In the case of M/s JSW Steel Coated Products Ltd. Vs. Commissioner of Central Excise, Thane-II, it was held that CENVAT credit of inputs and input services used for production of electricity captively consumed is allowed. Further no reversal of CENVAT credit is required under Rule 6 of CENVAT credit rules,2004.
Facts of the Case
The appellants, M/s JSW Steel Coated Products Ltd., are manufacturer of excisable goods. The appellants installed a captive power plant in their factory premises and availed credit of capital goods duty. The appellants were producing electricity and the electricity produced in excess to their requirement was wheeled out in the Grid. The appellants were consuming certain inputs and services for the production of electricity. In respect of services consumed in production of electricity, they were taking credit of only that proportion of the Service Tax paid which was the proportion of electricity consumed captively. In other words, if the production of electricity was 100 unit and they were consumed 55 units in their factory and wheeled out the balance 45 unit, they took credit of input services only to the extent of 55 % of duty paid. This credit took, as they did not take at beginning of the month and the same was taken in the end of the month when the electricity consumed and wheeled out was known to them.
The Revenue raised three different issues in respect of the electricity wheeled out. The first issue was that since all the electricity is not consumed captively and a part of it is wheeled out, the appellants are not entitled to capital goods CENVAT Credit. The second issue was that they are not entitled to CENVAT Credit on the input services because the plant was not set up with intention to captive consumption but also to the pre-set mind to sale electricity out of it for commercial consideration. Furthermore, it was alleged that the electricity generated from the plant does not attract Central Excise duty and hence, in terms of provisions of Rule 6(1), credit of Service Tax is not admissible to them. Numerous demands were raised on the second issue and three Orders-in-Original were passed, against which three appeals have been filed. The third issue raised is in respect of the period April, 11 to February, 14 wherein the demand under Rule 6(3)(i) of the Cenvat Credit Rules, 2004 was made alleging that the appellant had not followed the procedure and conditions laid down under Rule 6(3A) of the Cenvat Credit Rules, 2004. It was alleged that the appellant had failed to maintain separate account for input and input services used in the generation of electricity for captive use and for sale, and therefore they were required to pay the amount equal to 5% upto 31.3.2012 and 6% from 1.4.2012 onwards, on the value of electricity sold to MSEB, which was exempted from payment of Central Excise duty.
Contentions of the assessee
The appellant explained in detail how they were taking credit. It was submitted that no credit was taken when the services were received till the amount of electricity consumed captively and sold outside was determined at the end of the month. When the electricity consumed captively and sold at the end of the month was determined, the credit of input services was taken in that proportion. Rule 6 comes into play only when the credit of services is taken in respect of input services consumed for producing exempted goods. Since they were meticulously maintaining the records in that manner and taking credit only to that proportion of input services which were used in electricity consumed captively, Rule 6 does not come into operation. It was submitted that no notice was issued in respect of inputs consumed for manufacture of electricity, for which they had taken credit in the similar manner. They also relied on the decision of Hon’ble Supreme Court in the case of Maruti Suzuki Ltd. – 2009 (240) ELT 641 (SC). The Hon’ble Supreme Court had recognized that the appellants are entitled to avail proportionate credit in respect of inputs used for generation of electricity for captive consumption. There is no requirement under law that credit of capital goods cannot be allowed if the same is used for manufacture of both excisable and non-excisable goods.
Contentions of the Revenue
The Revenue relied on the impugned orders and stated that the demand is correctly upheld.
Held by Hon’ble CESTAT
The Hon’ble CESTAT stated that the capital goods credit is sought to be denied on the ground that the same are used partially for producing electricity which is sold outside. The law is very clear in this regard. It is seen that so long as the goods are used in manufacture of final products or for providing output service they qualify as capital goods. The only restriction to that is provided in Rule 6(4) of Cenvat Credit Rules, 2004 wherein it is stated that: –
“No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.”
It can be seen that in the instant case the Capital Goods are not used exclusively for producing electricity that is wheeled out. It is seen that in the same circumstances, in case of H.E.G. Ltd. – 2012 (275) ELT 315 (Chhatisgarh), the Hon’ble High Court has observed as under: –
“Plain reading of Rule 6(4) of the Rules makes it abundantly clear that Cenvat Credit in respect of capital goods shall not be allowed on capital goods which are used “exclusively” in manufacture of exempted goods. In the instant case, though major portion of the generated electricity from the power plant was sold to MPEB through its grid, however, it cannot be said that capital goods were exclusively used in manufacture of exempted goods (electricity) sold to MPEB as a portion of electricity generated in the power plant is also utilized in manufacture of final products “sponge iron” of the respondent factory, which is leviable to the excise duty and is not exempted goods.
On the basis of aforesaid analysis, we are of the opinion that the Tribunal was justified to hold that respondent was entitled for modvat credit against the capital goods used in the captive power plant of the respondent and Rule 6(4) of the Rules was no bar for denying Cenvat Credit.”
In view of the above, there is no bar on availment of Capital Goods Cenvat Credit in the Instant case.
It is noticed that in respect of other items namely, Sr No. 21, 42, 43, 61, 63, 65, 67 and 53 of the annexure B of SCN, it was observed by the Commissioner in the impugned order that these items cannot be called as capital goods but can be treated as inputs. So long as credit is allowable either as Capital goods or as inputs, the demand cannot be sustained. Tribunal in case of Bhilai Steel Plant – 2010 (261) ELT 612 (Tri-Del) has observed as under: –
“It is also to be noted that the appeal is a continuation of the original proceedings. The order passed by the original authority does not attain finality till the appellate authority disposes of the matter finally. Being so, even assuming that in the matter before adjudicating authority, no claim was made under Rule 57A and the claim was made under Rule 57Q that would not debar the assessee from establishing his claim for the benefit under Rule 57A even at the appellate stage. What is relevant to be seen in such a case is that whether the materials placed on record are sufficient to justify the claim under Rule 57A or not. To shift the claim for such benefit from one rule to anther rule cannot be denied in the absence of statutory bar being prescribed for such entitlement. The stage at which such shift in claim is made is immaterial.”
In view of above the benefit of credit cannot be denied to items namely, Sr No. 21, 42, 43, 61, 63, 65, 67 and 53 of the annexure B.
It has been alleged that since the appellants are using the services for production of electricity, which is an exempted product. It has been alleged that they are not entitled to take credit of the tax paid on input services in terms of Rule 6(1) of the Cenvat Credit Rules, 2004. It is apparent that the appellants are using the said input services for production of electricity which is in turn used for manufacture of the final products which are dutiable. However a certain part of electricity is sold for which they have been availing the benefit of Rule 6(2) of the Cenvat Credit Rules, 2004. They are availing credit of only that proportion of the duty paid, which proportion of the electricity has been used captively in production of dutiable goods. In the case of Maruti Suzuki Ltd. – 2009 (240) ELT 641 (SC), Hon’ble Supreme Court had the occasion to examine the issue. Hon’ble Supreme Court has observed as follows: –
“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 produced 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.”
The Cenvat rules are common for both the inputs and for input services. Thus what the Hon’ble Supreme Court has held in case of inputs will apply to the input services as well. In the instant case they have infact not availed entire credit but only the credit which is admissible to them in terms of Rule 6(2) of the Cenvat Credit Rules, 2004. In view of above we find that there is merit in the appeal filed by the appellants on this count.
The third issue raised concerns the demand of an amount equal to 5% upto 31.3.2012 and 6% from 1.4.2012 onwards, on the value of electricity sold to MSEB, which was exempted from payment of Central Excise duty in terms of rule in terms of rule 6(3)(i) of the Cenvat Credit Rules 2004. Tribunal in the case of MIRC Electronics 2015 (38) STR 199. held as under: –
“On scrutiny of the records it was found that the appellant had not maintained any separate accounts for the services used in respect of manufacturing activity and the trading activity and, therefore, a letter was issued to the appellant asking them how they satisfied the provisions of CENVAT Credit Rules, 2004 (CCR in short). The appellant replied that even though they did not maintain separate accounts at the end of the month, total service tax credit available for the said month was bifurcated in the ratio of turnover for the manufacturing sales and trading sales and service tax credit was taken only of the service tax relating to the manufacturing sales turnover. The department was of the view that in the absence of any maintenance of accounts for the dutiable goods and services, and exempted products and services, the appellant is liable to pay a sum @ 10% (up to 6-7-2009) and thereafter @ 5% on the value of the exempted goods cleared and the same is recoverable under the proviso to Section 11A of the Central Excise Act, read with Rule 14 and Explanation-III to Rule 6A of the CENVAT Credit Rules (CCR), 2004. The department was also of the view that interest on the above amounts were payable by the appellant under Section 11AB and the appellant is also liable to penalty under the provisions of Rule 15 of the CCR, 2004.
Secondly, as per Rule 6(2) maintenance of separate accounts is envisaged only when a manufacturer or provider of output service avails CENVAT credit. In the present case, the appellant has not availed any CENVAT credit at all in respect of input services relating to the traded goods. Therefore, question of maintenance of separate accounts does not arise at all. Consequently provision of sub-rule (3) of the said Rule 6 mandating payment of an amount equal to 10%/5% of the value of the exempted goods and exempted service would also not apply. Even assuming but not admitting that the appellant has availed input service credit on both dutiable/exempted goods and taxable/exempted service, Rule 3A which came into force w.e.f. 1-4-2008 provides for reversal of credit on the input service attributable to exempted goods/services on a proportionate basis based on the turnover. In the present case, the appellant has precisely done that ab initio and has not taken any credit in respect of input services attributable to the traded goods. Calculation done by the appellant has not been disputed by the Revenue and the Revenue has not shown that the credit taken by the appellant in respect of input services in relation to manufactured goods was in excess of what was eligible to be taken. Therefore, in the absence of any evidence led by Revenue proving that the appellant has taken ineligible credit, the question of appellant violating the provisions of Rule 6 of the CCR, 2004 would not arise at all.”
The ratio of this decision is also applicable to the case. The rule 6(3) can be invoked only if it is found that the appellant has failed to follow the previous provisions of the said rule 6 of the Cenvat Credit Rules 2004. In this case the appellants have taken credit only to the extent of credit that is eligible to them as the demands of reversal credit themselves have been set aside. In such circumstances the rule 6(3)(i) of the Cenvat Credit Rules 2004 cannot be invoked. The said rule comes into play only when there is a wrong and excess availment of credit. As the appellant have been taking credit only to the extent eligible to them rule 6(3)(i) of the Cenvat Credit Rules 2004 cannot be invoked. The impugned order is set aside and appeal is allowed.