2022 (7) TMI 1177 - HC - Central Excise

CENVAT Credit - sale of electricity sold outside the factory - liability to pay the amount at 6% when admittedly the respondent has reversed the proportionate credit of inputs and input services attributable to sale of electricity - liability to pay as per Rule 6(3) of the Cenvat Credit Rules - electricity generated from waste gas / tail gas - classifiable under Chapter Heading 27 16 00 00 and whether the same can be said to be exempted goods or not - waste gas or tail gas as obtained from process of manufacture as defined in Section 2 (f) of the Central Excise Act, 1944 - invocation of extended period of limitation - HELD THAT - The decision in GULARIA CHINI MILLS AND OTHERS VERSUS UNION OF INDIA AND OTHERS 2013 (7) TMI 159 - ALLAHABAD HIGH COURT which was affirmed by the Hon ble Supreme Court in UNION OF INDIA VERSUS DSCL SUGAR LTD. 2015 (10) TMI 566 - SUPREME COURT will also aid the case of the assessee. It was held that bagasse was a waste and hence, it was not manufactured of exempted goods and electricity generated from bagasse was neither excisable under Section 2(d) of the Central Excise Act, 1944, nor exempted good under rule 2(d) of the Cenvat Credit Rules 2004 and hence, Rule 6 of the said Rules is not applicable. In the present case it could not be pointed out as to whether any process in respect of Bagasse has been specified either in the Section or in the Chapter notice. In the absence thereof this deeming provision cannot be attracted. Otherwise, it is not in dispute that Bagasse is only an agricultural waste and residue, which itself is not the result of any process. Therefore, it cannot be treated as falling within the definition of Section 2(f) of the Act and the absence of manufacture, there cannot be any excise duty. The Tribunal rightly allowed the appeal filed by the assessee and set aside the order of adjudication - the appeal filed by the revenue is dismissed and the substantial questions of law are answered against the revenue.

Summary

Issues Involved:
1. Liability to pay 6% of the sale value of electricity sold outside the factory.
2. Applicability of Rule 6(3) of the Cenvat Credit Rules.
3. Classification of electricity generated from waste gas/tail gas under Chapter Heading 2716 00 00.
4. Consideration of 'waste gas or tail gas' as a by-product and its transformation into electricity.
5. Invocation of the extended period of limitation due to suppression of material facts by the respondent.

Issue-wise Detailed Analysis:

1. Liability to Pay 6% of the Sale Value of Electricity:
The respondent reversed the proportionate credit of inputs and input services attributable to the sale of electricity. The tribunal noted that the adjudicating authority made a factual error by assuming the production of "coal gas" instead of "waste gas," which is used to generate electricity. The tribunal held that electricity generated from waste gas is not classified under Chapter Heading 2716 00 00 and is neither excisable nor exempted for the purpose of Rule 6 of the Cenvat Credit Rules. Therefore, the demand for 6% of the sale value was not justified.

2. Applicability of Rule 6(3) of the Cenvat Credit Rules:
The tribunal found that the respondent did not follow the procedure for reversing the proportionate credit of inputs and input services used in generating electricity sold outside the factory. However, the tribunal noted that the adjudicating authority's demand based on Rule 6(3) was incorrect, as the electricity generated from waste gas is not considered excisable or exempted goods. The tribunal referred to several decisions, including the case of Gularia Chini Mills, which held that electricity generated from waste products like bagasse is not excisable.

3. Classification of Electricity Generated from Waste Gas:
The tribunal observed that the adjudicating authority's classification of electricity generated from waste gas under Chapter Heading 2716 00 00 was incorrect. The tribunal referenced the decision in Gularia Chini Mills, affirmed by the Supreme Court, which stated that electricity generated from waste products is not classified under Chapter 27 and is not excisable.

4. Consideration of 'Waste Gas or Tail Gas' Transformation:
The tribunal noted that the adjudicating authority failed to consider the respondent's explanation that no "coal gas" is generated, only "waste gas." The tribunal emphasized that the waste gas is used to generate electricity as it cannot be flared into the open air due to pollution concerns. The tribunal concluded that the electricity generated from waste gas is not a manufactured product and thus not subject to excise duty.

5. Invocation of Extended Period of Limitation:
The tribunal agreed with the respondent that the proceedings were barred by limitation. The tribunal noted that the respondent's manufacturing activities were regularly audited by the department and monitored by the State Pollution Control Board, with necessary disclosures made in audited financial statements. The tribunal found no evidence of willful suppression of information by the respondent, and the mere non-compliance with Rule 6(3) procedures did not justify invoking the extended period of limitation.

Conclusion:
The tribunal rightly allowed the respondent's appeal, setting aside the order of adjudication. The revenue's appeal was dismissed, and the substantial questions of law were answered against the revenue.