Electricity Qualifies As Input For Grant Of CENVAT Credit: Madras High Court

The Madras High Court has held that electricity qualifies as an input for the grant of CENVAT credit under the CENVAT Credit Rules, 2002 (CCR).

The Bench of Justice Anita Sumanth and Justice R. Vijayakumar have observed that the captive power plant has been set up at substantial cost by the appellant at one of the company locations. The electricity generated has been used as 'input' only within the appellant group of companies, though at different locations. The consumption is in pari materia with the power generation, and there is no inflated claim.

The appellant/assessee is a manufacturer of cement under the provisions of the Central Excise Act of 1985. It had set up a captive power plant (CPP) within its factory premises at Sankar Nagar, Tirunelveli District. The appellant has two other factories where cement is manufactured: Sankari, Salem District, and Dalavoi, Perambalur District, and a cement grinding unit in Chennai (sister units). Under an agreement entered into with the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), the appellant had been permitted to wheel out a portion of the energy generated by the CPP to TANGEDCO for adjustment against the drawal of electricity from the grid by the sister units. The drawal is not for cost, and no consideration is received by the appellant.

The appellant had imported coal for the generation of electricity in the CPP, availing CENVAT credit for countervailing duty (CVD) on imports. The imports span the period from September 2012 to May 2013. The litigation commenced with the show cause notice issued on September 30, 2013. The department alleges that no statement of accounts has been maintained for the receipt and consumption of coal for the production of electricity.

Since the electricity generated had been both consumed in the factory at Sankar Nagar as well as wheeled out to the sister units, the respondents alleged contravention of Rules 6(1), 6(2), and 6(3) of the CENVAT Credit Rules, 2002, proposing the demand of duty, interest, and penalty. The specific allegation was in regard to the availment of CENVAT credit in respect of the quantum of power wheeled out on the ground that it does not fall within the definition of 'input service' under Rule 2(k) and Rule 2(i) of the CCR.

The appellant confirmed that separate accounts were indeed being maintained as far as the import and utilization of coal were concerned. They also referred to the correspondences exchanged with the department that reflected the availing of CENVAT credit in relation to the power consumed captively and wheeled out through the grid.

The submissions of the appellant revolve around the fact that electricity qualifies as an input for the grant of CENVAT credit under the CCR 2004. The excess electricity generated has not been sold as a commodity to outsiders but merely transferred to its own duty-paying concerns.

The court held that the electricity generated has been wheeled through the grid, and thus the process of supply to each of the sister units is transparent and in accordance with the terms and procedures under the wheeling agreement entered into with TANGEDCO. Being related parties and units of one company, it is possible for there to be a check on the methodology adopted by the parties for the transfer of the input, the utilization of the 'input' itself, and all other relevant determinants by the department.

Counsel For Petitioner: N.Sri Prakash

Counsel For Respondent: N.Dilipkumar

Case Title: M/s.India Cements Limited Versus Commissioner of Customs

Citation: 2024 LiveLaw (Mad) 54

Case No.: C.M.A.(MD)Nos.910 to 914 of 2018 and C.M.P.(MD)Nos.7545, 7547, 7551 to 7553 of 2023

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