CENVAT Credit on Capital Goods is Permissible Unless Exclusively Used for Generating Exempted Electricity

The Respondent, a manufacturer of sugar and related products, operates a Captive Power Plant (CPP) within its factory premises

During FY 2009-10 and 2010-11, the Respondent used bagasse to generate electricity, which was primarily consumed captively for manufacturing dutiable goods; however, surplus electricity was supplied to the Bihar State Electricity Board

The Appellant-Department issued a Show Cause Notice on 30.04.2014, seeking to recover CENVAT credit on capital goods and input services used in the CPP, iron and steel structural items, and duties on waste/scrap

The Commissioner confirmed the demands in an Order-in-Original dated 29.01.2018

On appeal, the CESTAT, Kolkata, set aside the order and allowed the credit

The Revenue appealed to the High Court

1. Whether the Respondent was entitled to CENVAT credit on capital goods and input services used in the CPP when a portion of the generated electricity was cleared outside the factory

2. Whether CENVAT credit was admissible on iron and steel items (angles, joists, etc.) used for repair and maintenance after the 07.07.2009 amendment

3. Whether the CESTAT's order was per incuriam for allegedly disregarding precedents and statutory provisions

The Court applied Rule 6(4) of the CENVAT Credit Rules, 2004, which prohibits credit only if capital goods are used exclusively in the manufacture of exempted goods

It also applied Rule 6(5), which allows full credit for specified services unless used exclusively for exempted goods

The Court relied on CBEC Circular No. 665/56/2002-CX, clarifying that credit on capital goods is not denied if intermediate goods (electricity) are captively consumed to make dutiable final products

Furthermore, it distinguished Maruti Suzuki Ltd. v. Commissioner of Central Excise (2009) 9 SCC 193 regarding "inputs" vs. "capital goods"

The court followed the principle in Union of India v. HEG Ltd. regarding the "exclusive use" test under Rule 6(4)

The Court reasoned that under Rule 6(4), the statutory embargo is only triggered by "exclusive" use for exempted goods; since the CPP electricity was predominantly used for dutiable manufacturing, the embargo did not apply

Regarding Maruti Suzuki, the Court held it was inapplicable as it dealt with "inputs," whereas the present case concerned "capital goods" governed by a different legislative standard (Rule 6(4)) and "specified input services" under Rule 6(5)

Regarding the structural steel items, the Court accepted the CESTAT's factual finding that the items were used for "repair and maintenance" of machinery, not for creating immovable support structures, thus maintaining their eligibility for credit despite the 2009 amendment

The Court noted that Revenue failed to prove the findings were perverse

The Court affirmed that CENVAT credit is admissible for capital goods and specified services in a CPP if the electricity is partially consumed captively for dutiable goods

The CESTAT Final Order No. 76870/2019 was upheld, and the Revenue's appeal was dismissed