The Madras High Court has delivered a significant ruling in favour of manufacturers using captive power generation facilities, holding that MODVAT/CENVAT credit on Low Sulphur Heavy Stock (LSHS) used for generating electricity cannot be denied merely because a portion of the electricity is wheeled through the State electricity grid and consumed in sister units of the same company.
The Bench of Justice G. Jayachandran and Justice N. Mala has observed that where electricity is transferred to other units of the same manufacturer without any element of sale and is used for producing dutiable goods, denial of credit would defeat the purpose of the MODVAT/CENVAT scheme. The modern industrial operations frequently consist of multiple interconnected manufacturing units functioning as part of a single integrated enterprise.
The assessee is engaged in the manufacture of PVC resin, refrigerant gases, caustic soda, chlorine and other chemical products. For manufacturing these products, it used LSHS as fuel for generating electricity in its captive power plant and availed MODVAT credit on the duty paid on such fuel. A portion of the electricity generated was consumed within the generating unit, while surplus electricity was transferred through the Tamil Nadu Electricity Board (TNEB) grid to other manufacturing units of the company and, to a limited extent, for lighting its staff colony.
The Excise Department took the view that credit on fuel used for generating electricity was available only where the electricity was used within the factory of production. Since electricity was wheeled to Plants II and III situated outside the generating unit and also used for the staff colony, the Department demanded reversal of credit along with interest and penalty. The adjudicating authority, appellate authority and CESTAT all ruled against the assessee.
The principal question before the High Court was whether MODVAT/CENVAT credit on LSHS used for generation of electricity could be denied to the extent the electricity was transmitted through the TNEB grid and consumed in sister manufacturing units of the same assessee or in the company’s staff colony.
The assessee argued that electricity generated from LSHS was an intermediary product used in the manufacture of dutiable final products. It contended that the expression “factory” should not be interpreted narrowly and that electricity generated captively and used in sister units of the same company continued to remain within the manufacturing chain of the assessee. The company relied on several judicial precedents, including decisions of the Supreme Court, Madras High Court, Rajasthan High Court and Karnataka High Court, which recognized that captive power generation and consumption by different units of the same company formed part of an integrated manufacturing process.
The Department argued that Rule 57A of the Central Excise Rules, particularly after its amendment in 1995, specifically required electricity generated from eligible inputs to be used “within the factory of production.” Since the electricity was admittedly transferred outside the generating unit and supplied to other units and the staff colony, the assessee was not entitled to credit on the proportionate quantity of fuel attributable to such transferred electricity.
The Court undertook a detailed examination of Rule 57A before and after the 1995 amendment. It noted that the amendment expanded the scope of “inputs” and specifically included inputs used for generation of electricity. The Bench observed that the legislative intent reflected a liberal approach towards allowing credit on inputs used in power generation connected with the manufacturing process.
The Court extensively relied on judicial precedents, including the Madras High Court decision in India Cements Ltd., the Rajasthan High Court decision in Shree Cement Ltd., and Karnataka High Court rulings in Biocon Ltd. and Mukund Ltd.These decisions recognized that electricity generated captively and supplied to sister units of the same company forms part of a captive arrangement and remains integrally connected with the manufacturing activity.
The Court also examined the issue of invocation of the extended period of limitation. Referring to the Supreme Court’s ruling in Reliance Industries Ltd., the Bench reiterated that extended limitation can be invoked only where there is fraud, wilful misstatement, suppression of facts or deliberate intent to evade duty. Mere differences in interpretation of law or disclosure of relevant facts in statutory records would not justify invoking the extended limitation period.
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