CESTAT Delhi Clarifies: No 6%/10% Amount Once Proportionate Cenvat Is Reversed

Background of the Dispute

In Jayaswal Neco Industries Limited Vs Principal Commissioner (CESTAT Delhi), both the assessee and the Revenue challenged the same adjudication order relating to Cenvat credit on inputs and input services used in electricity generation.

The assessee was engaged in manufacturing sponge iron, pig iron and billets, using iron ore and coal/coke as primary inputs. Cenvat credit was taken on:

  • Inputs: iron ore, coal/coke, etc.
  • Input services:
    • goods transport agency service for coal,
    • cargo handling service for coal,
    • security services,
    • repair and maintenance services,
    • manpower recruitment services,
      all of which were used in the manufacture of dutiable final products.

Within the same factory premises, the assessee ran five captive power plants for generating electricity. This electricity was mainly consumed in the manufacture of dutiable finished products. However, a part of the power generated was surplus, and since electricity cannot be stored, that surplus electricity was supplied to Chhattisgarh State Electricity Board for a monetary consideration. Electricity cleared outside the factory was treated as exempted goods.

For generation of electricity, the assessee used:

  • Duty-paid coal; and
  • Coal fines and coal rejects emerging during the manufacture of sponge iron.

During an audit for the period January 2009 to March 2015, the Department noticed that:

  • The assessee did not maintain separate accounts for inputs and input services used for:
    • dutiable final products; and
    • exempted goods (electricity sold outside the factory).

On this basis, the Department invoked Rule 6(3)(i) of the Cenvat Credit Rules, 2004 and alleged that the assessee was liable to pay an amount equivalent to:

  • 10% / 5% / 6% of the value of electricity cleared outside the factory, depending on the relevant period.

Four show cause notices were consequently issued for different time periods within January 2009 to March 2015.

Stand of the Assessee Before the Adjudicating Authority

The assessee argued that:

  • Although separate accounts were not maintained,
  • It had already reversed proportionate Cenvat credit relatable to the inputs and input services used for generating electricity that was sold outside the factory.

Therefore, according to the assessee, its obligation under Rule 6(3)(i) stood discharged, and no further amount under the specified percentage of the value of electricity was payable.

The adjudicating authority accepted that:

  • The assessee had reversed Cenvat credit proportionate to the quantity of electricity cleared to the grid, and
  • This proportionate reversal, in principle, satisfied the requirement under Rule 6(3)(i).

On this basis, a major demand of ₹11,52,15,799/- was dropped.

However, the adjudicating authority further concluded that:

  • No corresponding reversal had been made in respect of coal fines and coal rejects used in generating electricity, and
  • On that limited ground, confirmed a demand of ₹2,65,35,674/-, along with an equivalent penalty.

Both the assessee and the Revenue carried the matter in appeal before the Tribunal.