Patna High Court Upholds CENVAT Credit On Captive Power Plant Despite Surplus Power Supply

The Patna High Court on 24 July dismissed the Central Excise Department's appeal against Harinagar Sugar Mills Ltd. and upheld the Customs, Excise and Service Tax Appellate Tribunal's (CESTAT) order allowing the company to claim CENVAT credit on capital goods, input services and iron and steel items used in its manufacturing operations.

A Division Bench of Justices Bibek Chaudhuri and Rana Vikram Singh held that the benefit cannot be denied merely because part of the electricity generated in the company's captive power plant was supplied to the Bihar State Electricity Board. The judges observed:

“Once the admitted position is that the Captive Power Plant formed an integral part of the respondent's manufacturing unit and the electricity generated therein was substantially utilized in the manufacture of dutiable final products, the requirement of exclusive use contemplated under Rule 6(4) cannot be said to have been satisfied.”

The dispute arose after the Department denied CENVAT credit on the ground that electricity generated by the company's captive power plant was partly supplied outside the factory, treating it as an exempted product. The Revenue also disputed CENVAT credit on certain input services and iron and steel items and demanded excise duty on waste and scrap.

The principal issue before the High Court was whether CENVAT credit on capital goods installed in the captive power plant could be denied merely because a portion of the electricity generated was supplied to the Bihar State Electricity Board.

The High Court rejected the Department's contention, holding that Rule 6(4) of the CENVAT Credit Rules, 2004 (which bars CENVAT credit only where capital goods are used exclusively to manufacture exempted goods) did not apply. It found that the electricity generated in the captive power plant was predominantly consumed within the factory for manufacturing dutiable products such as sugar and molasses, while only surplus electricity was supplied to the Bihar State Electricity Board. Therefore, the condition of exclusive use was not satisfied.

It also relied on CBEC Circular No. 665/56/2002-CX, which clarifies that CENVAT credit on capital goods cannot be denied where exempt intermediate goods are captively consumed in the manufacture of dutiable final products.

Further, the Bench upheld the Tribunal's decision allowing CENVAT credit of Rs. 7.12 lakh on seventeen specified input services under Rule 6(5) of the CENVAT Credit Rules, 2004, observing that the services were not used exclusively for exempted goods and therefore remained eligible for full credit.

On the issue of CENVAT credit of Rs. 33.32 lakh on iron and steel items, it noted that the materials were used to repair and maintain existing plant and machinery rather than to construct buildings or supporting structures. It held that the actual use of the goods determines eligibility for CENVAT credit and that the Tribunal's factual findings could not be interfered with in an appeal under Section 35G of the Central Excise Act, 1944 (which permits the High Court to hear appeals only on substantial questions of law).

The Bench also declined to interfere with the Tribunal's order setting aside the demand of Rs. 4.05 lakh on waste and scrap, observing that the Revenue had failed to establish any legal error in the Tribunal's findings.

Accordingly, the High Court dismissed the Department's appeal and affirmed the CESTAT's order in favour of Harinagar Sugar Mills Ltd.

For Appellant: K. N. Singh, Senior Advocate, Anshuman Singh, Shivaditya Dhari Sinha and Abhinav, Advocates 

For Respondent: Rahul Dhanuka, Sanjeev Kumar, Rishabh Mishra, Radha Raman and Ramesh Kumar Agrawal, Advocates