2019 (5) TMI 1092 - AT - Central Excise

CENVAT Credit - input services used in production of exempt goods - denial on account of nexus with taxable final products - It is the case of the Revenue that the input services in question were used in or in relation to the power plant which produced electricity which is exempt and not in or in relation to the manufacture of the final product namely sugar - HELD THAT - The term manufacture is not defined in Cenvat Credit Rules 2004 and therefore should be interpreted as per the definition of the term in Section 2(f) of the Central Excise Act 1944 according to which manufacture includes any process incidental or ancilliary to the completion of the manufactured product . Therefore the definition of manufacture itself is quite wide in the Central Excise Act - The scope of the term input service under Cenvat Credit Rules 2004 is still wider including services used by a manufacturer whether directly or indirectly in or in relation to the manufacture of the final products . It is not in dispute that the final products in this case is the sugar and that the electricity from the captive power plant and the steam generated from it were used for manufacture of the sugar. The input services in question were in turn used for running the captive power plant in relation to coal transporting Bagasse etc. Therefore these input services which were used in the captive power plant were indirectly used in the manufacture of sugar or in relation to such manufacture. Therefore the input services in question fall within the definition of input services under Rule 2(k) of Cenvat Credit Rules 2004. Whether electricity so generated is used within the factory only or is also sold outside? - HELD THAT - It is used partly in the factory and partly sold to grid. If the input services were divisible credit could be denied to the extent the input services were used in relation to generation of electricity sold to the grid. However the nature of the services is such that they cannot be divided - As far as the inputs are concerned there is provision for reversal of proportionate amount of cenvat credit under Rule 6. This however does not extend to the input services. Credit allowed - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Availability of CENVAT credit on input services used in the generation of electricity in a captive power plant for a sugar factory.

Analysis:

Issue 1: Availability of CENVAT credit on input services used in the generation of electricity in a captive power plant for a sugar factory

The case involved a sugar factory with a captive power plant and a distillery unit. The appellant claimed CENVAT credit on various input services used in the generation of electricity in their captive power plant, which was partially used in the manufacture of sugar. The Revenue contended that these services were used for electricity production, which is exempt, not for sugar manufacturing, hence no credit was available.

The CENVAT Credit Rules, 2004 define "input service" broadly, encompassing services used directly or indirectly in or in relation to the manufacture of final products. The dispute centered on whether the input services were used in the manufacture of sugar or solely in electricity generation. The First Appellate Authority relied on a Supreme Court judgment to deny credit on excess electricity sold to the grid, stating it was not used in sugar manufacturing.

The Tribunal analyzed Rule 6 of the CENVAT Credit Rules, which allows for proportionate credit reversal for inputs used in both dutiable and exempted products but lacks a similar provision for input services. The definition of "manufacture" under the Central Excise Act is broad, covering processes incidental to product completion. The Tribunal found that the input services used in the captive power plant indirectly contributed to sugar manufacturing, falling within the Rule's definition.

Since the input services were integral to the captive power plant's operation, which in turn supported sugar manufacturing, the Tribunal held the appellant was entitled to CENVAT credit on the disputed input services. The impugned order denying credit was set aside, and the appeal was allowed in favor of the appellant.

In conclusion, the judgment clarified the eligibility of CENVAT credit on input services used in a captive power plant for a sugar factory's electricity generation, emphasizing the indirect but integral connection to the manufacturing process, leading to a favorable decision for the appellant.