Department Cannot Demand 6% Of Value On Exempted Electricity Once Credit Is Reversed: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 18 March, held that once a taxpayer reverses proportionate CENVAT credit attributable to exempted goods, the Department cannot compel payment of 6% of the value of such goods.

The Bench of Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao, allowed the appeals by EID Parry India Ltd., holding the demands and penalties unsustainable both on merits and limitation.

“The appellant has reversed proportionate credit attributable to common input services used in relation to electricity generation. Once such credit stands reversed the object of Rule 6 stands achieved.”

EID Parry India Ltd., a manufacturer of sugar and allied products that operates cogeneration plants using bagasse. During the audit for the period March 2015 to March 2016, the Department observed that surplus electricity generated was wheeled out to the grid and other locations and treated as “exempted goods.”

Alleging non-maintenance of separate accounts for common input services, show cause notices were issued demanding 6% of the value of such electricity under Rule 6(3)(i) of the CENVAT Credit Rules, along with interest and penalties.

EID Parry contended that it had already reversed proportionate CENVAT credit attributable to common input services under Rule 6(3A) along with interest prior to issuance of the notices, and that such reversal satisfied the requirements of law.

It further argued that failure to intimate the Department regarding the exercise of the option under Rule 6(3A) was merely procedural and could not deny substantive benefit.

The Department, however, maintained that EID Parry had not exercised the option within the prescribed time and was therefore liable to pay 6% of the value of exempted electricity.

The Tribunal observed that although electricity cleared outside the factory qualifies as “exempted goods,” liability under Rule 6 arises only to the extent of common credit attributable thereto. It stated:

“Electricity is classifiable under Chapter 27 of the Central Excise Tariff but is exempt from payment of duty. Electricity cleared outside the factory would therefore fall within the expression 'exempted goods' under Rule 2(d) of the CENVAT Credit Rules. However, this by itself does not automatically attract liability under Rule 6(3). Such liability arises only where common inputs or input services have been used in the manufacture of both dutiable goods and such exempted electricity."

It held that Rule 6 provides alternative options, and once proportionate credit is reversed under Rule 6(3A), the objective of the provision stands fulfilled. Forcing payment of 6% in such cases would lead to recovery exceeding the actual credit availed and defeat the purpose of the CENVAT scheme. The Bench observed:

“The appellant, having reversed proportionate CENVAT credit attributable to common input services used in relation to electricity generation in terms of Rule 6(3A) of the CENVAT Credit Rules, 2004, has complied with the requirements of Rule 6 of the said Rules. Consequently, the demand raised under Rule 6(3)(i) for payment of 6% of the value of electricity cleared outside the factory is not sustainable on merits.”

The Tribunal also noted that the show cause notices issued on 27 April 2017 for the period March 2015 to March 2016 were barred by limitation, as they were issued beyond the normal period of one year and the extended period was not invoked. In the absence of any allegation of suppression or fraud, the demands were held to be time-barred.

Accordingly, the Tribunal set aside the demands as well as penalties and allowed the appeals with consequential relief.

For Appellant: Raghav Rajeev, Advocate

For Respondent: M. Selvakumar, Authorized Representative