Facts of the Case

M/s. Konark Met Coke Ltd. (“KMCL”) established a Metallurgical Coke Plant along with a Captive Power Plant (“CPP”). The CPP was intended to generate electricity for consumption connected with KMCL’s manufacturing operations as well as for supply/sale of power to M/s. Neelachal Ispat Nigam Ltd. (“NINL”).

KMCL applied for Central Excise registration on 12 January 1998 under Rule 174 of the Central Excise Rules, 1944 for setting up a Coke Oven Plant to manufacture excisable goods. It procured various capital goods falling within the relevant capital-goods provisions, paid duty thereon, filed the prescribed declaration, entered the capital goods in RG-23-C Part-I and availed credit on capital goods as well as inputs.

The dispute arose because the CPP was situated within premises associated with NINL, a separate company. According to the Department, the approved ground plan did not include the CPP and approximately 75% of the electricity generated by the CPP was intended for NINL. KMCL, however, maintained that the Coke Oven Plant and CPP were sections of the same integrated manufacturing arrangement and that electricity was essential for the manufacturing activity.

Upon completion of the project, KMCL entered the duty-paying documents relating to capital goods received up to 31 March 2001 in RG-23-C Part-II. The accumulated credit stood at Rs. 16,43,75,008. On 9 April 2001, KMCL furnished the relevant data concerning earning and availment of such credit.

A Show Cause Notice dated 1 April 2002 was issued alleging contravention of Rule 57AA of the Central Excise Rules, 1944 and Rule 2 of the CENVAT Credit Rules, 2001, on the ground that eligible inputs and capital goods were required to be received and used in the factory of manufacture of the final products.

By Order-in-Original dated 26 September 2002, the Commissioner disallowed the CENVAT credit and imposed a penalty of Rs. 1 lakh under Rule 173Q of the Central Excise Rules, 1944 and Rule 13 of the CENVAT Credit Rules, 2001.

KMCL challenged the adjudication order before CESTAT, Kolkata. CESTAT allowed capital-goods credit, holding substantially that use of the Power Plant to generate electricity for manufacture in the Coke Oven Plant supported credit eligibility and that supply of power to NINL did not by itself disentitle the assessee, particularly because electricity cannot be stored and must be gainfully utilised. Input credit was not adjudicated in favour of KMCL because that claim was not pressed. The Department thereafter approached the High Court.

Issues Involved

The High Court considered the following principal questions:

  1. Whether CENVAT credit could be allowed on capital goods used in the Power Plant of KMCL when the plant was also meant to serve another company/assessee, NINL, and the respective final products were different, namely Coke and Steel.
  2. Whether, under Rule 57AA of the Central Excise Rules, 1944 or Rule 2 of the CENVAT Credit Rules, 2001, capital goods used in KMCL’s Power Plant were eligible for CENVAT credit when electricity/power itself was non-excisable.
  3. Whether CENVAT credit could be allowed where the CPP was established within premises associated with NINL and approximately 75% of generated power was required by or supplied to NINL, instead of being exclusively used for manufacture of Coke by KMCL.
  4. Whether the CPP satisfied the definition of “factory” under Section 2(e) of the Central Excise Act, 1944 when the Coke Oven Plant and CPP were situated at separate locations/premises.
  5. Whether sale or supply of surplus electricity to another unit automatically disentitled the manufacturer from CENVAT credit on capital goods used in the CPP.

Appellant’s Arguments – Revenue/Department

The Revenue contended that the conditions prescribed under the Central Excise and CENVAT Credit provisions had to be cumulatively satisfied and that the capital goods must be used in the factory of manufacture of the final products.

It was argued that:

  • While granting registration under Rule 174 of the Central Excise Rules, the Power Plant portion had been excluded from KMCL’s approved ground plan.
  • KMCL and NINL were separate public limited companies having independent legal identities.
  • The CPP was located within NINL’s premises and was surrounded by NINL’s registered premises.
  • The Coke Oven Plant and CPP constituted disjoint premises and could not be treated as one factory.
  • The CPP did not satisfy the definition of “factory” under Section 2(e) of the Central Excise Act, 1944.
  • Electricity generated by KMCL was not an excisable commodity.
  • Credit was allegedly inadmissible under the relevant provisions, including Rule 57AH of the Central Excise Rules read with Rule 12 of the CENVAT Credit Rules.
  • Approximately 75% of the power generated was used by or supplied to NINL and not by KMCL.
  • The power should have been used for manufacture of excisable goods within the relevant factory premises, whereas a substantial portion was supplied/sold to another unit.
  • The Power Plant operated with blast furnace gas generated as a by-product in NINL’s separately registered factory, which, according to the Department, demonstrated absence of the required inter-linkage with KMCL’s final products.
  • CESTAT had not adequately addressed the Commissioner’s finding that the Power Plant was situated away from KMCL’s manufacturing premises and therefore did not constitute part of the same factory.

Respondent’s Arguments – Assessee

The Respondent supported CESTAT’s order and contended that the Coke Oven Plant and CPP formed part of an integrated and interlinked manufacturing arrangement.

The Respondent argued that:

  • Under the Scheme of Amalgamation sanctioned by the High Court in COPET No. 26 of 2004, KMCL was amalgamated with NINL with effect from 8 December 2004.
  • Considering Section 2(e) of the Central Excise Act, 1944 together with the relevant CBEC guidelines, the Coke Oven Plant and CPP could not be treated as unrelated merely because they were situated at different locations.
  • The land on which the Power Plant stood was subsequently transferred to KMCL.
  • So long as the CPP generated electricity used in the manufacture of goods in KMCL’s Coke Oven Plant, CENVAT credit on capital goods remained admissible.
  • Mere sale/supply of approximately 75% of generated power to NINL could not extinguish credit eligibility.
  • Electricity cannot be stored and has to be rolled out and gainfully utilised; such utilisation was described as a technological necessity.
  • CESTAT had granted relief only in respect of capital-goods credit and not input credit because the latter claim was not pressed.
  • NINL and KMCL were conceived as technologically and operationally interdependent units forming part of an integrated iron and steel project.
  • The manufacturing operation in the Coke Oven Plant could not be conceived without electricity from the CPP.
  • The principal restriction under the CENVAT scheme was against capital goods used exclusively for manufacture of exempted products.
  • The final manufactured goods were dutiable/excisable products.
  • Electricity was not KMCL’s final product; rather, it was generated and used in the manufacture of excisable goods.
  • There was no prohibition under the CENVAT scheme against supplying surplus electricity to another party after captive use.

Court Order / Findings

The High Court dismissed the Revenue’s appeal and upheld the availability of CENVAT credit on capital goods in the facts and circumstances of the case.

1. Separate Locations Do Not Automatically Mean Separate Factories

The Court examined the definition of “factory” under Section 2(e) of the Central Excise Act, 1944 together with the relevant portion of the CBEC Manual of Supplementary Instructions dated 1 September 2001.

The Court held that the statutory definition did not preclude two or more premises from being regarded as part of the same factory merely because they were physically separated. The CBEC instructions contemplated circumstances where premises segregated by a public road, canal or railway line could nevertheless form part of the same factory depending on factors demonstrating integration and inter-linkage.

Relevant factors included:

  • interlinked manufacturing processes;
  • use of products manufactured in one premises in another premises;
  • common raw materials;
  • common electricity supplies;
  • common labour/workforce;
  • common administration or works management;
  • common tax assessments; and
  • other circumstances indicating inter-linkage of manufacturing processes.

The Court held that where two portions are integrally connected and interlinked with the manufacturing process of excisable goods, they can be considered part of the same factory premises. Therefore, the mere fact that the Coke Oven Plant and CPP were located separately was not decisive against the assessee.

2. Transfer of Land Was a Material Factor

The Court noted the agreement dated 28 June 2000 between the Government of Odisha and KMCL, under which land measuring approximately 249.45 acres, on which the Coke Oven Plant and CPP were located, had subsequently been transferred to KMCL.

This factual circumstance supported the assessee’s case concerning the relationship and integration between the relevant facilities.

3. Sale of 75% Surplus Power Did Not Bar CENVAT Credit

The High Court expressly held that there was no restriction under the CENVAT Scheme prohibiting sale of surplus power to another party after captive use.

The Court identified the material restriction as being that the capital goods should not be used exclusively for manufacture of exempted products. It was not the Department’s case that the final manufactured products of KMCL or NINL were exempted products.

Accordingly, supply or sale of approximately 75% of generated power to NINL did not, by itself, disentitle KMCL from CENVAT credit on the capital goods.

4. Electricity Generated in the CPP Was Not the Final Product

The Court clarified that power/electricity was not KMCL’s final product. Electricity was generated in the CPP and used in the manufacture of excisable goods in the Coke Oven Plant.

Therefore, the decisive inquiry was not simply whether electricity itself was excisable, but whether electricity generated in the CPP was used in manufacturing KMCL’s excisable goods.

5. Decisive Test for CENVAT Credit

The High Court formulated the central question substantially as follows:

Whether the power generated in KMCL’s CPP was used in the manufacture of KMCL’s excisable goods?

Where the answer was affirmative, the mere fact that surplus electricity was sold to NINL did not deprive KMCL of CENVAT credit on capital goods.

Answers to the Substantial Questions

The High Court answered the framed questions as follows:

  • Question No. (i): Answered in the affirmative, in favour of the Respondent-Assessee and against the Revenue.
  • Question No. (ii): The Court held that power generated in the CPP was not a final product; therefore, the question as framed did not arise in the facts and circumstances. Since electricity generated in the CPP was used in manufacture of KMCL’s final excisable product, CENVAT credit was available.
  • Question Nos. (iii) and (iv): Answered in favour of the Respondent and against the Appellant, holding that the Coke Oven Plant and CPP had factually been shown to be part of the same factory premises and CENVAT credit could be allowed in the circumstances.

Accordingly, the Revenue’s appeal was dismissed with no order as to costs.

Important Clarification

This judgment lays down an important clarification that physical separation of a Captive Power Plant from the principal manufacturing plant is not, by itself, sufficient to deny CENVAT credit. What matters is the factual and functional relationship between the facilities, including whether they are integrally connected and interlinked with the manufacture of excisable goods.

The judgment further clarifies that sale or supply of surplus electricity to another unit does not automatically result in denial of CENVAT credit on capital goods, provided electricity generated by the CPP is used in the manufacture of the assessee’s excisable goods and the relevant capital goods are not exclusively used for manufacture of exempted products.

It is equally important that the High Court’s ruling concerned capital-goods credit. The claim concerning input credit was not pressed before CESTAT, and therefore no affirmative finding granting input credit formed part of the relief.

Sections Involved

  • Section 2(e), Central Excise Act, 1944 – Definition of “Factory”
  • Rule 57AA, Central Excise Rules, 1944
  • Rule 57A, Central Excise Rules, 1944
  • Rule 57D, Central Excise Rules, 1944
  • Rule 57Q, Central Excise Rules, 1944
  • Rule 57AH, Central Excise Rules, 1944
  • Rule 173Q, Central Excise Rules, 1944
  • Rule 174, Central Excise Rules, 1944
  • Rule 2, CENVAT Credit Rules, 2001

 

Link to download the order - https://mytaxexpert.co.in/uploads/1783152599_862compressed.pdf

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