CESTAT Hyderabad Grants ₹1.17 Cr CENVAT Credit Relief To Madhucon Sugar, Holds Electricity Non-Excisable

The Hyderabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) on 8 May held that Rule 6 of the CENVAT Credit Rules, 2004 does not permit denial of CENVAT credit on input services used for generation of electricity, since electricity is not an excisable good. Rule 6 bars CENVAT credit to the extent common inputs or input services are used for exempted goods or services.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad allowed the appeal filed by Madhucon Sugar & Power Industries Ltd. and quashed a demand of Rs. 1.17 crore along with interest and penalty, holding that the Department's case lacked a valid legal foundation. The Bench observed:

“....the very foundation for raising the demand is that the electricity is an excisable commodity and in an exempted good, this Rule 6 is applicable, will not survive in the light of the judgment of Hon'ble High Court of Allahabad in the case of Guleria Chini Mills, supra. Since, on this ground itself, the impugned order cannot sustain.....”

The dispute arose after the Department alleged that the company wrongly availed credit on services such as erection and commissioning, engineering consultancy, fabrication, cable laying, supervision, servicing, testing and freight services used in its captive co-generation power plant.

The Department argued that electricity falling under Tariff Heading 2716 0000 qualified as “exempted goods” because no excise duty applied to it. On this basis, it sought reversal of credit attributable to electricity generation under Rule 6.

The adjudicating authority confirmed the demand after holding that electricity generated in the power plant did not constitute an intermediate product in manufacture of sugar and molasses. It also observed that while the Rules specifically permit credit on “inputs” used for captive electricity generation, they contain no similar provision for “input services.”

Before the Tribunal, the company argued that the co-generation plant formed an integral part of its sugar manufacturing unit and that it consumed most of the electricity captively in manufacture of dutiable sugar and molasses, supplying only surplus power to the grid.

It further contended that the disputed services also related to expansion and modernisation of the sugar division and to erection and commissioning of boilers essential for sugar manufacture. It argued that electricity could not qualify as “exempted goods” in the absence of an exemption notification issued under Section 5A of the Central Excise Act.

Relying on the Allahabad High Court judgment in Gularia Chini Mills v. Union of India, later affirmed by the Supreme Court, the company argued that electrical energy does not constitute excisable goods and therefore falls outside Rule 6. It also cited precedents recognising bagasse-based co-generation plants as integral to sugar manufacturing operations.

The Revenue defended the impugned order and reiterated that Rule 6 barred credit attributable to exempted products.

The Tribunal examined whether electricity could qualify as exempted excisable goods for the purpose of Rule 6. Referring to the Allahabad High Court ruling in Gularia Chini Mills. It concluded that electrical energy does not attract excise duty under Section 2(d) of the Central Excise Act and therefore cannot qualify as excisable goods. Further, it observed that Rule 6 applies only to exempted excisable goods and therefore could not sustain the Department's demand. It noted:

“...the Rule 6 which has been invoked as the ground in the present appeal for recovery of erroneous credit taken by them cannot sustained as the electricity cannot be treated as exempted goods for the purpose of Rule 6....”.

In light of this finding, the Tribunal did not examine the remaining issues relating to limitation, penalty or the extent of use of services in the sugar manufacturing unit.

Accordingly, the CESTAT allowed the appeal and set aside the impugned order.

For Appellant: Y. Sreenivasa Reddy, Advocate

For Respondent: B. Subhas Chandra Bose, Authorized Representative