Custom, Excise & Service Tax Tribunal
M/S. India Cements Ltd vs Cce & St, Tirunelveli on 5 January, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI
E/40444/2015
(Arising out of Order-in-Original No. 5/Commr/CE/2014 dated 08.12.2014 passed by the Commissioner of Central Excises, Tirunelveli).
M/s. India Cements Ltd. : Appellant
Vs.
CCE & ST, Tirunelveli : Respondent
Appearance Shri C. Saravanan, Advocate, for the appellant Shri A. Cletus, ADC (AR) for the Respondent.
CORAM :
Honble Ms. Sulekha Beevi, Member (Judicial) Honble Shri Madhu Mohan Damodhar, Member (Technical) Date of Hearing: 05.01.2018 Date of Pronouncement: 28.02.2018 FINAL ORDER No. 40498/2018 Per Bench The facts of the case are that M/s. India Cements Ltd., the appellants herein, are manufacturers of cement. They are availing Cenvat credit of excise duty/service tax paid on inputs, capital goods and input services in terms of the provisions of Cenvat Credit Rules, 2004 (CCR in short). Consequent to investigation conducted by departmental Officers, it appeared that the appellants have availed Cenvat credit on input and input services used for generation of electricity in their Captive Power Plant (CPP) without adhering to the provisions of Rule 6 of CCR, in respect of excess quantum of electricity wheeled out to TANGEDCO (the State transmission utility distribution licensee). It further emerged that the appellants had entered into an agreement dated 31.08.2012 with TANGEDCO for wheeling out a part of the electricity generated in their CPP through TANGEDCO for distribution to and drawal by other units of the appellant at Salem District and Perambalur District and the grinding unit at Chennai. Department took the view that the appellants should have maintained separate accounts for the receipts, consumption and inventory for the production of electricity which is used within the factory, ie., for captive use and for the production of electricity wheeled out to TANGEDCO, hence they are liable to pay 6% of the value of the exempted goods wheeled out of the factory in terms of Rule 6 (3) (i) of CCR. Accordingly, SCN dated 30.09.2013 was issued to the appellants interalia proposing demand of Rs. 2,66,09,847/- being the amount equal to 6% of the value of electricity not captively consumed by the appellant, along with interest thereon and imposition of penalty under Rule 15(1) of CCR. In adjudication, vide impugned order dated 08.12.2014, proposal for demand of Rs. 2,66,09,847/- with interest was confirmed; equal penalty under Section 15(1) of CCR was also imposed. Aggrieved, appellants are before this forum.
2. Today when the matter came up for hearing, on behalf of the appellants, Ld. Advocate, C. Saravanan made various submissions, which can be broadly summarized as under:-
i) During the period in dispute, the appellants have not sold excess electricity to any outsiders. But have merely transferred excess electricity to the grid for being utilized by other duty paying units. Hence, credit of inputs and input services in relation to excess electricity wheeled is fully eligible to the appellants.
ii) Electricity is neither excisable or exempted goods as per Section 2 (d) of the Act as no rate of duty has been prescribed for the same under CETH 2716.
iii) The allegation that the input and input services used for generation of electricity wheeled out to TANGEDCO does not fit into the definition of input service as defined under Rule 2 (k) and 2 (i) of CCR respectively in as much as the same have not been consumed captively in toto, in or in relation to the final product manufactured by the appellants, is not sustainable in law as laid down in the following judgments passed by the Tribunal and Courts:-
i) M/s. Ultra Tech Cement Ltd. Vs. CCE, Ahmd.
2008-TIOL-187-CESTAT-AHM
ii) Arvind Mills Ltd. Vs. CCE, Ahmd.
2207 (220) ELT 981 (Tri.-Ahmd.)
iii) Manglam Cement Ltd. Vs. CCE, Jaipur 2008 (225) ELT 354 (Tri.-Del.)
iv) Kirloskar Ferrous Industries Ltd. Vs. CCE, Belgaum 2007 (219) ELT 233 (Tri.-Dang.)
v) CCE,Gujarat Vs. Gujarat Alkalies & Chemicals Ltd.
2007 (218) ELT 506 (Guj.)
iv) The judgment of the Honble Supreme Court in the case of Maruti Suzuki Ltd. Vs. CCE reported in 2009 (240) ELT 641 (S.C.) is not applicable to the facts and circumstances of their case as it has been held by the Honble Court that the appellants were not entitled to Cenvat credit only to the extent of the excess electricity cleared as the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. Whereas in their case, they have not sold the excess electricity to any outsiders but only transferred the same to their own units through grid.
v) The demand of amount @ 6% on the notional value of wheeled out power is totally arbitrary and legally not tenable, more specifically when the power is transferred to our own unit which involves no sales.
vi) Had any Excise Duty has been prescribed for electricity, they would have paid the same which would have been available as credit in other plants. Thus, the entire issue would have been revenue neutral. Even in the present circumstances, the Honble Tribunal has held in the case of Sanghi Industries Vs. CCE, Rajkot 2014 (302) ELT 564 (Tri.-Ahmd.) that the exercise is revenue neutral only.
vii) The proposal for imposing penalty is also not sustainable in law as the issue involves legal interpretation of statutory provisions and there are overwhelming number of case laws in favour of availing credit in similar circumstances, which judgments are tabulated vide para 3 above. We also submit that even in the case of Maruti Suzuki (which is the foundation for the subject issue raised by the department), penalty has been set aside.
viii) As per Rule 2 (k) (iii) of CCR, all goods used for generation of electricity or wheeling for captive use are eligible inputs. There is no definition for capitive use in the Rules. However, Captive generating plant is defined in Electricity Act, 2003 in Section 8 is as follows:-
Captive generating plant means a power plant set up by any person to generate electricity primarily ffor his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association.
From the above definition, it is evident that captive generating plant can be used to generate electricity not only for own use but also for use of members of co-operative society or association. This analogy can be extended to usage off captively generated electricity by other units of the appellants.
3. On the other hand, Ld. AR supports the impugned order. He emphasizes that the SCN has been issued only in respect of wrong availment of Cenvat credit attributable to generation of electricity wheeled out to TANGEDCO and accordingly, the amount equal to 6% of value of electricity not captively consumed by the appellant has been demanded under Rule 6 (3)(i) of the Cenvat credit Rules. Ld. AR also submits that the Honble Supreme Court has settled the issue in the case of Maruti Suxuki Ltd. Vs. CCE, Delhi 2009 (240) ELT 641 (S.C), which has been correctly laid down by the adjudicating authority.
4. Heard both sides and have gone through the facts.
5.1 For ready reference Rule 6 of CCR is reproduced as under:-
Rule 6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.-
(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).
Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.
(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for
(a) the receipt, consumption and inventory of inputs used
(i) in or in relation to the manufacture of exempted goods;
(ii) in or in relation to the manufacture of dutiable final products excluding exempted goods;
(iii) for the provision of exempted services
(iv) for the provision of output services excluding exempted services; and
(b) the receipt and use of input services
(i) in or in relation to the manufacture of exempted goods and their clearance upto the place of removal;
(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance upto the place of removal;
(iii) for the provision of exempted services; and
(iv) for the provision of output services excluding exempted services, and shall take Cenvat credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of clause (b).
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-
(i) pay an amount equal to six per cent of value of the exempted goods exempted services; or
(ii) pay an amount as determined under sub-rule (3 A); or
(iii) maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take Cenvat credit only on inputs under sub-clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment;
Provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i) Provided further that if any part of the value of a taxable service has been exempted on the condition that no Cenvat credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be six percent of the value so exempted.
Provided also that in case of transportation of goods or passengers by rail the amount required to be paid under clause (i) shall be an amount equal to 2 percent of value of the exempted services.
Explanation I If the manufacture of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn dur5ing the remaining part of the financial year.
Explanation II For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs used exclusively in or in relation to the manufacture of exempted goods or for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearances upto the place of removal or for provision of exempted services.
5.2 The Ld. Advocate has been at pains to contend that electricity is neither excisable goods under Section 2 (d) of the Act nor exempted goods as per CCR and hence, the provisions of Rule 6 (3) (1) of CCR would not be applicable to the appellants. Nonetheless, we find that Rule (2) k of CCR incorporated a specific provision for allowing credit on inputs of goods used for generation of electricity or steam for captive use. This being so, it is not necessary to delve into the aspect of whether electricity is non-excisable or exempted for the purpose of determining whether inputs used for generating electricity are eligible for availment of Cenvat credit. Rule 2 k (iii) specifically allows availment of Cenvat credit on all inputs used for generation of electricity subject to the exclusions listed as under:-
As per Rule 2 (k) of CCR, input means:-
(k)?input means -
(i) all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam for captive use; or
(iv) all goods used for providing any output service;
but excludes -
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) any goods used for -
(a) construction of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods, except for the provision of any taxable service specified in sub-clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act;
(c) capital goods except when used as parts or components in the manufacture of a final product;
(d) motor vehicles;
(e) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and
(f) any goods which have no relationship whatsoever with the manufacture of a final product. (Emphasis added) Thus, on the eligibility of availment of Credit in respect of eligible inputs used for generating electricity, there cannot be any doubt. The important takeaway from the definition in Rule 2 (k) (iii) of CCR, however is that the eligibility of input credits will however be restricted to goods used for generation of electricity for captive use. No doubt, there is no definition of captive use in CCR. In such a situation, the meaning of the phrase captive use as understood when used in central excise law and notifications will prevail. For example, there are notifications exempting intermediate products from liability to discharge central excise duty when captively consumed in the manufacture of final products. In our opinion, the interpretation of the phrase captive use in respect of manufacture of excisable goods will only mean consumption of goods within the factory of manufacture and, more importantly, the fact that such goods are not sold of otherwise removed from the factory of manufacture. In Rule 2 k of CCR, in the Sub rule (I iv), apart from sub rule (iii), the only other provision related to manufacture of excisable goods is sub-rule (i) which concerns all goods used in the factory by the manufacturer of final products. On the same analogy, the goods used in the production of electricity for captive use will then mean the goods used for generation of electricity for consumption of manufacturer within his own factory of manufacture but definitely not electricity which is sold outside the factory. In arriving at this conclusion, we are guided by the legal maxim of NOSCITUR A SOCIIS, by which, a meaning of a word can be known from nearby words and it is not proper to lay emphasis on one word disjuncted from its preceding and succeeding words as qualified by the Honble Supreme Court in K. Bhagirathi G. Shenoy Vs. K.P. Ballakuraya 1999 (4) SCC 135.
5.3 Ld. Advocate has placed reliance on the ratio laid down by the Honble Supreme Court in the case of Vikram Cement Vs. CCE - 2006 (194) ELT 3 (S.C). We however find that the Honble Apex Court in that judgment has only clarified that only goods used into generation of electricity/steam which is used within the factory would be an input for the purpose of obtaining credit. The relevant portion of the judgment is reproduced as under:-
4.?We observe that Rule 57B commences with a non obstante clause. It allows credit to be taken by a manufacturer on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final products or not. There is no qualification as to where the inputs must be used in the main body of sub-rule (1). Qualifications have been introduced to the extent stated in Clauses (i) to (vi) read with the Explanation. Thus Clause (i) provides for inputs which are manufactured and used within the factory of production. Paints, fuel, packing materials and accessories are also treated as inputs under clauses (ii), (iii), (v) and (iv) without any requirement for user within the factory. Clause (iv) provides for credit on inputs used for generation of electricity or steam used for manufacture of the final products or for any other purposes within the factory of production. It appears to us on a plain reading of the clause that the phrase within the factory of production means only such generation of electricity or steam which is used within the factory would qualify as an intermediate product. The utilization of inputs in the generation of steam or electricity not being qualified by the phrase within the factory of production could be outside the factory. Therefore, whatever goes into generation of electricity or steam which is used within the factory would be an input for the purposes of obtaining credit on the duty payable thereon. As far as the Explanation is concerned, the inputs are restricted to inputs notified under Rule 57A. There is no dispute that both explosives and limestone are notified under Section 57A for manufacture of the final product viz. cement. 5.4 Ld. Advocate has also placed reliance on the Tribunal decision in the case of Mangalam Cements Ltd. Vs. CCE, Jaipur 2008 (225) ELT 354 (Tri.-Del.), where it was held that Credit on that part of electricity generated using inputs supplied to other units cannot be denied on the ground that the units are separate. However, we note that the Honble Supreme Court in the landmark judgment of Maruti Suzuki Ltd. Vs. CCE - 2009 (240) ELT 641 (S.C), has held to the contrary. The Honble Apex Court in that subsequent judgment held that input used as fuel in generation of electricity wheeled out to vendors will not be entitled for credit availment. The relevant portions of the judgment are reproduced as under:-
19.?The question which still remains to be answered is : whether an assessee would be entitled to claim CENVAT credit in cases where it sells electricity outside the factory to the joint ventures, vendors or gives it to the grid for distribution? In the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in 1991 (55) E.L.T. 444 (S.C.) the test laid down by this Court is whether the process and the use are integrally connected. As stated above, electricity generation is more of a process having its own economics. Applying the said test, we hold that when the electricity generation is a captive arrangement and the requirement is for carrying out the manufacturing activity, the electricity generation also forms part of the manufacturing activity and the input used in that electricity generation is an input used in the manufacture of final product. However, to the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors, and that too for a price (sale) the process and the use test fails. In such a case, the nexus between the process and the use gets disconnected. In such a case, it cannot be said that electricity generated is used in or in relation to the manufacture of final product, within the factory. Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures, vendors, grid etc. would not be admissible for CENVAT credit as such wheeled out electricity, cleared for a price, would not fall within the definition of input in Rule 2(g) of the CENVAT Credit Rules, 2002. This view is also expressed in para 9 of the judgment of this Court in the case of Collector of Central Excise v. Solaris Chemtech Limited - 2007 (214) E.L.T. 481 (S.C.). Further, our view is supported by the observations of this Court in the case of Vikram Cement v. Commnr. of Central Excise, Indore - 2006 (194) E.L.T. 3 (S.C.) which is quoted below :-
It appears to us on a plain reading of the clause that the phrase within the factory of production means only such generation of electricity or steam which is used within the factory would qualify as an immediate product. The utilization of inputs in the generation of steam or electricity not being qualified by the phrase within the factory of production could be outside the factory. Therefore, whatever goes into generation of electricity or steam which is used within the factory would be an input for the purposes of obtaining credit on the duty payable thereon.
20.?To sum up, we hold that the definition of input brings within its fold, inputs used for generation of electricity or steam, provided such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. The important point to be noted is that, in the present case, excess electricity has been cleared by the assessee at the agreed rate from time to time in favour of its joint ventures, vendors etc. for a price and has also cleared such electricity in favour of the grid for distribution. To that extent, in our view, assessee was not entitled to CENVAT credit. In short, assessee is entitled to credit on the eligible inputs utilized in the generation of electricity to the extent to which they are using the produced electricity within their factory (for captive consumption). They are not entitled to CENVAT credit to the extent of the excess electricity cleared at the contractual rates in favour of joint ventures, vendors etc., which is sold at a price. 5.5 In the course of the arguments, Ld. Advocate has also placed reliance on the Tribunal decision in the case of Ultratech Cement Ltd. Vs. CCE, Ahmedabad - 2015 (320) ELT 635 (Tri.-Ahmd.), wherein it had been held that use of surplus electricity in other units of the same company or to its subsidiary should not lead to denial of credit taken and availed by the unit generating electricity. However, we note that appeals filed by the department were allowed by the Honble Supreme Court as reported in 2015 (320) ELT A259 (S.C) as follows:-
1.?Leave granted.
2.?For the reasons given in our judgment delivered today in the case of M/s. Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi-III - Civil Appeal No. 5554 of 2009 - (arising out of S.L.P. (C) No. 3826 of 2009), the civil appeals herein filed by the Department are allowed and the matters stand remitted to the Adjudicating Authority who will in each case ascertain whether any excess electricity was wheeled out/cleared at a price in favour of joint ventures, vendors, sister companies etc. and, if so, the Adjudicating Authority will calculate and charge duty or reverse credit to that extent alone. However, as stated above, the Department will not impose penalty in that regard for the disputed period(s).
3.?Subject to above, the civil appeals filed by the Department are accordingly allowed with no order as to costs. The Appellate Tribunal in its impugned order had held that the Cenvat credit on fuel, i.e., Naptha and furnace oil used for generating electricity, surplus of which was wheeled out to other units of the appellant and subsidiary company, could not be denied on the ground that the credit was taken by the unit generating electricity but the electricity was not used in their factory but used in other places. 5.6 In the grounds of appeal filed by the appellants, it has been conceded that portion of power electricity/power generated was wheeled out to TANGEDCO under an agreement dated 31.08.2012. As per para-5 of the terms and conditions mentioned in the agreement, net energy consumption should be adjusted on unit to unit basis. In para-7of the statement of facts, appellant has conceded that they had wheeled out electrical energy to TANGEDCO adjusting against the other units of the appellant at Shankari, Salem district, Dalavoi, Perambalur district and Chennai from 26.09.2012. There was thus adjustment between appellant and TANGETCO in respect of electricity wheeled out by them and thereafter supplied by them to sister units. It is definitely not the appellants case that the electricity wheeled out was supplied free or without any adjustment towards cost of the goods of the units wheeled out. In this scenario, the ratio laid down by the Honble Apex Court in the cases of Maruti and Ultratech (discussed supra) will be applicable on all force to the facts of the present appeal. The contention of the appellants that was no sale of electricity to third party is therefore not acceptable. In a recent judgment of the Punjab and Haryana High Court in Maruti Suzuki India Ltd. Vs. CCE, Delhi 2017 (5) GSTL 18 (P & H), it was held that electricity that was wheeled out to third parties was not used in the manufacture of final products, therefore LNG to the extent used for production of electricity wheeled out was not input of service of inward transportation thereby was not input service. The relevant portion of the Honble High Court judgment is reproduced below:-
17.?Moreover, the service of inward transportation of the LNG used by the assessee was not in relation to the manufacture of the final product or the clearance of the final product from the place of removal so far as it relates to the electricity that was wheeled out. The service of inward transportation of LNG would be an input service if that LNG was used in the production of electricity to the extent that the electricity was used by the assessee itself for manufacturing its final product. The electricity that was wheeled out to the third parties was, obviously, not used in the manufacture of the assessees final product. Therefore on the definition of the words input service itself, the LNG, to the extent used for production of electricity wheeled out to third parties, was not an input and the service of inward transportation thereof was not an input service.
18.?Even on facts, the appellant cannot succeed. There is nothing on record to establish that it was the electricity wheeled out that was used by the third parties to manufacture the products used by the appellant in turn for the manufacture of its final product. Electricity like money would lose its identity once it is used with electricity obtained from other sources. The question of apportionment would, however, arise for instance if some nexus is established between the final product of the third party sold to the assessee and the electricity sold to it by the assessee. A case to this effect is not established.
22.?The assessee having sold the electricity to the third parties lost all control or rights in respect thereof. They supplied the electricity and were paid for the same. The assessee could not be said, therefore, to have used the same either directly or even indirectly. Even if the electricity was by chance used for the manufacture of the final product sold by the third parties to the assessee, it would make no difference for it cannot be said that the same was used by the assessee itself.
6. In the light of the discussions herein above, we do not find any infirmity in the decision of the adjudicating authority that the appellants are liable to pay an amount of Rs. 2,66,09,847/- being the amount equal to 6% of the value of the electricity not used within the factory of production, along with interest at appropriate rates thereof.
7. However, on the imposition of penalty, we find that the aspect of eligibility or otherwise of inputs used in generation of electricity wheeled out to vendors was mired in litigation for quit sometime. On this very issue, the Honble Supreme Court in p-21 of their judgment in Maruti Suzuki Ltd. Vs. CCE, Delhi - 2009 (240) ELT 641 (SC) waived the penalty. The relevant portion is reproduced as under:-
21.?Before concluding, it may be clarified that on account of repeated amendments in the CENVAT Credit Rules, huge litigation in the country stands generated. In the circumstances, we are of the view that penalty is not leviable on appellant/assessee, particularly when in large number of other cases, on account of conflict of views expressed by various Tribunals/High Court, the assessees have also succeeded. Hence, although M/s. Maruti Suzuki Ltd. (appellant) has failed in their civil appeals the Department will not impose penalty.
We find that the same mitigating factors are applicable to the facts of the present case also. We therefore of the considered opinion that the ingredients attracting imposition of penalty equal to tax demanded under Rule 15 (1) of CCR are not attracted to the facts of the present case. This being so, we set aside the equal penalty imposed under Rule 15(1).
8. Appeal is partly allowed on above terms.
(Order pronounced in the open Court on 28.02.2018)
(MADHU MOHAN DAMODHAR) (SULEKHA BEEVI C.S.)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
BB
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