2008 (6) TMI 198 - AT - Central Excise

Cenvat Credit on Napthas used in generation of electricicy appellant used napthas as input for generation of electricity and availed Cenvat credit. Show Cause notices were issued proposing to disallow Cenvat credit on such quantity of naptha which was used for the purpose of manufacture of electricity sold to their Joint Venture and Vendors in terms of Rule 6(1) of Cenvat Credit Rules, 2002. The Adjudicating Authority disallowed the credit of Rs. 67,71,876/- and Rs. 81,60,990/- and imposed penalty of equal amounts under Rule 13 of Cenvat Credit Rules, 2002 along with interest. Held that on a plain reading of 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 intermediate product. The utilization of inputs in the generation steam or electricity used outside of the factory not being qualified by the phrase within the factory of production - demand of duty alongwith interest are upheld. The penalties are set aside.

Summary

Issues:
Disallowed Cenvat credit on naptha used for electricity generation and sold to joint ventures and vendors.

Analysis:
The appellants, engaged in manufacturing motor vehicle parts, used naptha in electricity generation for captive use and supply to joint ventures and vendors. Disallowed Cenvat credit on naptha used for electricity generation sold to joint ventures and vendors. Adjudicating Authority disallowed credit and imposed penalties under Cenvat Credit Rules, 2002.

The advocate for the appellants argued that as per Rule 2(g) of the Rules, credit cannot be denied as naptha was used for electricity generation within the factory. Cited Tribunal decisions on fuel usage for electricity generation in manufacturing processes. Differentiated the case from a Supreme Court ruling regarding electricity consumption by residential colonies.

The Revenue representative supported the Adjudicating Authority's decision. Referred to a Supreme Court case related to a similar issue. Argued that the Supreme Court ruling on inputs used for electricity generation applies to the present case.

The Tribunal found that the appellants used naptha as fuel for electricity generation within the factory, claiming it as an input under Rule 2(g). However, the credit denial was justified as the electricity generated was sold outside the factory to joint ventures and vendors, making it non-excisable. Cited Supreme Court judgments on the definition of "within the factory of production" and ineligibility of credit for inputs used for electricity consumed by external entities.

Concluding, the Tribunal modified the order, upholding the duty demand with interest but setting aside the penalties. Emphasized the correct disallowance of credit for naptha used in electricity generation sold to joint ventures and vendors, aligning with Supreme Court decisions. Penalty imposition was deemed unnecessary as it involved interpretation of the law.