CESTAT Grants CENVAT Credit For Electricity Production Inputs Transferred Free Of Charge To Sister Unit

CESTAT Grants CENVAT Credit For Electricity Production Inputs Transferred Free Of Charge To Sister Unit

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has ruled that the taxpayer is eligible for cenvat credit on inputs and input services utilized in the generation of electricity, even when transferred to its sister unit at Urse without charge.

The bench, led by Ajay Sharma (judicial member), noted that the show cause notices did not include any allegations regarding the sale of electricity. However, the authorities below proceeded under the assumption that the appellant had indeed sold electricity during this period.

The raised issue pertained to whether Cenvat Credit on inputs and input services used for electricity generation is eligible for the appellant, even when transferred (not sold) to its sister unit at Urse for their manufacturing of dutiable goods.

The appellants and assessees are involved in manufacturing PVC pipes, compounds, resins, and fittings subject to excise duty. They utilize various duty-paid inputs such as steam coal, turmoil, lubricant oil, caustic soda, boiler chemicals, etc., and claim Cenvat credit for the duty paid on these inputs. Additionally, they established an integrated captive power plant in 2010 at their manufacturing division in Ratnagiri. Here, they first produce steam, a portion of which is internally used for manufacturing dutiable goods, while the remainder is utilized for electricity generation. Any surplus electricity is either sold to MSEDCL or transferred to their sister unit at Urse, which is also engaged in manufacturing dutiable final products.

As the appellant did not maintain separate accounts for dutiable inputs and input services utilized in manufacturing dutiable goods versus generating electricity wheeled outside the factory, they chose the option of proportionate reversal as stipulated under Rule 6(3)(ii). Consequently, they consistently reversed the Cenvat credit claimed on inputs and input services used for generating electricity sold to MSEDL or transferred to its sister unit at Urse.

Unsatisfied with the appellant's method of calculating the cenvat credit, the department issued four show cause notices covering the period from April 2015 to June 2017. The department denied the credits, stating they were not compliant with Rule 6(3)(ii). Among the four notices, only two are under contention, covering the periods from April 2016 to September 2016 and from October 2016 to June 2017, respectively. In a consolidated order-in-original dated July 9, 2020, all four notices were adjudicated. The other two notices, covering the periods from April 2015 to December 2015 and from January 2016 to March 2016, were dismissed by the adjudicating authority as the appellant had provided the necessary intimation to the department in accordance with Rule 6(3A) in March 2015.

For the two show cause notices, the adjudicating authority upheld the demand because the requisite information was not provided to the department for the period from April 2016 to June 2017, which is mandatory under Rule 6.

Upon the appellant's appeal, the Commissioner (Appeals) noted that while the appellant failed to furnish the required information under Section 6(3) or (3A), the adjudicating authority could have allowed the appellant to exercise the option during the adjudication proceedings. The adjudicating authority acknowledged that the appellant is permitted to choose one of the options under the provisions of Rule 6(3). However, the authority dismissed the appeal of the appellant, asserting that they are not entitled to utilize Cenvat credit on inputs and input services in electricity generation subsequently supplied to MSEDCL or their other unit in Urse. They are thereby required to pay or reverse the Cenvat credit involved in the said supply in accordance with Rule 6(3A), along with interest and penalties.

The appellant argued that the show cause notice explicitly stated that during the disputed period, the appellants had not sold electricity to MSEDCL.

The tribunal ruled that the cenvat credit of inputs and input services utilized in generating power in the captive power plant and transferred to the sister concern is admissible to the assessee. This is because the inputs and input services were ultimately employed in the manufacture of dutiable final products, either by the assessee or by their sister concern.