CESTAT Hyderabad Rules Out Rule 6 Demand on Captive Power Plant Input Services

Introduction

The Hyderabad Bench of CESTAT, in Madhucon Sugar & Power Industries Ltd. Vs Pr. Commissioner of Central Tax Rangareddy – GST (CESTAT Hyderabad), has set aside a substantial demand raised under Rule 6(3) of the CENVAT Credit Rules, 2004 (CCR). The dispute revolved around CENVAT credit taken on input services associated with a captive co-generation power plant and whether such credit was liable to reversal on the footing that electricity constituted “exempted goods”.

The Tribunal, relying on binding precedent including Gularia Chini Mills Vs UOI and the Supreme Court decision in Union of India Vs DSCL Sugar Ltd., concluded that electricity is not “excisable goods” and consequently cannot be treated as “exempted goods” for the purpose of Rule 6 of CCR. On this foundation, the entire demand, interest, and equal penalty were quashed.

Background and Facts

Order-in-Original and Demand

The appeal arose from an Order-in-Original dated 28.09.2012 under which the Commissioner:

  • Confirmed recovery of CENVAT credit amounting to Rs. 1,17,49,121,
  • Ordered recovery of applicable interest, and
  • Imposed penalty equal to the credit amount under Rule 15(2) of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act.

The Department alleged that the assessee had wrongfully availed CENVAT credit of service tax on a variety of input services allegedly used exclusively in its captive power plant, such as:

  • Commissioning and erection
  • Engineering and professional consultancy
  • Repairing and re-shelling
  • Freight and cable laying
  • Supervision, servicing, testing and inspection
  • Vulcanizing and fabrication

According to the Department, the electricity generated in the captive power plant was covered under Tariff Heading 2716 0000, but no central excise duty was actually being paid on it. On that basis, the Department treated electricity as “exempted goods” and invoked Rule 6(3) of CCR to demand reversal of credit on input services stated to be used in the generation of such electricity.

Nature of Operations and Use of Electricity

The assessee was engaged in the manufacture of sugar and molasses, both dutiable excisable products. It operated a co-generation power plant using bagasse as fuel.

Key factual aspects highlighted by the assessee were:

  • Electricity generated in the co-generation plant was partly used captively in the manufacture of sugar and molasses.
  • Only the surplus electricity was supplied to the grid.
  • Various input services were claimed to be connected not only with the power plant but also with:
    • Expansion of the sugar division,
    • Fabrication and erection of the co-generation plant as part of the integrated sugar factory, and
    • Erection and commissioning of boilers forming part of the sugar manufacturing process.

The Department, however, proceeded on the assumption that the services in dispute related solely to the captive power plant and therefore attracted Rule 6 on the footing that electricity was an exempted product.

Procedural History

  1. A show cause notice was issued alleging wrongful availment of CENVAT credit on input services related to the captive power plant and proposing recovery under Rule 6(3) of CCR.
  2. The Commissioner, by Order-in-Original dated 28.09.2012, confirmed:
    • Recovery of Rs. 1,17,49,121 of CENVAT credit,
    • Interest under the Central Excise Act, and
    • Equal penalty under Rule 15(2) of CCR read with Section 11AC.
  3. The assessee challenged the Order-in-Original before CESTAT Hyderabad.

The Tribunal focused on the following questions:

  1. Applicability of Rule 6 of CCR
    Whether Rule 6 of the CENVAT Credit Rules, 2004 was at all attracted in respect of input service credit associated with electricity generated in the assessee’s captive power plant.

  2. Status of Electricity as “Exempted Goods”
    Whether electricity could be treated as “exempted goods” within the meaning of Rule 6, given that it was classifiable under Heading 2716 0000 but not subjected to excise duty.