The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, comprising Justice S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member), has held that CENVAT credit is not admissible on fuel used for generating electricity that is entirely wheeled out to the state electricity grid, even if an equivalent quantity of power is later drawn back for use in the factory.
The appellant, Jindal Stainless Ltd., is engaged in the manufacture of slabs, blooms and ingots. To overcome power shortages, the company installed a captive power plant using diesel generator sets. However, the electricity generated was unstable and unsuitable for direct use in furnaces and mills. Consequently, the company entered into agreements with the Haryana State Electricity Board (HSEB) to synchronize its captive power with the grid and receive back an equivalent quantity of stable electricity, subject to 10% wheeling charges.
The company availed CENVAT credit on furnace oil and other inputs used in the generation of electricity, claiming that the power was ultimately used in the manufacture of excisable goods. The Department disputed the claim, alleging that the electricity generated was not used within the factory and was effectively supplied to the grid, rendering the credit inadmissible. Show cause notices were issued seeking denial of credit amounting to ₹6.58 crore for the period January 1999 to December 2004, along with interest and penalties. The adjudicating authority confirmed the demand, leading to the appeal before the Tribunal.
The Tribunal examined whether the wheeling arrangement amounted to a “sale” under the Central Excise Act, 1944. It noted that although electricity laws restricted captive generators from selling power, the definition of “sale” under the Central Excise Act covers any transfer of goods for cash, deferred payment or “other valuable consideration.”
The Tribunal observed that the entire electricity generated by the appellant was transferred to the grid because it was unsuitable for use in the factory. In return, the appellant received stable electricity from the grid and paid wheeling charges. It held that this arrangement amounted to a barter or exchange, where unusable electricity was supplied to the grid in return for usable electricity, which constituted valuable consideration. It further observed that the electricity generated by the appellant “could never be utilized within the factory of production,” and therefore the inputs used for generating such electricity were not used in the manufacture of final products within the factory.
The Tribunal concluded that the entire electricity produced by the appellant was supplied to the grid and not used within the factory, and therefore the company was not entitled to CENVAT credit on the fuel used for generation of such electricity, notwithstanding the fact that equivalent or greater electricity was later drawn from the grid.
On the issue of limitation, the Tribunal found merit in the appellant’s contention that the Department was aware of the captive generation and synchronization arrangement. The appellant had filed declarations and had been subjected to multiple audits. The Tribunal noted that the dispute involved interpretation of law amid conflicting decisions, and therefore the extended period of limitation was not invocable.
Accordingly, the demand raised under the show cause notice dated 30 December 2003 was set aside as time-barred, and all penalties were quashed. The remaining portion of the order was upheld, and the appeal was partly allowed.
Cause Title: M/s Jindal Stainless Ltd. Versus Commissioner of Central Excise, Goods &Service Tax, Rohtak
Case No.: Excise Appeal No. 587 of 2006
Coram: Justice S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member)
