Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(Guj) 12349

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
A.S. Supehia, Pranav Trivedi, JJ
Commissioner of Central Excise – Appellant
Versus
P N Mulgund – Respondent
R/TAX APPEAL NO. 1913 of 2008 | R/TAX APPEAL NO. 1697 of 2008 | R/TAX APPEAL NO. 1910 of 2008 | R/TAX APPEAL NO. 1911 of 2008 | R/TAX APPEAL NO. 1931 of 2008

Advocates:
For the Appellants/Petitioners: Ankit Shah
For the Respondents: Anand Nainawati

CENVAT credit on inputs remains admissible even if incidental by-products like exhaust heat are used to generate electricity that is partially wheeled out, provided the primary input was legitimately used for manufacturing within the factory of production and no separate diversion of inputs occurred.

Headnote:(A) Central Excise Rules, 1944 - Rule 57AA - CENVAT Credit Rules, 2001/2002 - Rule 2(f) - Input credit on fuel (Naphtha) used in generators - Waste heat/steam generated as a technological necessity - Wheeling out minor quantities of electricity to sister concerns - Interpretation of ‘input’ as fuel used in factory of production - Whether credit is restricted or denied due to incidental use outside the factory. (Paras 9.2, 10, 11, 14)

Facts of the case:
The assessee used Naphtha and furnace oil for power generation using gas turbine generators and steam turbine generators. The power generated by the gas turbine was used within the factory. The steam turbine utilized the waste exhaust gas from the gas turbine to generate additional electricity. A small portion of this electricity was wheeled out to sister concerns. The revenue denied CENVAT credit on Naphtha, alleging it was used for generation of electricity cleared outside the factory. The Tribunal initially upheld the denial of credit, leading to the present appeals.

Findings of Court:
The court found that the generation of steam/electricity from waste gas is an inevitable outcome of the manufacturing technology. Since the Naphtha was primarily used for manufacturing within the factory, the incidental wheeling out of surplus electricity does not breach the conditions of usage or the relevant forms. The court held that the credit cannot be denied based on the emergence of by-products.

Issues: Whether CENVAT credit on Naphtha used as fuel is admissible when waste steam derived therefrom is used to produce electricity that is partially used outside the factory, and if such usage violates the definition of 'input'.

Ratio Decidendi: If an input is used for manufacturing in the factory of production, the incidental generation of a by-product—even if that by-product is further used to generate electricity partially consumed outside—does not disqualify the original input from CENVAT credit, as the input was not exclusively used for an external purpose.

Result: Substantial questions of law answered in favour of the assessee.

Table of Content
1. procedural consolidation of tax appeals arising from common orders and framework of substantial questions of law. (Para 1 , 2 , 3 , 4)
2. determination of whether electricity generation via waste heat constitutes secondary usage disqualifying cenvat input credit. (Para 5 , 6 , 7 , 8 , 9)
3. input definitions and the treatment of inevitable by-products like steam which are utilized for energy conservation. (Para 10 , 11 , 12 , 13 , 14 , 15)
4. final outcome of the tax appeals based on the interpretation of input usage for internal manufacturing. (Para 16 , 17)

ORAL COMMON JUDGMENT

(PER : HONOURABLE MR. JUSTICE A.S. SUPEHIA)

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR. JUSTICE A.S. SUPEHIA

and

HONOURABLE MR. JUSTICE PRANAV TRIVEDI

Approved for Reporting	Yes	No
	✔

1. Heard learned advocate Mr. Ankit Shah for the appellant and learned advocate Mr. Anand Nainawati for the respondent.

2. Since Tax Appeal No.1697 of 2008 is treated as the lead matter, all the Tax Appeals are being heard and decided together, as they arise out of the common judgment and order dated 18.02.2008 passed by the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”), West Zonal Bench at Ahmedabad. The facts are, therefore, recorded from the lead Tax Appeal.

3. The Coordinate Bench, vide order dated 16.09.2009, has framed the following substantial questions of law in Tax Appeal No. 1697 of 2008 :-

(i) Whether on the facts and in the circumstances of the case the CESTAT was right in rejecting the appeal and denying the credit on Naptha used as fuel for generation of electricity which was used within the factory of production?

(ii) Whether on the facts and in the circumstances of the case the CESTAT was correct in not following its decision which was in favour of the Appellants vide Final Order No.A/3048/ WZB/AHD/07 dated 21.11.2007 involving identical issue and identical facts?

(iii) Whether on the facts and in the circumstances of the case the CESTAT was correct in denying the credit on Naphtha when Naptha was used in generation of steam which was used within the factory of production?

(iv) Whether on the facts and in the circumstances of the case the CESTAT was justified in relying upon the decision of the CESTAT in the case of Reliance Industries Final Order No.A/70/WZB/AHD/2008 dated 15.01.2008 without considering the legal provisions of the Cenvat Credit Rules, 2001 /2002 and submissions made by the Appellants thereon?

(v) Whether on the facts and in the circumstances of the case the CESTAT was right in not following the decision of the CESTAT identical facts in the case of SRF Limited 2005 (191) ELT 887 (T) which has attained finality inasmuch as no appeal has been filed by the department against the aforesaid order passed in the case of SRF Ltd.?”

3.1. Whereas in Tax Appeal No.1913 of 2008 filed by the Commissioner of Customs and Excise challenging the same judgment and order, the Coordinate Bench, vide order dated 02.04.2009, has framed the following substantial question of law:

“Whether in the facts and circumstances of the case, the Tribunal is justified and has committed a substantial error of law in setting aside the penalty imposed under the provisions of Sub rule (2) of Rule 57AH of the erstwhile CER, 1944: Sub rule (2) of Rule 13 of the erstwhile CCR , 2002 read with Section 11 AC and Section 38A of the CEA, 1944, despite having upheld the demand of duty as confirmed by the Commissioner?”

4. The substantial questions of law in both the Tax Appeals filed by the Company as well as the Department are interlinked and, since, with the consent of the learned advocates appearing for the respective parties, the Tax Appeals arise out of the same judgment and order, the substantial questions framed in Tax Appeal No.1697 of 2008 are answered by us for the reasons recorded herein, as the same would also encompass the substantial question framed in Tax Appeal No.1913 of 2008.

5. At the outset, learned a

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