By TIOL News Service

CHENNAI, AUG 04, 2014: THE main appellant, known as M/s. Southern Iron and Steel Company Ltd. (‘SISCOL') was established in 1996 and was in working condition till 2002. M/s. SISCOL was also brought under ‘Restructuring Scheme' under Corporate Debt Restructuring. Thereafter, M/s. SISCOL was declared a sick company and was brought under BIFR. Therefore, in order to enable them to get the finance for ‘CPP', M/s. SISCOL leased out a portion of their factory premises of 50.14 acres to M/s. JSW Power Ltd (JSWPL) for the purpose of setting up of ‘CPP'. on 17.01.2005, for a nominal amount of Rs. 10,000/- p.a. M/s. JSWPL pledged the land with the UTI Bank Ltd., to raise fund to the tune of Rs.62 crores, for the purpose of setting up of the ‘CPP' in the leased factory land for captive use of M/s. SISCOL in the manufacture of their final product i.e., iron and steel. M/s. JSWPL also used the funds to procure capital goods for the purpose of setting up the ‘CPP'. They had instructed their suppliers to indicate in the invoice as “M/s. JSWPL, Consignee of M/s. SISCOL” and on the strength of these invoices, M/s. SISCOL took the CENVAT credit on the capital goods. On 31.08.2006, M/s. SISCOL terminated the lease agreement with M/s. JSWSL and (M/s. JSWPL merged with M/s. JSWSL with effect from 01.04.2005) took over the ‘CPP'. The loan of UTI Bank was also taken over by M/s. SISCOL.

In this backdrop, department issued Show Cause Notice to deny the CENVAT credit on CPP inter alia on the following grounds:

++ The capital goods have not been received by M/s. SISCOL in its premises as the land where these capital goods were received was leased out to M/s. JSWPL and the ‘CPP' was not in the possession of M/s. SISCOL to take credit;

++ Rule 4 of the CENVAT. Credit Rules, 2004 requires that goods should be received within the factory to take credit. The real manufacturer is only M/s. JSWPL and as the land is leased out, the owners of the land is M/s. JSWPL and not M/s. SISCOL; and

++ Possession of capital goods was with M/s. JSWPL and not with M/s. SISCOL.

After hearing both sides, the Member (J) held that credit is admissible by holding that

The land has been leased to M/s. JSWPL only to set up a ‘CPP' to take care of the power requirements of M/s. SISCOL on payment of annual rent of Rs.10,000/- only. The said lease deed has been executed for raising the finance for setting up the ‘CPP' as per CDR scheme. Further, M/s. JSWPL and M/s. SISCOL merged with M/s. JSWSL, therefore, and relying on the case laws of M/s. Steel Authority of India Ltd. - 2007 (219) E.L.T.960 (Tri.-Del), M/s. Chemplast Sanmar Ltd. - 2004(177) E.L.T.446 (Tri.-Chennai) and M/s. Vikram Cement - 2006 (197) E.L.T.145 (S.C.), we find that the appellants are entitled to CENVAT credit on the capital goods which were being used for manufacturing of ‘CPP' by M/s. JSWPL, which is being used by the appellants to manufacture their final i.e iron and steel.

However, the Member (T) felt that the above interpretation would lead to disastrous consequences and as per the above ratio, a factory of SAIL can take credit of duty paid on equipment used by NTPC in a power plant for the reason that the power from NTPC is used in the factory of SAIL at least partially. Such benefits are not intended by the scheme. He held that the credit would be admissible only from 31.08.2006, when the two companies got merged.

In view of difference of opinion, the matter was referred to Third Member. The Third Member agreed with the Member(J) and held “Even prior to 31.8.2006, it was a Captive Power Plant of M/s. SISCOL as approved by TNEB under the Electricity Act. SISCOL was a sick unit. They entered into lease agreement with M/s. JSWPL, a relationship had already been developed prior to October 2005, as evident from CDR Cell report, JSWPL balance sheet etc., for financial accommodation to get loan from UTI Bank Ltd. for setting up C.P.P. and one of the considerations is that electricity would be supplied to M/s. SISCOL, which is an integral part of manufacturing activities of M/s. SISCOL.