Introduction:
In a significant ruling strengthening the principle of functional nexus under indirect tax law, the Gujarat High Court has held that CENVAT credit of service tax paid on input services used for setting up a windmill located away from factory premises is admissible, so long as such services bear a clear nexus with the manufacturing activity. The judgment was delivered by a Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi while deciding two connected tax appeals filed by Rajhans Metals Limited against orders passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad. The controversy arose from the denial of CENVAT credit on services availed for installation, erection, and commissioning of windmills situated approximately 100 kilometers away from the manufacturing unit, on the ground that such services were not received at the factory premises and therefore could not qualify as “input services” under the CENVAT Credit Rules, 2004. The appellant-manufacturer had installed windmills under Gujarat’s progressive power policy and entered into a “Wheeling Agreement” with the Gujarat Energy Transmission Corporation Limited, whereby electricity generated at the windmills was fed into the Gujarat Electricity Board grid and wheeled back for use in the manufacturing of excisable goods. The High Court, setting aside the restrictive interpretation adopted by the Tribunal, reaffirmed that the true test for availing CENVAT credit is not the physical location of the service, but its nexus with the output activity, and held that windmill-related services were integrally connected with electricity generation, which in turn directly supported manufacturing operations.
Arguments on Behalf of the Appellant:
The appellant-manufacturer contended that the denial of CENVAT credit was legally unsustainable and contrary to the scheme and object of the CENVAT Credit Rules, 2004, which were designed to avoid cascading of taxes and permit credit on all inputs and input services that have a nexus with manufacturing. It was argued that electricity is an essential and indispensable input for manufacturing excisable goods, and the windmills were set up solely to generate electricity for captive consumption in the factory through a legally recognized wheeling mechanism. The appellant emphasized that the distance between the windmill site and the factory was irrelevant once it was established that the electricity generated was ultimately consumed in the manufacturing process.
The appellant further submitted that Rule 2(l) of the CENVAT Credit Rules, 2004, which defines “input service,” does not impose any geographical restriction requiring that services must be received within factory premises. What the rule mandates is a nexus—direct or indirect—with the manufacture of final products or clearance thereof. The services of installation, erection, and commissioning of windmills were argued to be “exclusively” used for generating electricity, which was inextricably linked to manufacturing activity, thereby satisfying the nexus test.
Reliance was placed on judicial precedents, including Endurance Technologies and Excel Crop Care, where courts had allowed CENVAT credit on services such as mobile phone usage outside factory premises and windmill-related services, recognizing that business realities often extend beyond factory boundaries. The appellant also drew support from CBEC Circular No. 97/8/2007-S.T. dated 23 August 2007, which clarified that the place of use of an input service is not determinative, provided it is used in or in relation to business or manufacturing activity. The appellant thus argued that the CESTAT had adopted an unduly narrow and mechanical interpretation, defeating the very purpose of the credit mechanism and discouraging investment in renewable energy infrastructure.
Arguments on Behalf of the Revenue:
The Revenue authorities defended the orders of the adjudicating authority and the CESTAT, contending that CENVAT credit is admissible only when input services are directly connected with factory operations and received within or in relation to the factory premises. It was argued that the windmills were situated far away from the manufacturing unit and functioned as independent installations, and therefore services used for their setting up could not be said to have a direct nexus with the manufacture of excisable goods.
The Revenue asserted that electricity generation at windmills, which was fed into the Gujarat Electricity Board grid, lost its identity and could not be directly correlated with electricity consumed at the factory. According to the Department, once electricity entered the grid, it became part of a common pool, breaking the chain of nexus required under Rule 2(l). On this basis, it was contended that windmill-related services were too remote and indirect to qualify as “input services.”
It was further argued that permitting credit on services availed outside factory premises would open floodgates and blur statutory boundaries, allowing manufacturers to claim credit on any peripheral or ancillary activity. The Revenue maintained that the CENVAT scheme should be strictly construed and that credit being in the nature of a concession, the burden lay heavily on the assessee to prove eligibility. Accordingly, the Department urged that the High Court should not interfere with the well-reasoned findings of the Tribunal, which had applied a factory-centric interpretation consistent with revenue interests.
Court’s Judgment and Reasoning:
The Gujarat High Court decisively rejected the narrow approach adopted by the Revenue and the Tribunal, holding that the essence of CENVAT credit eligibility lies in the nexus with manufacturing activity, not the physical situs of the service. The Court began by analyzing Rule 2(l) of the CENVAT Credit Rules, 2004, noting that the definition of “input service” is broad and inclusive, covering services used directly or indirectly, in or in relation to the manufacture of final products. The Court emphasized that the rule does not prescribe any requirement that such services must be received at the factory premises.
Applying this principle to the facts, the Court observed that the windmills were installed solely to generate electricity for use in the appellant’s manufacturing unit, and the wheeling arrangement through the GEB grid was a recognized and lawful mechanism under state policy. The Court held that the electricity generated at the windmills retained its character as an input for manufacturing, notwithstanding the fact that it was transmitted through the grid. The nexus between windmill services and manufacturing activity, therefore, remained intact and unbroken.
The Bench underscored that services such as installation, erection, and commissioning of windmills were “exclusively used” for electricity generation, which was an essential input for the manufacturing process. Denying credit merely because the windmills were geographically distant would amount to importing conditions into the rules that do not exist. The Court illustrated this reasoning by referring to instances where credit on mobile phone services was allowed even when phones were used outside factory premises, as recognized in Excel Crop Care and supported by the CBEC circular.
The Court also relied on Endurance Technologies, where windmill-related services had been treated as eligible input services, reinforcing the principle that renewable energy infrastructure directly supporting manufacturing activity falls within the ambit of CENVAT credit. Rejecting the Revenue’s argument about loss of nexus due to grid transmission, the Court held that such an interpretation was overly technical and divorced from commercial reality.
Consequently, the High Court set aside the impugned orders of the CESTAT, allowed both tax appeals, and declared that the appellant was entitled to CENVAT credit of service tax paid on windmill-related services, firmly establishing that sustainability-driven investments cannot be penalized through restrictive tax interpretations.