Case Law Details
Haldia Petrochemicals Limited Vs Commissioner of CGST & Central Excise (CESTAT Kolkata)
CESTAT Kolkata held that naphtha used for generation of electricity which is consumed within the factory of production is eligible for Cenvat Credit.
Facts- M/s. Haldia Petrochemicals Limited (the Appellant) are engaged in the manufacture of petrochemical products. A Show Cause Notice dated 08.04.2011 was issued to the Appellant proposing reversal of Cenvat credit of Rs.9,35,24,895.78, on account of naphtha used for generation of electricity which was used for production purposes in the power plant, by invoking the extended period of limitation. The said Notice was adjudicated by the Commissioner, Haldia vide Order-in-Original dated 17.10.2012, wherein the reversal of Cenvat credit as proposed in the Notice was confirmed along with interest under Rule 14 and Section 11AB. Equivalent penalty was also imposed under Rule 15 read with Section 11AC of the Central Excise Act, 1944. Aggrieved against the impugned order, the Appellant filed the present appeal.
Conclusion- Naphtha used in the power plant to produce electricity which was used in the power plant itself for the production of electricity is an ‘inpu’ within the meaning of rule 2(k) of the 2004 Rules. As held by the Hon’ble Supreme Court, “electricity generation also forms part of the manufacturing activity and the “input” used in that electricity generation is an “input used in the manufacture” of final product”.
Accordingly, we hold that the Appellant is eligible for the Cenvat credit availed on naphtha, which is used for generation of electricity and consumed within the factory of production.
FULL TEXT OF THE CESTAT KOLKATA ORDER
M/s Haldia Petrochemicals Ltd.(The Appellant) are engaged in the manu-facture of petrochemical products. Electricity and steam, essential for the operation of the petrochemical plant were produced in the power plant which was located adjacent to the petrochemical plant within the factory premises of the Appellant. Prior to April 1, 2008, the said power plant belonged to HPL Co-generation Ltd. (“HPLCL”). With effect from April 1, 2008, HPLCL stood amalgamated with the Appellant in terms of an order dated September 22, 2009 passed by the Hon’ble Calcutta High Court.
2. The Appellant supplied naphtha as such or after partial processing (in-ternally known as “CLS”) to the power plant for conversion into steam and electricity which were re-turned to the Appellant. A small quantity of such electricity was used by the power plant for its adminis-trative operations as also for its production operations. Prior to becoming owner of the power plant with effect from April 1, 2008, the Appellant paid a conversion charge to HPLCL for such job work.
3. The Appellant took credit of the duty paid on naphtha which was sent to the power plant for production of electricity and steam. The Appellant reversed proportionate credit in respect of naphtha to the extent –
(i) electricity was used in the power plant for its admin-istrative operations,
(ii) electricity was supplied to a company called Praxair India Ltd. which used it to manufacture and supply liquid nitrogen to the appellant, and
(iii) Electricity was sent to the housing colony of its employees owned by a 100% subsidiary named Haldia Riverside Estates Ltd.
4. The Appellant used to submit details and working in respect of such re-versal regularly to their jurisdictional authorities. The details and working submitted by the Appellant included separate details of –
(i) electricity consumed in the power plant for its ad-ministrative operations,
(ii) electricity consumed in the power plant for its pro-duction operations,
(iii) electricity supplied to Praxair Ltd., and
(iv) Electricity supplied to Haldia Riverside Estates Ltd.
5. The Appellant reversed the credit on naphtha only to the extent electric-ity that was used for the purposes (i), (iii) and (iv) above and that no reversal of credit was made with reference to the electricity used in the power plant for its production purposes.
6. Production in the petrochemical complex of the Appellant commenced in the year 2000. For the period November 2000 to October 2002, proceedings were initiated by the Central Excise Authorities seeking to deny credit in respect of naphtha supplied as such or after partial processing to HPLCL by way of job work for generation of steam and electricity which were returned back to the Appellant’s factory for the manufacture of petrochemical products. Upon consideration of the definition of “input” and the provisions of rules 57AB and 57AC of the Central Excise Rules, 1944 and rules 3 and 4 of the Cenvat Credit Rules, 2001, the Tribunal passed the following decision reported in 2006 (197) ELT 97 (Tri-Del.) [Haldia Petrochemicals Ltd. v Commissioner] :-
(i) The definition of “input” specifically covered inputs used for generation of electricity or steam used for manufacture of final products or for other purpose within the factory of production.
(ii) The power plant was a job worker because the raw materials were supplied by the appellant free of charge for doing certain operations and intermediate products so produced were returned to the petrochemical complex of the appellant against payment of conversion charges. The generation of electricity or steam as intermediate products fell within the scope of the expressions “further processing” and “any other purpose” mentioned in rule 4(5)(a) and amounted to job work.
(iii) That the inputs sent for job work lost their original character and were converted into energy in the form of electricity did not take them out of the purview of rule 4(5)(a). It cannot be insisted that the same articles should be returned by the job worker after processing. The job work may result in intermediate goods which may be not excisable or otherwise ex-empt. Cenvat credit was available even if the identity of the input was lost when the job worker re-turned the goods after further processing.
(iv) Credit was admissible whether inputs were physi-cally present in the finished excisable goods or not so long such inputs were used in or in relation to the manufacture of finished excisable goods.
7. The Tribunal, thus held that the Appellant was entitled to take cenvat credit of the duty paid on naphtha sent as such or after being partially processed to the power plant for generation of steam or electricity which was sent to the petrochemical complex of the Appellant for use in or in relation to the manufacture of final products under rule 57AC and rule 4(5)(a). It was also held that no facts were suppressed and the extended period of limitation cannot be invoked. It was further held that since the demand for duty was unsustainable, no penalty can be imposed and that even oth-erwise, the case involved a question of interpretation of law.
8. The dispute involved herein for the period April 2006 to January 2011 is as regards the Appellant’s eligibility to proportionate credit in respect of naphtha used for generation of electricity to the extent such electricity was used for production purposes in the power plant i.e. to run the power plant itself.
9. A Show Cause Notice dated 08.04.2011 was issued to the Appellant proposing reversal of Cenvat credit of Rs.9,35,24,895.78, on account of naphtha used for generation of electricity which was used for production purposes in the power plant, by invoking the extended period of limitation. The said Notice was adjudicated by the Commissioner, Haldia vide Order-in-Original dated 17.10.2012, wherein the reversal of Cenvat credit as proposed in the Notice was confirmed along with interest under Rule 14 and Section 11AB. Equivalent penalty was also imposed under Rule 15 read with Section 11AC of the Central Excise Act, 1944. Aggrieved against the impugned order, the Appellant filed the present appeal.
10. In their grounds of appeal, the Appellant submitted that in the im-pugned order, the Commissioner has confirmed the demand by holding that credit on naphtha used to generate electricity which was consumed to run the power plant was not admissible as it was not related to the manufacturing activities of the Appellant. The plea of limitation was rejected on the ground that reversal of Cenvat credit was shown in a consolidated manner and it was not possible for the depart-mental officers to ascertain whether any credit was reversed on naphtha used for running the captive power plant or not. The reported decision of the Tribunal in the Appellant’s own case was also held to be not relevant since during the material period the Appellant also sent electricity to its housing colony (Haldia Riverside Estates Ltd.) and to Praxair India Ltd. and electricity was also used in the captive power plant for its administrative purposes. It was further held that inputs consumed by the captive power plant for running the plant were not returned to the Appellant and as such duty was payable on such quantity of the input naphtha which was not received back by the appellant under Rule 4(5)(a). The Ap-pellant’s contention with regard to mistake in the demand for 2009-10 was also rejected. Thus, Cenvat credit of Rs.9,35,24,895.78 was demanded with interest under Rule 14 and Section 11AB. Equivalent penalty was imposed under Rule 15 read with Section 11AC.
10. During the material period, the provisions of the Cenvat Credit Rules, 2004 (“the 2004 Rules”) were in force. “Input” was defined in rule 2(k) of the 2004 Rules as follows:-
‘(k) “input” means—
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manu-facture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service.
Explanation 1.—The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any pur-pose whatsoever.
Explanation 2.—Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of founda-tion or making of structures for support of capital goods;’
(emphasis added)
11. According to the above definition, all goods used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not were “inputs”. Further, goods used for generation of electricity or steam used in or in re-lation to manufacture of final products or for any other purpose within the factory of production were also “inputs”. As per the aforesaid definition, there can be no doubt that naphtha used for generation of electricity or steam used in or in relation to the manufacture of final products within the factory of pro-duction is “input” in respect of which Cenvat credit was admissible in terms of Rule 3 of the Cenvat Credit Rules..
12. In Maruti Suzuki Ltd. v Commissioner, 2009 (240) ELT 641 (SC), the Hon’ble Supreme Court while considering the definition of “input” in rule 2(g) of the Cenvat Credit Rules, 2002, the material part of which was the same as rule 2(k) of the 2004 Rules, observed as under:-
19. The question which still remains to be answered is : whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gives it to the grid for distribution? In the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) E.L.T. 444 (S.C.) the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own eco-nomics. Applying the said test, we hold that when the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the “input” used in that electricity generation is an “input used in the manufacture” of final product. However, to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale) the “process and the use test” fails. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that electricity generated is “used in or in relation to the manufacture of final product, within the factory”. Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures, vendors, grid etc. would not be admissible for CENVAT credit as such wheeled out electricity, cleared for a price, would not fall within the definition of “input” in Rule 2(g) of the CENVAT Credit Rules, 2002. This view is also expressed in para 9 of the judgment of this Court in the case of Collector of Central Excise v. Solaris Chemtech Limited – 2007 (214) E.L.T. 481 (S.C.). Further, our view is supported by the observations of this Court in the case of Vikram Cement v. Commnr. of Central Excise, Indore – 2006 (194) E.L.T. 3 (S.C.) which is quoted below :-
“It appears to us on a plain reading of the clause that the phrase “within the factory of production” means only such generation of electricity or steam which is used within the factory would qualify as an immediate product. The utilization of inputs in the genera-tion of steam or electricity not being qualified by the phrase “within the factory of production” could be outside the factory. Therefore, whatever goes into generation of electricity or steam which is used within the factory would be an input for the purposes of obtaining credit on the duty payable thereon.”
20. To sum up, we hold that the definition of “input” brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted is that, in the present case, excess electricity has been cleared by the assessee at the agreed rate from time to time in favour of its joint ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the pro-duced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price.
(Emphasis added)
13. Having regard to the ratio of the said judgment of the Hon’ble Su-preme Court, it is indisputable that naphtha used in the power plant to produce electricity which was used in the power plant itself for the production of electricity is an ‘inpu’ within the meaning of rule 2(k) of the 2004 Rules. As held by the Hon’ble Supreme Court, “electricity generation also forms part of the manufacturing activity and the “input” used in that electricity generation is an “input used in the manu-facture” of final product”.
14. The Appellant also placed their reliance on the following decisions:-
(a) Collector v Solaris Chemtech Ltd., 2007 (214) ELT 481 (SC).
The Hon’ble Supreme Court held that Modvat credit under Rule 57A was admissible in respect of low sulphur heavy stock used as fuel for generating electric-ity which was captively consumed for the production of caustic soda and cement. It is pertinent to men-tion that in the decision reported in 2006 (197) ELT 97, the Tribunal relied upon the decision of the Larg-er Bench in Ballarpur Industries Ltd. v Collector, 2000 (116) ELT 312 (Tribunal). The said Larger Bench decision was upheld by the Hon’ble Supreme Court in Collector v. Solaris Chemtech Limited, 2007 (214) ELT 481 (SC).
(b) Hindustan Petroleum Corporation Ltd. v Commis-sioner, 2000 (124) ELT 323 (Tribunal).
In the said case, the Tribunal held that naphtha used for the production of electricity and steam which were used for refining of petroleum crude was used in the manufacture of the final products.
15. In view of the above discussion and the decisions of the Hon’ble Su-preme Court and the decision in Appellant’s own case for the past period, they contended that the elec-tricity used to run the power plant itself was an ‘input’ and the findings of the Commissioner in the im-pugned order is not sustainable. Accordingly, they prayed for setting aside the impugned order.
16. The Ld. A.R. reiterated the findings in the impugned order.
17. Heard both sides and perused the Appeal records.
18. We observe that there are two periods involved in the present appeal. we will discuss the issue for each of the period separately.
PERIOD FROM APRIL 1, 2008 to JANUARY 31, 2011
19. HPLCL was amalgamated with the Appellant with effect from April 1, 2008 and the power plant within the appellant’s petrochemical complex became part of its property. The Appellant’s excise registration was amended to include the activities of the power plant. As such, during the period April 1, 2008 to January 31, 2011, naphtha was used within the factory of production for the generation of electricity which was used in the manufacture of final products. As held by the Hon’ble Supreme Court in the case of Maruti Suzuki Ltd. v Commissioner, reported in 2009 (240) ELT 641 (SC) and by the Tribunal in Appellant’s own case, the naphtha used for generation of electricity, which is consumed within the factory of production is an eligible ‘input’ . Accordingly, we hold that the Appellant is eligible for the Cenvat credit availed on naphtha, which is used for generation of electricity and consumed within the factory of production.
PERIOD APRIL 1, 2006 to MARCH 31, 2008
20. We observe that during the period from April 1, 2006 to March 31, 2008, when the power plant belonged to HPLCL, it was covered by the job work arrangement under rule 4(5)(a) of the 2004 Rules, which reads as follows:-
“(a) The CENVAT credit shall be allowed even if any in-puts or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning, or for the manufacture of intermediate goods neces-sary for the manufacture of final products or any other purpose, and it is established from the rec-ords, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CEN-VAT credit or otherwise, but the manufacturer or provider of output service can take the CENVAT credit again when the inputs or capital goods are received back in his factory or in the premises of the provider of output service.”
(emphasis added)
21. The above provision permitted inputs to be sent to the job worker as such or after being partially processed, for further processing or for the manufacture of intermediate goods necessary for the manufacture of the final products or any other purpose. We observe that the reported decision in the Appellant’s case was rendered with respect to the provisions of Rule 4(5)(a) of the Cenvat Credit Rules, 2002. The Tribunal in the Appellant’s own case has held that it was permissible to send naphtha to HPLCL for manufacture of intermediate products, namely, electricity and steam which were used by the Appellant for the manufacture of their final products. The reported decision in the Appellant’s case was rendered on January 28, 2005. The provisions of Rule 4(5)(a) of the Cenvat Credit Rules, 2004 were amended by Notification No. 27/2005-CE (NT) dated May 16, 2005 to specifi-cally cover the sending of inputs to a job worker for the manufacture of intermediate goods necessary for the manufacture of final products.
22. In view of the above cited decisions, we observe that the legal position of the issue is very clear . However, the impugned order has held that Cenvat credit was not admissible in respect of naphtha used to produce electricity which was used for production purposes in the power plant itself, on a totally different ground. The Commissioner sought to distinguish the reported decision in Appellant’s own case on the ground that in the instant case electricity was also sent to the housing colony and Praxair India Ltd. and was also used in the power plant for administrative purposes. We ob-serve that this was also the case during the period involved in the reported decision. During the earlier period also, the Appellant had reversed the proportionate Cenvat credit in respect of naphtha referable to electricity so used and such use of electricity cannot be a reason for not following the reported deci-sion in Appellant’s own case,.
23. The other aspect raised by the Commissioner is that naphtha to the extent consumed in the power plant for the running of the plant was not returned to the Appellant and as such duty was payable on such quantity of naphtha which was not received back by the Appel-lant.
24. We observe that Rule 4(5)(a) provides that the goods should be re-ceived back in the factory within the specified period. If the inputs are not received back within such pe-riod, the manufacturer shall pay an amount equivalent to the Cenvat credit attributable to such input. The manufacturer can take Cenvat credit again when the inputs are received back in his factory. We ob-serve that the stipulation regarding return of goods must not be read divorced from the context in which such stipulation was made. The requirement to reverse Cenvat credit in Rule 4(5)(a) can apply only in a case where the inputs sent for job work still remains with the job worker. In such a case, the Appellant has to reverse the credit and take it back when the intermediate goods are received. The stipu-lation regarding reversal would not apply when the inputs have been totally used up by the job worker and the intermediate goods manufactured out of the same have been sent back to the Appellant in the form of electricity generated. Thus, we hold that the grounds raised by the Commissioner in the im-pugned order to deny the credit availed on naphtha sent for job work for generation of electricity is not tenable.
25. The Appellant also raised the ground of limitation. They contended that the Show Cause Notice dated 08.04.2011 was barred by limitation for the period up to February, 2010 inasmuch as the extended period could not have been invoked. We observe that there in merit in the contention of the Appellant. They have been regularly reversing proportionate credit and submitting details and workings in that behalf to the jurisdictional authorities. According to the Commissioner, the Appellant had shown Cenvat credit reversal in a consolidated manner and as such it was not possible for the departmental officers to ascertain whether any Cenvat credit was reversed on the naphtha used for running the captive power plant or not. We observe that the said finding of the Commissioner is ex facie contrary to the contents of the Appellant’s communications to the Department. A perusal of the copy of working details relating to reversal of credit for the months of January 2005 and February 2005 sub-mitted by the Appellant to the Superintendent of Central Excise vide letter dated April 28, 2005, indicate that the Appellant has separately given the bifurcation of the quantum of electricity consumed in the power plant for its production operations . Accordingly, we hold that grounds raised in the impugned order for invoking extended period not tenable. As there is no suppression of fact involved and the en-tire issue was within the knowledge of the department, we hold that the demand confirmed in the im-pugned order is not sustainable on the ground of limitation also.
26. In view of the above discussion and the decisions of the Hon’ble Su-preme Court and decision of the Tribunal in Appellant’s own case, we hold that the demand confirmed in the impugned order is not sustainable and accordingly we set aside the same. As the demand itself is not sustainable, the question of demanding interest and imposing penalty does not arise.
27. In view of the above discussion, we set aside the impugned order on merit as well as on limitation and allow the appeal filed by the Appellant.
(Pronounced in the open court on…30.08.2023.…)
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