Introduction: The Madras High Court’s recent ruling in India Cement Limited v. Commissioner of Customs has significant implications for Cenvat credit concerning electricity supplied to sister units. This article delves into the case, its background, and the court’s decisive stance.
The Hon’ble Madras High Court in the case of India Cement Limited v. Commissioner of Customs [C.M.A.(MD) Nos.910 to 914 of 2018 dated January 30, 2024] allowed the appeal filed by the Appellant wherein it was held that the electricity was not sold but only supplied to sister units, all of which were involved in manufacturing of the final product. Therefore, electricity used for manufacturing the final product qualifies as an ‘input’. Further, there is a substantial cost in the setting up of a Captive Power Plant for which the benefit must be provided to the Appellant as a whole, including the sister concerns to which supply is made.
Facts
India Cement Limited (“the Petitioner”) was engaged in the manufacturing of cement under the provisions of the Central Excise Act, 1985 (“the CE Act”). It had set up a Captive Power Plant (“CPP”) within its factory premises. The Appellant had two other factories where cement was manufactured. They entered into an agreement with the Tamil Nadu Generation and Distribution Corporation Limited (“TANGEDCO”) to wheel out a portion of the electricity to sister companies. The drawal was not for cost and no consideration was received by the Appellant for the same. The Appellant had imported coal for the generation of electricity in the CPP availing Central Value Added Tax (“CENVAT”) credit of Countervailing Duty (“CVD”) on such imports. The span period of the import was September 2012 to May 2013.
The Revenue Department (“Respondent”) issued a Show Cause Notice dated September 30, 2013 (“the Impugned SCN”) on the ground that no statement of accounts was maintained for receipt and consumption of coal for the production of electricity. Further, the quantum of power wheeled out does not fall within the definition of ‘input service’ under Rule 2(k) and Rule 2(i) of the CENVAT Credit Rules, 2002 (“the CENVAT Credit Rules”) and is in contravention of Rues 6(1), 6(2) and 6(3) of the CENVAT Credit Rules and proposed demand of duty, interest, and penalty.
Consequent to the Impugned Notice an Order-in-Original dated December 08, 2014 was passed wherein the issues framed were:
a. Whether the Petitioner is entitled to the full credit of duty on inputs and input services used for the generation of electricity at their CPP for distribution to the sister units?
b. Whether the Petitioner is liable to pay an amount equal to 6% of the value of electricity wheeled out to the grid of TANGEDCO in terms of rule 6(3)(i) of the CENVAT Credit Rules?
Parallel with these proceedings, the Appellant had sought a refund of the credit reversed for the periods (i) September 2012 to May 2013 (ii) June 2013 to November 2013 (iii) December 2013 to October 2014 (iv) November 2014 to July 2015 (v) August 2015 to January 2016. The Court rejected the Refund of the credit. An appeal was filed before the Customs, Excise & Service Tax Appellate Tribunal (“CESTAT”) for such reversal which was rejected vide Order dated February 28, 2018 (“the Impugned Order”).
Hence, aggrieved the Impugned Order, an appeal was filed by the Appellant.
Issue:
Whether CENVAT Credit is allowed if inputs are wheeled out to the sister company?
Held:
The Hon’ble Madras High Court in C.M.A.(MD) Nos.910 to 914 of 2018 dated January 30, 2024 in held as under:
- Noted that, the definition of ‘input’ under Rule 2(g) of the CENVAT Credit Rules, contains a clear mandate that inputs must be consumed within the factory of production/generation. However, in the current case, the period in question is September, 2012 to May, 2013 to which the substituted definition of ‘input’ would apply.
- Observed that, Under the substituted Rules however, inputs have been categorized into four categories:
i. goods used ‘in the factory’ by the manufacturer of the final product
ii. all goods including accessories cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products.
iii. all goods used for the generation of electricity or steam for captive use and
iv. all goods used for providing any output service.
The distinction has been envisaged between the goods used ‘in the factory’ by the ‘manufacturer of the final product’ and the goods used for ‘generation of power’. While the former insists that the goods must be used ‘in the factory’, there is no stipulation of place as regards the goods in clause (iii). Therefore, the electricity captively generated is an input, wherever used by the Appellant. Further, the use of the term ‘captive’ is a qualification of the location where it is generated and not of the location where it is used.
- Relied on, the case of Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi [2009 (240) ELT 641 (SC)] where interpretation of the term ‘input’ in regard to production during the period July, 2002 and December, 2002. The definition of ‘input’ considered was with reference to the definition that was applicable then and with reference to transactions at the relevant point in time. However, the definition of ‘input’ stood substituted with effect from April 01, 2011 vide Notification No. 03/2011-C.E.(N.T), dated March 01, 2011, and was discussed as follows:
a. The first component is related to the description of the goods that would qualify as ‘input’ and is wide and inclusive.
b. The second component relates to the use of those inputs as aforesaid in manufacturing.
c. The dispute arises from the reference to ‘place of use’.
- Observed that, the fact that the power in this case has not been sold for consideration and has only been shared with the sister units will be a relevant consideration.
- Held that, there is a substantial cost in the setting up of a CPP. Further, the object of the substitution is itself that such expenditure must go to benefit the Appellant as a whole, including the sister concerns to which supply is made. Hence, the Appeal was allowed.
Conclusion: The Madras High Court, in its ruling, recognized the unique circumstances of electricity supply within sister concerns and allowed Cenvat credit. The decision clarifies the interpretation of ‘input’ in the context of power generation, emphasizing the broader objective of benefiting the entire entity. This judgment sets a precedent for similar cases and underscores the importance of considering the specific nature of inputs and their utilization within related entities.
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