2017 (5) TMI 697 - HC - Central Excise

CENVAT credit - reversal - whether the assessee is entitled to CENVAT credit in respect of the LNG used by it to produce electricity sold to the third parties? - scope of input service as per rule 2(l)(ii) of the 2004 Rules - Held that - For a service to fall within the ambit of the definition of input service in rule 2(l)(ii), the service must be used by the manufacturer/assessee in or in relation to the manufacture of the assessee s final product and clearance of the final product from the place of removal - although a part of the LNG which is transported to the assessee is used by the assessee, it is not used in or in relation to the manufacture of the assessee s final product, namely, vehicles but for generating electricity which is not a final product. Moreover, such LNG is not used for the manufacture of a final product clearance whereof is from the place of removal. The service of inward transportation of the LNG used by the assessee was not in relation to the manufacture of the final product or the clearance of the final product from the place of removal so far as it relates to the electricity that was wheeled out. The service of inward transportation of LNG would be an input service if that LNG was used in the production of electricity to the extent that the electricity was used by the assessee itself for manufacturing its final product. The electricity that was wheeled out to the third parties was, obviously, not used in the manufacture of the assessee s final product. Therefore on the definition of the words input service itself, the LNG, to the extent used for production of electricity wheeled out to third parties, was not an input and the service of inward transportation thereof was not an input service. Moreover, the service of inward transportation of the LNG used by the assessee was not in relation to the manufacture of the final product or the clearance of the final product from the place of removal so far as it relates to the electricity that was wheeled out - The electricity that was wheeled out to the third parties was, obviously, not used in the manufacture of the assessee s final product. Therefore on the definition of the words input service itself, the LNG, to the extent used for production of electricity wheeled out to third parties, was not an input and the service of inward transportation thereof was not an input service. There was no fraud or suppression on the part of the appellant. These are involved and complex questions of law. It is not the case of the Revenue that the appellant withheld any information for any mala fide reasons. Appeal dismissed - decided against appellant.

Issues Involved:
1. Correctness of the Tribunal's order.
2. Applicability of the Maruti Suzuki judgment.
3. Denial of CENVAT credit for service tax paid on LPG used for electricity generation.
4. Demand of ?2,20,23,582/- for both units.
5. Disallowance of CENVAT credit for both units.
6. Disallowance of CENVAT credit for service tax on transportation of LPG.

Detailed Analysis:

1. Correctness of the Tribunal's Order:
The primary issue was whether the Tribunal was correct in its final order denying CENVAT credit proportionate to service tax paid on the procurement of LPG used in electricity generation, which was wheeled outside to joint ventures/vendors. The High Court upheld the Tribunal's decision, stating that the electricity sold to third parties does not qualify for CENVAT credit as it is not used in the manufacture of the final product within the factory.

2. Applicability of the Maruti Suzuki Judgment:
The assessee argued that the Tribunal's reliance on the Maruti Suzuki judgment was incorrect as it was no longer good law. The High Court clarified that the Maruti Suzuki judgment was not overruled entirely but only to the extent of the interpretation of the word "include" in the definition of "input" under Rule 2(g) of the 2002 Rules. The principles laid out in Maruti Suzuki regarding the use of inputs within the factory for manufacturing final products were still applicable.

3. Denial of CENVAT Credit for Service Tax Paid on LPG Used for Electricity Generation:
The High Court held that the assessee was not entitled to CENVAT credit for the service tax paid on the transportation of LNG used to generate electricity that was sold to third parties. The use of LNG in generating electricity sold to third parties does not qualify as "input service" under Rule 2(l) of the CENVAT Credit Rules, 2004, as it was not used in or in relation to the manufacture of the assessee's final product.

4. Demand of ?2,20,23,582/- for Both Units:
The High Court upheld the Tribunal's decision to demand the reversal of ?2,20,23,582/- in CENVAT credit for both units. The demand was justified as the credit was availed for inputs used in generating electricity sold outside the factory, which does not qualify for CENVAT credit.

5. Disallowance of CENVAT Credit for Both Units:
The High Court confirmed the Tribunal's decision to disallow CENVAT credit of ?2,20,23,582/- for both units. The credit was disallowed as the LNG used to generate electricity sold to third parties does not qualify as an input service under the CENVAT Credit Rules.

6. Disallowance of CENVAT Credit for Service Tax on Transportation of LPG:
The High Court held that the service tax paid on the transportation of LNG used to generate electricity sold to third parties does not qualify for CENVAT credit. The service must be used by the manufacturer in or in relation to the manufacture of the final product and its clearance from the place of removal, which was not the case here.

Conclusion:
The High Court dismissed all appeals, upholding the Tribunal's decision to demand the reversal of proportionate CENVAT credit for the normal period while disallowing the extended period and penalty. The judgment clarified that the service tax paid on transportation of LNG used to generate electricity sold to third parties does not qualify for CENVAT credit as it is not used in or in relation to the manufacture of the final product within the factory.

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