3)(i) for payment of a fixed percentage. Denial of the benefit of proportionate reversal on the ground that the option under Rule 6(3A) was not exercised within the prescribed time. - HELD THAT: - The Tribunal observed that the intimation under Rule 6(3A) facilitates departmental verification but the rule does not make non intimation a ground for automatic denial of the substantive benefit. The records showed that proportionate reversal and intimation (by letters) had been made and the department did not dispute the correctness of the reversal; hence the procedural lapse could not be used to deny the benefit. [Paras 10] Non-intimation within the prescribed time is a procedural defect and does not bar the benefit where proportionate reversal under Rule 6(3A) has been made and is not disputed. Whether the demand raised in the show cause notices is barred by limitation and whether penalties are sustainable - HELD THAT: - The Tribunal applied the law that the normal limitation during the disputed period was one year and that the Finance Act, 2016 extension to two years is not retrospective to revive barred demands. As the extended period was not invoked and there were no allegations of fraud, suppression or wilful misstatement, the demands issued after expiry of the one year limitation are time barred; consequentially, penalties based on those demands cannot be sustained. [Paras 11] The demands are time barred under Section 11A and the penalties imposed are also unsustainable in the absence of fraud or suppression. Final Conclusion: The Tribunal set aside the impugned orders, holding that the appellant's proportionate reversal under Rule 6(3A) complied with Rule 6 and precluded a demand under Rule 6(3)(i), that procedural non intimation did not forfeit the benefit where reversal was effected, and that the show cause notices for March 2015 to March 2016 were time barred under Section 11A, rendering the demands and penalties unsustainable. Issues: (i) Whether electricity generated in a co-generation plant and wheeled out to the grid constitutes exempted goods attracting Rule 6 of the CENVAT Credit Rules, 2004; (ii) Whether reversal of proportionate CENVAT credit under Rule 6(3A) precludes demand for payment of 6% under Rule 6(3)(i); (iii) Whether failure to intimate exercise of option under Rule 6(3A) disentitles the assessee from proportionate reversal; (iv) Whether the demands in the show cause notices dated 27.04.2017 for March 2015 to March 2016 are barred by limitation and whether penalties are sustainable.Issue (i): Whether electricity cleared outside the factory constitutes exempted goods attracting the provisions of Rule 6 of the CENVAT Credit Rules, 2004.Analysis: Electricity is classifiable under Chapter 27 and is exempt from duty and thus falls within the expression 'exempted goods' under Rule 2(d). Liability under Rule 6, however, arises only where common inputs or input services have been used in the manufacture of both dutiable goods and such exempted electricity. Precedents addressing byproducts and incidental outputs inform this analysis.Conclusion: Electricity cleared outside the factory is 'exempted goods' but Rule 6 liability arises only to the extent common inputs or input services were used for both dutiable goods and the exempted electricity.Issue (ii): Whether the appellant, having reversed proportionate CENVAT credit under Rule 6(3A), can still be required to pay 6% of the value of electricity cleared outside the factory under Rule 6(3)(i).Analysis: Judicial precedents establish that reversal of proportionate credit under the statutory formula satisfies the requirements of Rule 6 and that the department cannot insist on the alternate percentage payment where proportionate reversal has been effected. Applying those principles, reversal of credit attributable to common input services achieves the object of Rule 6 and prevents double recovery.Conclusion: Once proportionate credit has been reversed under Rule 6(3A), the assessee cannot be compelled to pay 6% under Rule 6(3)(i); the demand under Rule 6(3)(i) is not sustainable on merits.Issue (iii): Whether non-intimation of exercise of option under Rule 6(3A) would disentitle the appellant from availing proportionate reversal.Analysis: The intimation requirement under Rule 6(3A) is procedural, intended to facilitate departmental verification. Where proportionate reversal has in fact been made and intimated (even if there was some procedural lapse in timing), the substantive condition of the rule is satisfied and procedural lapses cannot be employed to deny substantive benefit in the absence of any dispute on correctness of reversal.Conclusion: Failure to strictly comply with the timing of the intimation is a procedural lapse and does not disentitle the appellant from the benefit of proportionate reversal where reversal has been made and accepted on record.Issue (iv): Whether the demands raised in the show cause notices dated 27.04.2017 are barred by limitation and whether penalties are sustainable.Analysis: For the disputed period March 2015 to March 2016 the normal limitation under Section 11A(1) of the Central Excise Act, 1944 was one year. The show cause notices dated 27.04.2017 were issued beyond that period and the extended period was not invoked nor were there allegations of fraud, suppression, or willful misstatement. Amendments extending limitation from one to two years effected from 14.05.2016 cannot be applied retrospectively to revive barred demands. Penalties dependent on unsustainable demands are therefore also unsustainable.Conclusion: The demands in the show cause notices are time-barred and unsustainable; consequentially, the penalties imposed are also unsustainable and are set aside.Final Conclusion: The appellant has complied with Rule 6 by reversing proportionate CENVAT credit under Rule 6(3A); the demand under Rule 6(3)(i) is unsustainable on merits, the show cause notices are barred by limitation under Section 11A of the Central Excise Act, 1944, and the penalties are set aside. The impugned Orders-in-Original Nos. 31/2017 and 32/2017 dated 30.11.2017 are set aside and the appeals are allowed with consequential relief.Ratio Decidendi: Reversal of proportionate CENVAT credit in accordance with Rule 6(3A) satisfies the obligation under Rule 6 and precludes alternate recovery under Rule 6(3)(i); failure to strictly time intimation under Rule 6(3A) is a procedural lapse that cannot defeat substantive reversal where reversal is made; demands raised beyond the statutory limitation under Section 11A of the Central Excise Act, 1944 without invocation of extended limitation or allegation of fraud are barred.