Cenvat credit on eligible inputs used in generation of electricity

J.K. Manghani

Inputs used in relation to generation of electricity (which is in turn used in manufacture of final products) are eligible inputs for availing the cenvat credit.

The word “input” has been defined under Rule 2(g) of the erstwhile Cenvat Credit Rules, 2002 which were effective up to 09.09.2004 and also in Rule 2(k) of the Cenvat Credit Rules, 2004 which are effective from 10.09.2004.

Both of the above Rules have been notified under Section 37 of the Central Excise Act, 1944.

The Hon’ble Supreme Court of India in the case of Maruti Suzuki Ltd., Vs. Commissioner of Central Excise, Delhi-III [2009(240) E.L.T. 641 (S.C.) has delivered an important judgment analyzing the definition of inputs, both under the erstwhile Rules of 2002 and the present Rules of 2004.

The Hon’ble Apex Court, in order to establish “an input” to be “an eligible input”, has set the following conditions to be satisfied:-

i)       “Such input to be used in or in relation to manufacture of final product, within the factory”;

ii)      “Whether directly or indirectly” and

iii)     “Whether contained in the final product or not”.

Further, it has been held that the expression “used in or in relation to manufacture of final product”, is not a standalone phrase, but to be read in entirety as “used in or in relation to manufacture of final product whether directly or indirectly and whether contained in the final product or not”. The inputs falling in inclusive part must have nexus with manufacture of final product. Functional utility of item would constitute relevant consideration.

The provisions of erstwhile Rule 2 (g) of Cenvat Credit Rules, 2002 and Rule 2(k) of present Rules of 2004, have been analyzed by the Hon’ble Court, dividing the same in 3 parts namely,

i)       Specific Part,

ii)      Inclusive Part and

iii)     Place of use.

The court has also held that all the above 3 parts of the said Rules should be satisfied to make “an input” as “an eligible input” for the purpose of availing Cenvat credit.

The Hon’ble Apex Court while analyzing specific part of the above Rules, has pointed out that goods used in or in relation to manufacture of final product qualify as “inputs”. This presupposes that the element of “manufacture” must be present.

(1)     While analyzing the Specific Part, the Hon’ble Court has referred the following judgments to further explain the said point of view:-

i)        J.K. Cotton Spinning and Weaving Mills Co. Ltd. Vs. S.T.O. reported at 1965(16)STC 563 – In the said case the Apex Court had held that –

The expression “in the manufacture of goods” should normally encompass the entire process carried on by the dealer while converting raw material into finished goods. Further, where any particular process (generation of electricity) is so integrally connected with the ultimate production of goods, that for such process, manufacture of goods would be inexpedient, then, goods required in such process would fall within the expression “in the manufacture of goods”.

ii)       Union Carbide India Ltd Vs. Collector of Central Excise, Calcutta-1 reported at 1996 (86) E.L.T. 613 (Tri) – In the said judgment the Hon’ble Larger Bench of CEGAT observed that a wide impact of the expression “used in relation to manufacture” must be followed in its natural play.

According to the Special Bench of CEGAT – the purpose behind the above expression is to widen the ambit of the definition so as to attract all goods, which do not enter directly or indirectly into the finished product, but are used in any activity concerned with or pertaining to the manufacture of the finished product.

Electricity is an ancillary activity. It is an activity which is anterior to the process of manufacture of the final product. It is on account of the use of the above expression “used in relation to manufacture” that such an activity of electricity generation comes within the ambit of the definition because it is integrally connected with the manufacture of the final product.

iii)      Collector of Central Excise, New Delhi Vs. M/s. Ballarpur Industries Ltd., reported at (1989) 4 SCC 566 – In the said judgment, the difference between the expression “used in manufacture” and “used as input (raw material)” was highlighted. In that judgment, it was held that undoubtedly the said two expressions are distinct and separate, but, when an ancillary process (like electricity generation) aids the making of an end product, then, the ancillary process (like electricity generation) aids the making of an end product, then, the ancillary process gets integrally connected to the end product.

These words “whether directly or indirectly” and “whether contained in the final product or not” indicate the intention of the legislature. What the legislature intends to say is that even if the use of input (like electricity) in the manufacturing process is not direct but indirect still such an item would stand covered by the definition of “input”.

In order to get over this controversy in the above definition of “input” the Legislature has clarified that even if an item is not contained in the final product still it would be classifiable as an “input” under the above definition.

Moreover, the said expression viz, “used in or in relation to the manufacture of the final product” in the specific/substantive part of the definition is so wide that it would cover innumerable items as “input” and to avoid such contingency the Legislature has incorporated in inclusive part after the substantive part qualified by the place of use.

(2)      While analyzing the inclusive part of the definition, the Apex Court has observed that, ‘the words and phrases used in inclusive parts become relevant only when they are read with the expression “used in relation to manufacture of final product” in the substantive/specific part of the definition. In each case it has to be established that inputs mentioned in the inclusive part is “used in or in relation to the manufacture of final product.”

Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression, “used in or in relation to the manufacture” have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product.

Inputs used in generation of electricity is an ancillary activity which is anterior to process of manufacture of final product – the said activity comes within the ambit definition of input, because it is integrally connected with manufacture of final product (Rule 2(g) of Cenvat Credit Rules, 2002 and Rules 2(k) of Cenvat Credit Rules, 2004].

After analyzing the above legal positions, the Court has held as under:-

“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 parts of the manufacturing activity and the “input” used in that electricity generation is an “input used in the manufacture” of final product.

This view is also expressed in para 9 of the judgment of this Court in the case of Collector of Central Excise Vs. Solaris Chemtech Limited reported at 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 Vs. Commissioner of Central Excise, Indore – reported at 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 generation 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”

Conclusion: In short, a manufacturer is entitled to cenvat credit on the eligible inputs used in generation of electricity to the extent to which they are using the generated electricity, within their factory for manufacture of finished products on which excise duty is discharged.