2014 (2) TMI 280 - HC - Central Excise

Denial of benefits of Modvat credit - Assessee reversed the credit duty on furnace oil used for generation of electricity supplied to the other units up to August, 2002 by adopting the lowest value of furnace oil procured during the relevant period - Short duty paid - Demand of differential duty - Held that - the assessee would not be entitled to claim Cenvat credit in case where it sells electricity outside the factory to joint ventures, vendors, etc. - when the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the input used in that electricity generation is an input used in the manufacture of final product. However, to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale) the process and the use test fails. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that electricity generated is used in or in relation to the manufacture of final product, within the factory. Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures, vendors, grid, etc. would not be admissible for Cenvat credit as such wheeled out electricity, cleared for a price, would not fall within the definition of input in Rule 2(g) of the Cenvat Credit Rules, 2002 - Therefore, assessee is entitled to credit on the eligible inputs utilised 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 - Following decision in the case of Maruti Suzuki Limited 2009 (8) TMI 14 - SUPREME COURT - Decided in favour of Revenue.

Summary

Issues Involved:
1. Interpretation of Rule 2(g) of Cenvat Credit Rules, 2002.
2. Admissibility of Cenvat credit on furnace oil used for generating electricity supplied to other units.
3. Consideration of new pleas not raised before lower authorities.

Detailed Analysis:

1. Interpretation of Rule 2(g) of Cenvat Credit Rules, 2002:

The primary issue revolves around whether Cenvat credit is admissible on the portion of furnace oil used for generating electricity that is wheeled out to other units. According to the appellant, the CESTAT misinterpreted Rule 2(g) by allowing such credit. The Tribunal held that tax laws should align with normal commercial practices, implying that generating electricity in one unit for use in neighboring units is more efficient and economical. The Supreme Court's judgment in Maruti Suzuki Limited v. Commissioner of Central Excise clarified that inputs used for generating electricity are eligible for credit only if the electricity is used within the factory of production. Therefore, the Tribunal's interpretation was set aside as it contradicted this principle.

2. Admissibility of Cenvat Credit on Furnace Oil Used for Generating Electricity Supplied to Other Units:

The assessee, a manufacturer of various nylon products, used furnace oil to generate electricity, part of which was supplied to other units. The department issued a notice for recovery of short-paid/reversed duty on the furnace oil used for this purpose. The original authority and the Commissioner (Appeals) upheld the duty recovery. However, the CESTAT allowed the assessee's appeal, stating that the generation of electricity in one unit for use in other units was efficient and economical. The Supreme Court in Maruti Suzuki ruled that credit is not admissible for inputs if the generated electricity is sold or supplied to other units, as it does not qualify as being used "in or in relation to the manufacture of final product within the factory." Consequently, the Tribunal's decision was overturned, and the matter was remanded for fresh consideration.

3. Consideration of New Pleas Not Raised Before Lower Authorities:

The Tribunal considered the plea regarding the use of fuel oil for manufacturing final products within the factory, which was not raised before the lower authorities. The Supreme Court's judgment in Maruti Suzuki emphasized that the eligibility for Cenvat credit depends on the use of inputs within the factory of production. The Tribunal's failure to address whether the electricity supplied to other units qualifies for credit and the sale to another concern necessitated a remand for reconsideration. The Tribunal must now re-evaluate the factual distinctions and the applicability of the Supreme Court's ruling in Maruti Suzuki.

Conclusion:

The High Court set aside the CESTAT's order and remanded the matter for fresh consideration, emphasizing the need to align with the Supreme Court's interpretation in Maruti Suzuki. The Tribunal must reassess the eligibility of Cenvat credit for furnace oil used in generating electricity supplied to other units, considering the factual distinctions and the principle that inputs must be used within the factory of production to qualify for credit.