2025 (4) TMI 369 - HC - Central Excise

CENVAT Credit for the capital goods used in establishing a captive power plant of the respondent - delay in adjudication of SCN - HELD THAT - It is a settled legal proposition that the Revenue cannot improve their case beyond what has been shown in their show cause notices. Umpteen number of decisions have been rendered that the Revenue must confine with the content of the show cause notice as the show cause notice is the basis based on which only adjudication process has to go on and to be decided. The Adjudicating Authority in the case of M/s.EID Parry (India) Ltd. has stated that the User Test theory propounded by the Hon ble Supreme Court in the case of Rajasthan Spinning and Weaving Mills Ltd. 2010 (7) TMI 12 - SUPREME COURT to satisfy that the materials components have been used in the captive power plant was applied and therefore the Adjudicating Authority before whom infact the Jurisdiction Range Officer had filed Verification Report dated 31.03.2023 after conducting the verification and inspection by the Chartered Engineer and thereafter has allowed the case of the M/s.EID Parry (India) Ltd. Even in Jawahar Mills Ltd. 2001 (7) TMI 118 - SUPREME COURT case this kind of User Test Principle by requiring a User Test Certificate as a mandatory one before the Adjudication has not been propounded. What is the case of the Revenue right from the beginning is the matter. As the case of the Revenue should emanate from the show cause notice where what was the stand that has been taken by the Revenue that shall be taken into account. The case of the Revenue all through has been whether the goods utilised or used by the assessee are the capital goods or not and if they are capital goods whether the assessee would be entitled to avail the CENVAT Credit or not are the only question to be answered by the Adjudicating Authority in every such case - Therefore based on the facts that has been emanated from the show cause notice which are the basic content of the Revenue applying the principle of Jawahar Mills Ltd. case that would not advance the case of the Revenue instead that would advance the case of the assessee. The show cause notice dated 16.06.2009 having been perused the relevant portions have already been extracted herein above where it is the definite case of the Revenue that the assessee had set up a co-generation plant in their factory premises. During the course of audit of the records and accounts maintained by the assessee it was noticed that they have availed CENVAT Credit on capital goods used in co-generation plant as detailed below. By stating this eight items have been mentioned as capital goods which had been used in co-generation plant. The only reason for issuing these show cause notices by the Revenue is that in the co-generation plant capital goods were used for which CENVAT Credit was availed however the co-generation plant generates electricity which is an exempted product - merely because in respect of some other assessees such a User Test Certificate was sought for or produced voluntarily or the User Test Theory has been adopted by the Adjudicating Authority in each and every case such an User Test Theory need not be adopted as that kind of proposition has not been propounded in those two cases i.e. in Jawahar Mills Ltd. case and Rajasthan Spinning and Weaving Mills Ltd. case. There are no hesitation to hold that apart from the reason that has been given by the learned Judge for the reasons and discussions herein above made the show cause notices which were under challenge before the writ court cannot be adjudicated merely on the ground that the User Test Certificate has not been produced by the assessee. Conclusion - i) The Revenue s case must be clearly articulated in the show cause notices and cannot be expanded during adjudication. ii) The show cause notices could not be sustained for adjudication on the basis of the reasons originally cited by the Revenue. All these writ appeals are failed therefore they are liable to be dismissed. As a result of which all these writ appeals are dismissed.

Summary

The core issues addressed in this judgment revolve around the entitlement of the respondent, Kothari Sugars and Chemicals Ltd., to avail CENVAT Credit for capital goods used in a co-generation plant, which generates electricity, an exempted product. The legal questions considered include whether the issuance of show cause notices by the Revenue was justified, whether the production of a User Test Certificate (UTC) is mandatory for availing CENVAT Credit, and whether the delay in adjudicating the show cause notices affects their validity.

The relevant legal framework involves the CENVAT Credit Rules, 2004, particularly Rule 6(4), which prohibits CENVAT Credit on capital goods used exclusively in the manufacture of exempted goods. The precedents considered include the Supreme Court decisions in Commissioner of C.Ex., Coimbatore v. Jawahar Mills Ltd. and Commr. of C.Ex., Jaipur v. Rajasthan Spinning & Weaving Mills Ltd., which discuss the applicability of the "User Test" to determine the eligibility of capital goods for CENVAT Credit.

The Court's interpretation emphasized that the Revenue's case, as articulated in the show cause notices, was based solely on the fact that the co-generation plant produced electricity, an exempted product, and not on any doubt regarding the usage of the capital goods. The Court noted that the Revenue cannot introduce new grounds or demands, such as the requirement for a UTC, which were not part of the original show cause notices.

Key evidence included the show cause notices issued between 2008 and 2015, which consistently stated that the CENVAT Credit was availed on capital goods used in a co-generation plant generating electricity. The notices did not question the usage of the goods or request a UTC. The Court found that the Revenue's later insistence on a UTC was an afterthought and not supported by the original notices.

The Court applied the law to the facts by affirming that the Revenue's case must be confined to the grounds stated in the show cause notices. It rejected the Revenue's attempt to require a UTC, as this was not part of the original notices and was not mandated by the Supreme Court precedents. The Court also addressed the issue of delay, noting that the show cause notices were placed in the call book at the request of the assessee due to pending litigation in the Supreme Court, and later withdrawn by the Revenue due to low monetary value. The Court found no fault with this process.

In treating competing arguments, the Court considered the Revenue's reliance on the "User Test" theory but found that the Supreme Court cases cited did not mandate a UTC. The Court also addressed the argument regarding the delay in adjudication, concluding that while the delay itself did not invalidate the notices, the notices were defective due to their limited scope.

The significant holdings of the Court include the reaffirmation that the Revenue cannot expand its case beyond the original show cause notices. The Court held that the insistence on a UTC was unjustified, as it was not part of the original notices and not required by the relevant Supreme Court precedents. The Court concluded that the show cause notices could not be sustained for adjudication on the basis of the reasons originally cited by the Revenue.

The Court dismissed the Revenue's appeals, finding that the show cause notices were fundamentally flawed due to their limited reasoning and the improper introduction of new demands. The judgment underscores the principle that the Revenue's case must be clearly articulated in the show cause notices and cannot be expanded during adjudication.