2009 (8) TMI 14 - SC - Central Excise

Cenvat Credit use of fuel in generation of electricity a part of electricity supplied to its sister units, vendors, joint ventures held that - It may be noted from the CENVAT Credit Rules of 2004 vis-a vis CENVAT Credit Rules of 2002 that the word for in the inclusive part after the words steam used is substituted by the words used in or in relation to the manufacture of final products - 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. - assessee is entitled to credit on the eligible inputs utilized 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.

Summary

Issues Involved:
1. Entitlement to CENVAT credit on naphtha used for generating electricity.
2. Interpretation of "input" under Rule 2(g) of the CENVAT Credit Rules, 2002.
3. Application of Rule 6 of the CENVAT Credit Rules, 2002.
4. Imposition of penalty on the assessee.

Issue-wise Detailed Analysis:

Entitlement to CENVAT Credit on Naphtha Used for Generating Electricity:
The primary issue was whether the Department was correct in reversing proportionate CENVAT credit for the electricity wheeled out to the appellant's sister units, vendors, and joint ventures. The appellant used naphtha to generate electricity, claiming CENVAT credit on it. The court held that while the appellant is entitled to CENVAT credit for the electricity used within the factory, credit cannot be claimed for the electricity sold outside the factory. The court emphasized that the electricity generation must be integrally connected with the manufacturing process within the factory to qualify for CENVAT credit.

Interpretation of "Input" under Rule 2(g) of the CENVAT Credit Rules, 2002:
The court analyzed the definition of "input" under Rule 2(g) of the CENVAT Credit Rules, 2002, dividing it into three parts: specific part, inclusive part, and place of use. The specific part includes all goods used in or in relation to the manufacture of final products. The inclusive part lists items like lubricating oils, greases, cutting oils, coolants, accessories, goods used as paint, packing material, fuel, or for generating electricity or steam. The place of use specifies that these inputs must be used within the factory of production. The court concluded that the definition of "input" requires compliance with all three parts, and the electricity generated must be used within the factory to qualify for CENVAT credit.

Application of Rule 6 of the CENVAT Credit Rules, 2002:
Rule 6(1) prohibits CENVAT credit on inputs used in the manufacture of exempted goods. The court held that electricity is not an excisable item, and Rule 6(1) does not apply to naphtha used for generating electricity. However, Rule 6(2) and 6(3) require separate accounts for inputs used in the manufacture of dutiable and exempted goods or payment of a specified amount. The court noted that the appellant did not maintain separate accounts for naphtha used in generating electricity sold outside the factory, thus failing to comply with Rule 6.

Imposition of Penalty on the Assessee:
The court acknowledged the frequent amendments in the CENVAT Credit Rules, leading to extensive litigation. Given the conflicting views from various Tribunals and High Courts, the court decided not to impose a penalty on the appellant, despite ruling against them. The court dismissed the civil appeals with no order as to costs, emphasizing the absence of a penalty due to the complex and evolving nature of the CENVAT Credit Rules.

Conclusion:
The court concluded that the appellant is entitled to CENVAT credit on naphtha used for generating electricity within the factory but not for the electricity sold outside. The definition of "input" under Rule 2(g) requires the electricity to be used within the factory. The appellant failed to comply with Rule 6 regarding separate accounts or payment for inputs used in exempted goods. Despite ruling against the appellant, the court did not impose a penalty due to the complex and evolving nature of the CENVAT Credit Rules. The appeals were dismissed with no order as to costs.