CESTAT Delhi Allows CENVAT Credit on Captive Power Plant Capital Goods and Structural Steel Items: Hindustan Zinc Ltd. Vs Commissioner

Overview of the Dispute

The CESTAT Delhi bench adjudicated a consolidated batch of thirteen appeals filed by Hindustan Zinc Ltd. against a single adjudication order dated 31.01.2022 passed by the Commissioner, CGST and Central Excise, Commissionerate, Udaipur. The said order had collectively disposed of thirteen show cause notices, resulting in disallowance of CENVAT credit aggregating to ₹41,10,94,874 and imposition of penalties totalling ₹8,59,76,777 under the CENVAT Credit Rules, 2002 and CENVAT Credit Rules, 2004.

The assessee is engaged in manufacturing zinc ingots and lead, classified under Chapters 78 and 79 of the First Schedule to the Central Excise Tariff Act, 1985, and had availed CENVAT credit on inputs, capital goods, and input services across multiple assessment periods spanning from November 2002 to March 2012.

The Tribunal crystallised the dispute into three distinct questions of law:

  1. **Reversal of CENVAT credit on inputs and capital goods transferred to the Captive Power Plant (CPP)😗* Whether maintaining the CPP as a separate accounting unit under Section 80IA of the Income Tax Act, 1961 constituted "removal" of goods under Rule 3(4)/Rule 3(5) of the CENVAT Credit Rules, warranting reversal of credit.

  2. Admissibility of credit on CPP components installed by a third-party contractor: Whether CENVAT credit on duties paid on parts and components of the Captive Power Plant — installed by Wartsila Finland Oy within the assessee's factory premises — was legitimately available to the assessee during the period November 2002 to July 2003.

  3. Eligibility of iron and steel structures used for chimney installation as capital goods: Whether credit on structural iron and steel items such as columns, platforms, angles, and floor plates used in erecting and supporting a chimney qualified as capital goods under Rule 2(a)(A) of the CENVAT Credit Rules during the period April 2002 to April 2003.

Note: While all three issues arose in one appeal (Excise Appeal No. 51503 of 2022, period: 01.11.2002 to 15.07.2003), the remaining twelve appeals concerned only the first issue relating to reversal of credit on goods transferred to the CPP.

Factual Background

The assessee had procured a Captive Power Plant comprising four diesel generator sets of 29.62 MW capacity. Four separate agreements, all executed on 14.08.2002, were entered into with Wartsila Finland Oy covering procurement of both imported and indigenous components, erection, commissioning, manufacturing, and ongoing operation and maintenance of the plant. The fully commissioned and functional CPP was formally handed over on 25.03.2003. However, the assessee began availing CENVAT credit on the duties paid on individual components as and when they were received at the factory from November 2002 onwards.

For the purposes of complying with Section 80IA of the Income Tax Act, 1961 — which grants tax deductions on profits from power generation undertakings — the assessee maintained separate books of account for the CPP under the name "Hindustan Zinc Ltd.-CPP." The Department treated this as the creation of a distinct business entity and initiated proceedings accordingly.

The Department's Position and Commissioner's Findings

The Revenue raised the following objections in its show cause notices and reiterated them before the Tribunal:

  • On CPP components: The contractor, Wartsila Finland Oy, was the actual manufacturer of the power plant since it procured all components, assembled, erected, commissioned, and handed over a complete and operational unit. Accordingly, only the contractor — and not the assessee — was entitled to claim CENVAT credit under Rule 3(1) of the CENVAT Credit Rules.