CENVAT Credit on Captive Power Plant Capital Goods Not Deniable Merely Because Electricity Was Initially Sold Externally — CESTAT Mumbai

Case Overview

Case Name: Commissioner of Central Excise Vs Finolex Industries Ltd.
Forum: CESTAT Mumbai
Appeal Number: Excise Appeal No. 1214 of 2012
Date of Order: 02/03/2022

Background and Context

Finolex Industries Ltd. is a manufacturer engaged in the production of PVC resin, PVC pipes, and pipe fittings. Given the nature of its manufacturing operations, consistent and uninterrupted power supply was essential. To address this operational requirement, the company established a Captive Power Plant (CPP). Upon procurement of capital goods for the purpose of setting up, erecting, and commissioning this CPP, the assessee availed CENVAT credit on such capital goods during the period spanning 2006-07 to 2010-11 (up to December 2010).

The dispute originated when the Revenue raised objections to this availment of CENVAT credit. The primary contention of the Revenue was that electricity — being a non-excisable or exempted commodity — was generated through the CPP, and that this electricity was not used within the manufacturing facility. Instead, during the period from December 2009 to 02.05.2011, the electricity generated at the CPP was sold to Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL) through the transmission network of Maharashtra State Electricity Transmission Co. Ltd. (MSETCL). There was, admittedly, no direct electrical connection between the CPP and the PVC manufacturing plant during this period.

Show Cause Notice and Revenue's Allegations

The Revenue issued a show cause notice dated 15.06.2011, alleging wrongful availment of CENVAT credit amounting to Rs. 17,06,34,666/- on capital goods used exclusively for the generation of electricity — an exempted/non-excisable product — in contravention of Rule 6(4) of the CENVAT Credit Rules, 2004.

The show cause notice alleged, among other things:

  • The CPP was commissioned in December 2009, and the entire electricity generated therein was sold to MSEDCL via MSETCL without a single unit being utilized for captive consumption in the PVC plant.
  • There was no electrical connection of any kind between the CPP and the PVC manufacturing plant during the period December 2009 to 02.05.2011.
  • The Chairman of the assessee company had, in a shareholder address in 2006-07, indicated an intention to generate revenue from the CPP, thereby suggesting a commercial motive for selling electricity rather than using it captively.
  • The assessee failed to inform the department about the commissioning of the CPP and the sale of electricity, and this omission amounted to suppression of material facts.
  • CENVAT credit had been availed as early as 2006-07, well before the electricity was eventually used in manufacturing operations, which the Revenue treated as premature and impermissible.

The assessee was accordingly called upon to show cause as to why:

  1. CENVAT credit of Rs. 17,06,34,666/- should not be disallowed and recovered under Rule 14 of the CENVAT Credit Rules, 2004 read with the proviso to Section 11A(1) of the Central Excise Act, 1944;
  2. Interest should not be demanded under Rule 14 of the CENVAT Credit Rules, 2004 read with Section 11AB of the Central Excise Act, 1944;
  3. Penalty should not be imposed under Rule 15(2) of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944;
  4. The capital goods should not be confiscated under Rule 15(1) of the CENVAT Credit Rules, 2004.

A subsequent corrigendum to the show cause notice also proposed personal penalties against certain individuals under Rule 27 of the Central Excise Rules, 2002 read with Rule 15A of the CENVAT Credit Rules, 2004, who were the subject matter of connected Appeal Nos. E/1215/2012 and E/1216/2012.

Commissioner's Order: Proceedings Dropped

The Commissioner of Central Excise, Kolhapur, vide Order-in-Original No. 14/CEX/COMMR/KOP/2012 dated 30.03.2012, dropped all proceedings arising from the show cause notice and the corrigendum.

The Commissioner reasoned that, although electricity was indeed sold to MSEDCL during the initial period, a banking arrangement had operated from March 2011 onwards through the MSEDCL/MSETCL grid. Under this arrangement, the electricity uploaded by the assessee to the grid was compensated against the electricity subsequently supplied to and consumed by the PVC plant. Accordingly, the Commissioner concluded that the electricity generated in the CPP was ultimately utilised for the manufacture of dutiable excisable goods, and therefore the CENVAT credit on the capital goods used for setting up the CPP could not be denied.