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Whether proportionate service tax paid on services used for generation of electricity at factory needs to be reversed in case of partial sale of electricity?
Facts
The appellant was engaged in manufacture of motor vehicles and parts thereof which were liable to excise duty. They have a captive power plant inside their factory. Some portion of the power generated was sold to other units for a consideration. CENVAT was availed on transportation of gas services used for manufacture of power. Adjudicating authority passed an order for reversal of CENVAT credit attributable for electricity sold outside. It was contested that ‘nexus’ test is applicable only in case of inputs and not input services. In case of input services, it should be used directly or indirectly, in or in relation to the manufacture of final products. Hence, as long as input service was used by the manufacturer, no portion of credit pertaining to such service can be reversed.
Held
The admitted fact is that electricity which is sold by the appellant is not used in or in relation to manufacture of dutiable final products. Consequently, inputs and input services which are used in production of such electricity sold outside will not be eligible for credit as they are outside the ambit of definition of input and input service as defined in CENVAT Credit Rules, 2004. Hence, demand for reversal of proportionate CENVAT credit is sustainable. It was also observed that since demand was issued on the basis of audit para, it was held that extended period was not invocable and considering repeated amendments in the Cenvat Credit Rules resulting in huge amount of litigation, it was held that no penalty shall be imposed.
